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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-22689
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SCM MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0444317
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
47211 BAYSIDE PARKWAY, FREMONT, CALIFORNIA 94538
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 360-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements or
any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 22, 2001 was approximately $248,457,000 based upon the
last sales price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At March 22, 2001 registrant had outstanding 15,281,323 shares of Common
Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement and Notice of Annual Meeting is incorporated
herein by reference.
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SCM MICROSYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 14
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5 Market for SCM's Common Stock and Related Stockholder
Matters..................................................... 15
Item 6 Selected Financial Data..................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a Quantitative and Qualitative Disclosures about Market
Risk........................................................ 39
Item 8 Financial Statements and Supplementary Data................. 39
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 39
Item 11 Executive Compensation...................................... 40
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13 Certain Relationships and Related Transactions.............. 40
PART IV
Item 14 Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 40
Exhibit Index............................................... 41
Signatures.................................................. 43
Consolidated Financial Statements........................... F-1
SCM, CIMax, SmartReady, SmartSecure, St@rKey, SwapBox and SwapSmart are
registered trademarks and Dazzle, Dazzle Digital Video Creator, POD Tool,
SmartOS and SwapFTL are trademarks of SCM Microsystems. Other product and brand
names may be trademarks or registered trademarks of their respective owners.
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PART I
This Annual Report on Form 10-K contains forward-looking statements that
are subject to a number of risks and uncertainties, many of which are beyond our
control. All statements, other than statements of historical facts included in
this Annual Report on Form 10-K regarding our strategy, future operations,
financial position, estimated revenues or losses, projected costs, prospects,
plans and objectives of management are forward-looking statements. When used in
this Annual Report on Form 10-K, the words "will", "believe", "anticipate",
intend", "estimate", "expect", "project" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain such identifying words. All forward-looking statements speak only as of
the date of this Annual Report on Form 10-K. You should not place undue reliance
on these forward-looking statements. Although we believe that our plans,
intentions and expectations reflected in or suggested by the forward-looking
statements that we make in this Annual Report on Form 10-K are reasonable, we
can give no assurance that these plans, intentions or expectations will be
achieved. We disclose important factors that could cause our actual results to
differ materially from our expectations under "Risk Factors" and elsewhere in
this Annual Report on Form 10-K. These cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our behalf.
ITEM 1. BUSINESS
SCM Microsystems designs, develops and sells hardware, software and silicon
that enables people to conveniently and securely access digital content and
services, including content and services that have been protected through
digital encryption. We sell our products primarily into four markets:
- Digital Television, where our products are used to control access to
digital television broadcasts;
- Digital Video, where our products are used to capture, edit and publish
analog or digital video on the PC;
- PC Security, where our products are used to control access to PCs,
computer networks and the Internet to facilitate computer and network
security and secure online transactions; and
- Digital Media Transfer, where our products expedite the transfer of
information between PCs and digital devices such as digital still cameras
and Internet music players.
Our target customers are end user consumers as well as manufacturers in the
consumer electronics, computer, digital appliance, digital media and conditional
access system industries. We sell and license our products through a direct
sales and marketing organization, both to the retail channel and to original
equipment manufacturers, or OEMs. We also sell through distributors, value added
resellers and systems integrators worldwide.
Operationally, we have organized our business around three divisions:
- Digital Television and Video, which focuses on products, development,
customers and relationships in the global Digital TV and Digital Video
markets;
- PC Security, which focuses on smart card technology-based products and
development as well as customers and relationships in the global markets
for enterprise, financial and government PC security applications; and
- Digital Media and Connectivity, which focuses on the global market for
connectivity and data transfer between various digital devices and
platforms.
INDUSTRY BACKGROUND
Individuals, businesses, governments and educational institutions
increasingly rely upon computer networks, the Internet, intranets and direct
broadcast systems for information, entertainment and services. The proliferation
of and reliance upon digital data and digital transactions has created an
increasing need to protect and control access to these networks and the devices
that connect to them. For the enterprise, there is a need to control access to
corporate networks and intranets to prevent loss of proprietary data. For
consumers and for
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online merchants or banks, there is a need to authenticate credit cardholders or
bank clients for Internet transactions without jeopardizing sensitive account
information. For digital television broadcasters and Internet service providers,
there is a need to limit access to broadcast content to paying subscribers, and
for downloadable content providers such as Internet music or book companies,
there is a need to generate revenues while protecting copyrighted material. In
all of these areas, standards-based connectivity devices that provide secure,
controlled access are an easily deployed and effective solution.
Digital Television
The research firm Datamonitor estimates that by 2003, 85 million households
will subscribe to digital television in North America, Europe and the
Asia-Pacific region, compared with 15 million households in 1999. This rapid
transition from analog to digital television is being driven by consumer demand
for the very high resolution, high quality video images that digital
broadcasting affords, as well as by the medium's ability to enable delivery of a
broad range of customized, private content and interactive services. Digital TV
may take the form of direct satellite broadcast services, digital cable services
or direct terrestrial broadcasts.
A primary challenge for broadcasters is to limit access to their content to
the intended users such as those who have purchased appropriate subscriptions or
event-by-event pay-per-view privileges. Traditionally, security software that
restricts access to encrypted content has been embedded in set-top boxes that
are connected to a viewer's television set. To take advantage of the digital
broadcasting environment where there are a host of new services offered, set-top
boxes must incorporate many new features in addition to security, such as return
communication via modem, digital video disk read and write capabilities and
personal video recording. For manufacturers of set-top boxes, it can be cost
prohibitive to develop receiver products which can only be used with specific
security systems, as they may not be able to achieve the high volume sales that
such products would require in order to be attractively priced. Likewise,
consumers may not receive the full benefit of competition between various brands
of receivers if those receivers are limited in the security systems they
support.
To address the need for greater competition in the market for advanced
set-top receivers, many industry leaders have endorsed the use of removable
security modules that enable the same set-top box to be used with multiple
security systems. Various standards for removable security have been developed
and adopted around the world. In Europe, the Digital Video Broadcasting-Common
Interface, or DVB-CI standard was developed by the DVB Project, an international
consortium of over 200 enterprises involved in varying aspects of digital
television including France Telecom, Deutsche Telekom, Nokia, Sony and Philips.
Legislation has been enacted in Spain, Switzerland and the United Kingdom
mandating that set-top boxes comply with the DVB-CI standard in order to assure
broad access to digital content without requiring consumers to purchase multiple
set-top boxes. In addition, in the United Kingdom, the British Digital
Broadcasting Consortium has defined a reference design for set-top boxes for the
British digital television market that is compliant with the DVB-CI standard. In
the United States, the Federal Communications Commission has mandated the
conversion of the proprietary cable infrastructure to an open environment that
supports greater competition by 2005. To support this move, CableLabs, a
research and development consortium of U.S. cable television multi-system
operators, or MSOs, has developed specifications for removable security as part
of its OpenCable initiative. We believe that similar standards may be adopted in
certain Asian countries in the future.
Digital Video
According to the Consumer Electronics Association, nearly 6 million video
recorders were sold in the U.S. alone in 2000. With most new computers now
capable of playing video, there is a significant demand from consumers worldwide
to be able to upload their videos onto a computer, where they can be simply
viewed or shared with family and friends via email or posting to a Web site. The
majority of video cameras in use today create analog video recordings that must
be converted to a digital, compressed format known as MPEG in order to be played
on a computer. Likewise, the millions of video recordings already created by
consumers could be uploaded to computers if they were converted to an MPEG
format.
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PC Security
The proliferation of personal computers in both the home and office
combined with widespread access to computer networks and the Internet have
created significant opportunities for electronic transactions of all sorts:
business-to-business, e-commerce, home banking, etc. For example, Forrester
Research, from its study dated February 2000, anticipates that by 2003,
business-to-business transactions over the Internet will reach $1.3 trillion
annually. In the area of e-commerce, International Data Corporation, or IDC,
reports that the total value of goods and services purchased over the Web grew
from $3 billion in 1996 to $111 billion in 1999, and project further exponential
growth to $708 billion in 2003. However, network and Internet-based transactions
pose a significant threat of fraud, eavesdropping and data theft for both
companies and individuals. As a result of the anonymity of the Internet,
merchants and consumers need assurances that customers are correctly identified
and that the authenticity and confidentiality of information such as credit card
numbers is established and maintained. We believe that successful expansion of
electronic transactions, particularly outside the U.S., will require the
implementation of improved security measures that accurately identify and
authenticate users and reliably encrypt data transmissions over networks and the
Internet.
Authentication of a user's identification is generally accomplished by one
of two approaches: passwords, which are codes known only by specific users; and
tokens, which are user-specific physical devices that only authorized users
possess. Passwords, while easier to use, are also the least secure because they
tend to be short and static, and are often transmitted without encryption. As a
result, passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons. Tokens range from simple credit card-size objects to
more complex devices capable of generating time-synchronized or
challenge-response access codes. Certain token-based systems require both
possession of the token itself and a personal identification number, or PIN, to
indicate that the token is being used by an authorized user. Such an approach,
referred to as two-factor authentication, provides much greater security than
single factor systems such as passwords or the simple possession of a token.
One example of a token used in two-factor authentication is the smart card,
a credit card-sized plastic card that contains an embedded microprocessor,
memory and a secure operating system. In addition to their security
capabilities, smart cards are able to store data such as account information,
health care records, merchant coupons, still or video images and, in some cases,
cash. We believe that smart cards are ideally suited to serve as tokens for
network transactions and electronic commerce, both for their security
capabilities and for the added value of the applications they support. While the
use of smart cards in the U.S. has been limited to a few government, education
and healthcare system deployments to date, smart card use is widespread in
Europe, where the existence of multiple languages and currencies has created a
demand for common solutions that enable businesses and consumers to conduct
their affairs effectively and efficiently while moving from country to country.
The benefits of smart cards are beginning to influence industry leaders to
incorporate smart card technology into their product development. Microsoft and
Netscape have both endorsed smart cards as key components of their respective
data security architectures, have released application program interfaces, or
APIs, for smart cards and have incorporated smart card access or smart card
security features into Microsoft Windows NT 5.0 and Netscape Communicator 5.0,
respectively. In addition, Microsoft has incorporated support for smart cards in
its Windows 2000 operating system. Sun Microsystems has released a Java
application program interface for smart cards and has integrated our SmartOS(TM)
smart card interface architecture and Smart Transporter chip into its Java
Station in the Java operating system. In 2000, Visa and Mastercard launched
smart cards to their subscribers, following American Express's lead in the first
widescale commercial deployment of smart cards in the U.S. several months
earlier. However, consumer demand for smart cards still lags industry support
for these tokens, as applications such as discount and reward programs designed
to create customer loyalty are not in place despite widespread smart card
deployment. We believe that new applications that appeal to consumers will drive
the adoption of smart card technology for e-commerce and electronic business
transactions in the United States. We also believe that as smart card-based
security systems become accepted in the United States, users outside the United
States will adopt similar systems.
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Digital Media Transfer
The proliferation of PCs in both the home and office, as well as the
explosive growth of Internet use, has led to widespread consumer familiarity
with the storage, manipulation, transfer and management of digital content, from
photographs to music to personal calendars. In recent years, digital appliances
have emerged which augment the PC in their ability to access or manipulate
digital data, including digital cameras, digital audio player/recorders,
personal digital assistants, highly portable computers and "smart" cellular
telephones. The market for these advanced electronic products is growing
rapidly. According to IDC, 18 million digital appliances were shipped worldwide
in 1998. IDC expects this number to increase to more than 75 million by 2002.
Transferring content between digital appliances and the PC is, in many
cases, either more complex or less convenient than consumers would like. First,
while many digital appliances use removable media cards with quick loading flash
memory to store content, there are multiple, competing standards of media in
use, including SmartMedia(TM), CompactFlash(TM), Memory Stick(R),
MultiMediaCard(TM) and SecureDigital(TM) media cards. Because there are multiple
types of flash media, there are no standard reader ports on PCs for these media.
Second, consumers who choose to directly connect their digital appliances to
their PCs must use cables to transfer content. Often this involves plugging the
cable into the back of the PC, which is inconvenient. Third, the speed of
transfer of data using this method is very slow when large amounts of data are
being transferred. This is inconvenient for the consumer, and is also
detrimental for the effectiveness of the digital appliance, whose batteries must
provide power for this type of time-consuming transfer.
While many consumers have increased their use of digital appliances, there
is still a large group of potential users that has not ventured beyond desktop
PCs because of the inherent difficulty of connecting digital appliances that
have non-conforming interfaces and difficult-to-master connections. 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 digital data between PCs and digital appliances. For example, the rapid
growth of the digital camera market is based, to a large degree, upon consumers'
desire to both transfer images to family members and others through the Internet
and manipulate the captured images with their PCs. Accordingly, one of the
principal challenges faced by manufacturers of consumer digital appliances is
the convenient transfer of content between their appliances and PCs or other
digital appliances.
SCM MICROSYSTEMS' PRODUCTS
SCM Microsystems develops and sells products that enable people to
conveniently access secure digital content and services, enabling a wide range
of consumer, business and government applications. Our products include a range
of solutions from silicon and software components to fully integrated hardware
solutions that enable secure exchange of electronic information for applications
such as e-commerce, broadband content delivery and secure content transfer by
providing controlled access points to platforms such as PCs, digital appliances
and digital television set-top boxes. We believe that our solutions provide a
necessary component to the market for these applications and others to enable
their continued market acceptance and growth.
We have developed our products using our core competencies in smart card
and PC interoperability, digital television conditional access and PC Card
expertise and flash memory chip experience. We sell our industry
standards-compliant hardware, software and silicon solutions both to original
equipment manufacturer, or OEM, customers in the consumer electronics, computer,
digital appliance, digital media and conditional access system industries, and
also to the retail channel. We provide high quality, easy-to-use solutions in
the following product categories:
DIGITAL TELEVISION
Conditional Access Modules
Our conditional access modules combine our smart card interface technology
with the proprietary descrambling code of a digital television content provider,
providing a cost-effective means of controlling access to digital broadcasts.
Our conditional access modules utilize a smart card to determine if a viewer has
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access to a given content provider's service. If the viewer is authorized, the
conditional access module descrambles the signal for viewing.
Our conditional access modules comply with the DVB-CI standard for
removable security for digital television systems. This allows them to be used
with any open standards television receiver, and enable the receiver to accept
content from multiple service providers. Subscribers wishing to change service
providers can do so just by removing one conditional access module and inserting
another. Service providers also benefit from seamless security upgrades and
reductions in fraud. Our conditional access modules enable content providers to
deliver a variety of services including video-on-demand, pay-per-view,
interactive video, home shopping, home banking and interactive games.
We sell our conditional access module platforms to security encryption
system providers including Mindport, Nagra-Kudelski, Philips, NDS, France
Telecom and Telenor. These encryption companies in turn provide their security
systems, including our conditional access modules, to major European content
providers including France Telecom, Telenor (Norway Telecom) and The Kirch Group
(BetaDigital/Beta Research); consumer electronics companies such as Nokia,
Panasonic, Philips and Toshiba; and broadcasters such as BBC, ITV (UK), Channel
4 (UK), Telefonica (Spain) and SVT (Sweden).
We are actively involved in the development and adoption of removable
conditional access systems to support open digital receivers worldwide. We are
currently key contributors to the European DVB and U.S. OpenCable
standards-setting organizations for removable conditional access. We have
supplied 90% of the open standards-based security modules for European digital
TV, and based on that experience, co-authored the specifications for the U.S.
Point of Deployment (POD) modules, which are scheduled to be deployed throughout
the U.S. cable system by 2005. We continue to support the development of the
worldwide digital TV market by working with industry standards organizations
such as CableLabs, DVB and Free Universe Network, or FUN, a consortium of
companies supporting open digital television platforms in Germany; leading
consumer electronics companies; and security system providers to achieve
interoperability between multiple conditional access systems, head end
transmitters and set tops, all of which depend on our conditional access modules
for encryption and de-encryption.
CIMaX(R)
Our CIMaX is a controller chip that enables digital TV receiver
manufacturers to quickly create equipment that can accept common interface
modules, including DVB-CI compliant conditional access modules. The CIMaX
controller interfaces with major digital TV receiver microprocessors and
includes support for other systems critical to implementing removable
conditional access.
DIGITAL VIDEO
Under our Dazzle(TM) brand, we offer a number of digital video products,
designed to be plug-and-play devices for novice to advanced users. These
products focus on applications for creating and using TV-quality digital video,
particularly in capturing analog video to the PC, where it is converted to
digital MPEG video format for viewing, editing and/or publishing. Applications
include creating and editing home videos, creating streaming audio and video for
Web pages and video e-mail, developing video-enhanced PowerPoint presentations,
and designing and distributing educational or training materials on CD-ROMs.
We sell our Dazzle branded digital video products in the U.S., Germany,
Japan and UK primarily through large specialized distributors such as Ingram
Micro and Tech Data and various retail outlets such as Best Buy, CompUSA,
Dixons/PC World, Fry's Electronics, Office Depot, Staples, Sears and Walmart.
Dazzle Video Creator
Our Dazzle Digital Video Creator(TM) allows users to easily connect a
camcorder to the PC and create TV-quality MPEG 1 format video and still images
from analog videos such as home movies. Connection is via USB cable. Software in
the product also allows users to edit videos by removing unwanted scenes or
adding special effects such as music, transitions, titles and narration. The
resulting digital video can then be recorded
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back to VHS tape for viewing on a standard video cassette recorder, or saved to
CD-ROM. In addition, the Digital Video Creator enables easy posting of videos to
Websites or in emails where they can be shared with friends, family or
colleagues.
Dazzle Hollywood DV-Bridge
Our Dazzle Hollywood DV-Bridge allows users to convert analog video such as
VHS tapes to high quality DV video, a standardized high-resolution video format.
DV video can also be converted to analog, making it easy to view digital videos
created on the PC on a traditional video cassette recorder. Hollywood DV-Bridge
allows users to capture video on a Mac or PC by connecting an analog camcorder,
TV, VCR or DV/D8 camcorder via 1394 interface. Videos can also be converted
between analog and DV format without the use of a computer, by connecting both
an analog and DV camcorder to the Hollywood DV-Bridge product. Software in the
product also allows users to edit video in the DV format, preserving video
quality during the editing process and speeding up the editing process.
PC SECURITY
Smart Card Readers
We develop and sell smart card readers, software and application specific
integrated circuits, or ASICs, used to control access to computers or networks.
These smart cards readers act as a "lock" on the computer or network that can
only be opened by a user with a legitimate smart card "key," supporting security
in enterprise or government networks and enabling rapidly emerging Internet
applications such electronic loyalty programs, online cash downloading, home
banking and on-line credit card transactions.
Our products employ an open-systems architecture that provides
compatibility across a range of hardware platforms and software environments and
accommodates remote upgrades so that compatibility can be maintained as the
security infrastructure evolves. We have made significant investments in
software that enable our smart card readers and components to read any of the
billions of smart cards in the world, regardless of manufacturer or application.
Our smart card readers are also available with a variety of interfaces,
including USB, PCMCIA or serial port.
To ensure compatibility with multiple platforms and applications, we offer
a range of smart card readers for use with both desktop and notebook computers,
from simple PC Card reader devices to more complex PIN entry systems. Our
readers include the SmartReady(R), SmartSecure(R), SmartTrust and SmartRetail
lines. Our readers are compatible with digital identification means, such as a
password typed on a keyboard, as well as biometric identification means, such as
a thumbprint placed on the reader. We sell our readers to end user
organizations, such as large enterprises and the U.S. government, and also to
original equipment manufacturers who incorporate our readers into their devices,
such as PCs or set top boxes. We typically customize our smart card readers with
unique customer casing designs and configurations.
SmartOS Smart Card Interface Architecture; SmartTransporter Chip
SmartOS is a proprietary operating system for smart card readers that
utilizes our SmartTransporter chip and a unique firmware technology to make it
possible to easily integrate smart cards with a wide variety of PC and
stand-alone devices, thus allowing companies to integrate smart card support
cost-effectively within desktop, notebook or network computers, USB or serial
devices and keyboards as well as point of sale terminals and vending machines.
SmartOS allows integrators to utilize only essential components to control cost
and maximize design flexibility. Many hardware designs, such as a keyboard or
network computer, may already incorporate a controller chip but lack an
interface unit and firmware for the completion of a smart card reader solution.
Instead of being forced to purchase all components, SmartOS offers just those
components an integrator needs and those tools necessary for the quick
implementation of smart card readers at a minimum cost.
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DIGITAL MEDIA TRANSFER AND CONNECTIVITY
Our digital media and connectivity products address the need for
connectivity between digital platforms as well as connectivity for the rapidly
emerging market for digital cameras, Internet music players and other digital
appliances that utilize small flash memory media.
Digital Media Readers
Our digital media readers enable quick and convenient transfer of digital
content between a digital appliance and the PC by enabling users to read or
write content directly to the appliance's flash memory card. We offer media
readers with various commonly used platform interfaces, such as USB and SCSI, to
support the major types of digital flash media on the market, including
CompactFlash, MultiMediaCard, Memory Stick and SmartMedia. Our media readers are
designed and marketed to complement specific digital appliances, such as digital
still cameras and Internet music players. In addition, our digital media combo
readers read and write digital content from multiple storage devices -- such as
CompactFlash, SmartMedia and PC Cards -- alleviating the need for a special
reader for each digital appliance using a different flash memory card or other
storage media.
We have also developed secure digital media readers for an emerging class
of flash memory cards, called Secure Digital, or SD memory cards. The SD Memory
card addresses the need for fast, secure and convenient transfer and storage of
copyrighted or sensitive digital content, which is an increasing concern as the
Internet becomes a more viable venue for selling content such as music.
Copyrights on content such as music or audio books protect the composer, artist
or author, but cannot be enforced without some way to secure the data being
transferred over the Internet.
We sell our digital media readers both to OEMs and to the retail channel.
Original equipment manufacturers either bundle our readers with their own
products, such as digital cameras, or offer the readers in the aftermarket for
their products under their own brands. In the retail channel, our digital media
reader products carry the Microtech brand and product names including Microtech
CameraMate and Microtech ZiO! We sell our Microtech branded digital
reader/writer products through various electronic and photography stores
including B&H Photo, CompUSA, The Good Guys, MicroCenter, CameraWorld.com and
Sams.
Intelligent Cables and ASICs for Connectivity
We offer a variety of intelligent cables and custom ASICs that provide
high-speed connectivity to the PC for digital devices such as scanners, digital
cameras, hard disk drives, CD-RWs, DVD, tape and other removable storage
products. These products support all major operating systems and enable
inter-connectivity through USB, 1394, parallel, PCMCIA, ATA/ATAPI and SCSI
ports.
We sell our intelligent cables and ASICs to OEM customers who use them to
reduce their time to market for new products and to reduce their need to master
connectivity interface technology.
See Note 13 to the consolidated financial statements for financial
information regarding revenue and gross margin for our business segments.
TECHNOLOGY
Most of the markets in which we participate are young, and their needs will
evolve as they mature. For example, early markets such as ours typically require
complete hardware solutions, but over time requirements shift to critical
components such as silicon or software as OEMs increase their knowledge and
volume sales of the technologies being provided. We are committed to developing
products using standards compliant technologies. Our core technologies, listed
below, leverage our development efforts to benefit products across our business
divisions and across markets.
Chip-Level Integration. We have implemented a number of our core
technologies into silicon chips. These include the SmartTransporter chip, the
CIMaX DVB-CI chip and a custom PCMCIA controller based on technology licensed
from Intel and optimized by us. Additionally, our silicon designs for parallel
port and
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USB connectivity are implemented within our digital media and connectivity
products, as well as licensed to other peripheral manufacturers.
Silicon and Firmware. We have developed physical interface technology that
provides interoperability between PCs and smart cards from many different smart
card manufacturers. Our interoperable architecture includes an International
Standards Organization, or ISO, compliant layer as well as an additional layer
for supporting non-ISO compliant smart cards. Through our proprietary integrated
circuits and firmware, our smart card readers can be updated electronically to
accommodate new types of smart cards without the need to change the reader's
hardware. For digital media and connectivity, we leverage our firmware expertise
to provide better compatibility among devices, computer platforms and media
storage cards.
Proprietary Software. We have developed a flexible proprietary software
architecture for real-time downloading of firmware for new smart card protocol
handling requirements into a flash memory chip that resides on the smart card
reader. This software, combined with our proprietary integrated circuits and
firmware described above, allows the reader to accommodate new types of smart
cards without the need to change the reader's hardware. We have filed patent
applications for this software application. We also add value to our digital
media products via software, which allows our customers to perform specialized
functions such as formatting media storage cards.
Complete Hardware Solutions. We provide complete hardware solutions that we
customize in terms of physical design and product feature set to accommodate the
specific requirements of each customer. For example, we have designed and
manufactured digital media reader cases in multiple sizes, colors and shapes to
meet customer specifications. Our hardware products also address the wider needs
of the market for differentiation between various digital media. In addition, we
have entered into technology licensing agreements with Gemplus and Schlumberger,
two of the largest smart card manufacturers in the world, in order to provide
SCM with broader intellectual property rights in this area.
CUSTOMERS AND APPLICATIONS
Our products are targeted at original equipment manufacturers of computer,
telecommunication and digital TV component and systems, as well as the retail
channel. Sales to a relatively small number of customers historically have
accounted for a significant percentage of our total sales. Sales to our top 10
customers accounted for approximately 37% of our total net revenues in 2000. In
2000 and 1999, no customer exceeded 10% of our revenues. In 1998, BetaDigital, a
division of the Kirch Group, accounted for 17% of our revenues. We expect that
sales of our products to a limited number of customers will continue to account
for a high percentage of our total sales for the foreseeable future. The loss or
reduction of orders from a significant customer, including losses or reductions
due to manufacturing, reliability or other difficulties associated with our
products, changes in customer buying patterns, or market, economic or
competitive conditions in the digital information security business, could harm
our business and operating results.
SALES AND MARKETING
We market, sell and license our products worldwide to original equipment
manufacturers and to the retail channel. We utilize a direct sales and marketing
organization, supplemented by distributors, value added resellers, system
integrators and resellers. As of December 31, 2000, we had 132 full-time
employees and consultants engaged in sales and marketing activities. Our direct
sales staff solicits prospective customers, provides technical advice and
support with respect to our products and works closely with customers,
distributors and OEMs. In support of our sales efforts, we conduct sales
training courses, comprehensive targeted marketing programs, advertising,
seminars, trade shows and ongoing customer and third-party communications
programs.
At December 31, 2000, our backlog was approximately $30 million, as
compared to approximately $34 million at December 31, 1999. Our backlog consists
of all written purchase orders for products that have a scheduled shipment date
within the next six months. Orders for our products are usually placed by
customers on an as-needed basis and we have typically been able to ship products
within 30 days after the customer submits a firm purchase order. Our customer
contracts generally do not require fixed long-term purchase
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commitments. In view of our order and shipment patterns and because of the
possibility of customer changes in delivery schedules or cancellation of orders,
our backlog as of any particular date may not be indicative of sales in any
future period.
COLLABORATIVE INDUSTRY RELATIONSHIPS
We are party to collaborative arrangements with a number of corporations
and are a member of key industry consortia. We evaluate, on an ongoing basis,
potential strategic alliances and intend to continue to pursue such
relationships. Our future success will depend significantly on the success of
our current arrangements and our ability to establish additional arrangements.
These arrangements may not result in commercially successful products.
Microsoft. Since September of 1999, SCM Microsystems and Microsoft have
collaborated on the development of an OpenCable(TM) compliant cable ready
receiver that allows open standards, software-based set top boxes to receive
digital cable TV and data transmissions. The device was publicly demonstrated at
several trade shows during 2000.
OpenCable. We are a founding member of the OpenCable project, an initiative
of the cable television industry with a goal of attaining interoperable digital
set-top boxes manufactured by multiple vendors. OpenCable was launched in
September 1997 by Cable Television Laboratories, Inc., or CableLabs, a research
and development consortium of cable television system operators, including most
of the largest multi-system operators in the United States. The OpenCable
process is intended to foster competition among suppliers for key elements of
digital cable networks, while ensuring interoperability of devices connected to
cable networks. We play a leading role in OpenCable, including co-authoring the
OpenCable standards specifications for conditional access to digital TV in the
U.S. We are also the primary source of CableLabs-certified qualification tools
used by consumer electronics manufacturers around the world preparing to enter
the retail digital TV market.
Teletrust. We are a member of Teletrust, a German organization whose goal
is to provide a legally accepted means to adopt digital signatures. Digital
signatures are encrypted personal identifiers, typically stored on a secure
smart card, which allow for a high level of security through internationally
accepted authentication methods. We are actively working on the smart card
terminal committee which defines the standards for connecting smart cards to
computers for applications such as secure electronic commerce over the Internet.
PCMCIA. We are an executive and founding member of Personal Computer Memory
Card International Association, or PCMCIA, an international standards body and
trade association with over 500 member companies. PCMCIA was founded in 1989 to
establish standards for integrated circuit cards and to promote
interchangeability among mobile PCs. Other executive members include Advanced
Micro Devices, AMP, Centennial, Compaq, IBM, Intel, Texas Instruments, 3Com,
Toshiba and Xircom. Since 1990, we have been a member of PCMCIA in Europe. In
1996, we introduced to PCMCIA the DVB-CI standard which was adopted as an
extension to its PC Card standard Release 2.0.
FUN. We are a member of Free Universe Network, a media and technology
alliance in Germany whose goal it is to open up German broadband cable networks
to ensure competition, diversity and unimpeded access for all market
participants. The centerpiece of FUN is the definition of a universal platform
which forms the basis for the distribution and use of all digital programs,
through the integration of DVB common interface technology.
FINREAD. We are a member of FINREAD, a consortium of European banks whose
goal it is to create a secure online payment system based on smart cards that is
affordable and easy to use, deploy and upgrade. Members of the FINREAD
Consortium include Groupement des Cartes Bancaires "CB" (France), Visa EU
(United Kingdom), Europay International (Belgium), Banksys (Belgium), Interpay
Nederland (the Netherlands), SIZ (German Savings Banks Financial Group, Germany)
and Ingenico (France). In addition to our participation with the standards
setting activities of FINREAD, we have been selected by FINREAD to
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provide secure smart card readers for various financial application deployments
in Europe beginning in the second half of 2001.
RESEARCH AND DEVELOPMENT
To date, we have made substantial investments in research and development,
particularly in the areas of physical, token-based access devices and
connectivity interface devices. Our engineering design teams work
cross-functionally with marketing managers, applications engineers and customers
to develop products and product enhancements to meet customer and market
requirements. We also strive to develop and maintain close relationships with
key suppliers of components and technologies in order to be able to quickly
introduce new products that incorporate the latest technological advances. Our
future success will depend upon our ability to develop and to introduce new
products that keep pace with technological developments and emerging industry
standards while addressing the increasingly sophisticated needs of our
customers.
Our research and development expenses were approximately $13.5 million,
$8.9 million and $6.4 million for the years ended December 31, 2000, 1999 and
1998, respectively. As of December 31, 2000, we had approximately 214 full-time
employees engaged in research and development activities, including software and
hardware engineering, testing and quality assurance and technical documentation.
All of our research and development activities occur in India, France, Germany
and the U.S. We fund a portion of our research and development activities with
technology development revenues received from OEM customers in connection with
design and development of specific products. We recognized approximately $1.4
million, $3.0 million and $2.8 million in technology development revenues in
2000, 1999 and 1998, respectively.
MANUFACTURING AND SOURCES OF SUPPLY
We supplement our internal manufacturing capabilities with contract
manufacturers in both Europe and Asia. We have implemented a global sourcing
strategy that we believe will enable us to achieve greater economies of scale,
improve gross margins and maintain uniform quality standards for our products.
In the event any of our contract manufacturers were unable or unwilling to
continue to manufacture our products, we may have to rely on other current
manufacturing sources or identify and qualify new contract manufacturers. Any
significant delay in our ability to obtain adequate supplies of our products
from current or alternative sources would harm our business and operating
results.
We believe that our success will depend in large part on our ability to
provide quality products and services. As of December 31, 2000, we had 122
full-time employees engaged in manufacturing and logistics activities. We have a
formal quality control program to satisfy our customers' requirements for high
quality and reliable products. To ensure that products manufactured by others
are consistent with our standards, we manage all key aspects of the production
process, including establishing product specifications, selecting the components
to be used to produce our products, selecting the suppliers of these components
and negotiating the prices for these components. In addition, we work with our
suppliers to improve process control and product design. Our quality control
specialists conduct on-site inspections of our suppliers, and our products are
tested by our contract manufacturers prior to shipment.
We rely upon a limited number of suppliers of several key components of our
products. For example, we currently purchase ASICs for our Digital TV modules
exclusively from TEMIC, Philips and Atmel, smart card connectors exclusively
from ITT Canon and another supplier and DTV/SwapSmart(R) mechanical components
exclusively from Stocko. Our reliance on only one supplier could impose several
risks, including an inadequate supply of components, price increases, late
deliveries and poor component quality. Disruption or termination of the supply
of these components could delay shipments of our products which could have a
material adverse effect on our business and operating results. These delays
could also damage relationships with current and prospective customers.
COMPETITION
The market for digital data security, access control and digital media
transfer products is intensely competitive and characterized by rapidly changing
technology. We believe that competition in this market is
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likely to intensify as a result of increasing demand for security products. We
currently experience competition from a number of sources, including:
- Pinnacle in digital video capture and conversion products;
- ActionTec, Carry Computer Engineering and Greystone in PC Card adapters;
- Advanced Card Systems and O2 Micro in smart card interface chips;
- Advanced Card Systems, Gemplus, Infineer, Litronic, PubliCard and
Towitoko in smart card readers and universal smart card reader
interfaces; and
- Carry Computer Engineering, DataFab, Lexar, SanDisk, Simple Technology
and SmartDisk for digital media readers and connectivity.
We also experience indirect competition from certain of our customers which
currently offer alternative products or are expected to introduce competitive
products in the future. We may in the future face competition from these and
other parties that develop digital data security products based upon approaches
similar to or different from those employed by us. In addition, the market for
digital information security and access control products may ultimately be
dominated by approaches other than the approach marketed by us.
We believe that the principal competitive factors affecting the market for
our products include:
- the extent to which products support industry standards and provide
interoperability;
- the extent to which standards are widely adopted and product
interoperability required within industry segments;
- technical features;
- ease of use;
- quality/reliability;
- level of security;
- strength of distribution channels; and
- price.
While we believe that we compete favorably with respect to these factors,
we may not be able to successfully compete due to these or other factors and
competitive pressures we face could materially and adversely affect our business
and operating results.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect our
proprietary rights. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. We generally enter into confidentiality and non-disclosure
agreements with our employees and with key vendors and suppliers. We have many
trademarks registered in the United States and/or in Europe. We continuously
evaluate the registration of additional trademarks as appropriate. We currently
have patents issued in both the United States and Europe and have other patent
applications pending worldwide. In addition, we have licenses for various other
United States and European patents associated with our products. Although we
often seek to protect our proprietary technology through patents, it is possible
that no new patents will be issued, that our proprietary products or
technologies are not patentable, and that any issued patent will fail to provide
us with any competitive advantages.
There has been a great deal of litigation in the technology industry
regarding intellectual property rights. Litigation may be necessary to protect
our proprietary technology. We have from time to time received claims that we
are infringing upon third parties' intellectual property rights and future
disputes with third parties may
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arise and these disputes may not be resolved on terms acceptable to us. As the
number of products and competitors in our target markets grows, the likelihood
of infringement claims also increases. Any claims or litigation may be
time-consuming and costly, cause product shipment delays, or require us to
redesign our products or require us to enter into royalty or licensing
agreements. Any of these events could have a material adverse effect on our
business and operating results. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
use our proprietary information and software. In addition, the laws of some
foreign countries do not protect proprietary and intellectual property rights to
as great an extent as do the laws of the United States. Our means of protecting
our proprietary and intellectual property rights may not be adequate. There is a
risk that our competitors will independently develop similar technology,
duplicate our products or design around patents or other intellectual property
rights.
EMPLOYEES
As of December 31, 2000, we had a total of 549 full-time employees, of
which 214 were engaged in engineering, research and development; 132 in sales
and marketing; 122 in manufacturing and logistics; and 81 in general management
and administration. None of our employees is represented by a labor union. We
have experienced no work stoppages and believe that our employee relations are
good.
ITEM 2. PROPERTIES
Our corporate headquarters are in Fremont, California where we lease
approximately 38,400 square feet pursuant to a lease agreement which expires on
March 31, 2003. Our European headquarters are located in Pfaffenhofen, Germany,
where we lease approximately 6,900 square feet pursuant to a lease agreement
which began March 2000 and ends February 2005. We lease approximately 69,000
square feet at a facility in Guilford, Connecticut, where the lease term is from
March 2001 to February 2011. We also lease our research and development
facilities in La Ciotat, France and Chennai, India as well as our facilities in
Japan, Munich, Germany, The Netherlands and Singapore. We believe that our
existing facilities will be adequate for our needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to SCM's stockholders during the fourth quarter
of 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Price Range of common stock; Number of Holders; Dividends
Our common stock is quoted on the Nasdaq National Market and on the Neuer
Markt of the Frankfurt Stock Exchange under the symbol "SCMM." The following
table lists the high and low closing prices from the first quarter of 1998.
NASDAQ
NATIONAL MARKET NEUER MARKT
----------------- -------------------
HIGH LOW HIGH LOW
------- ------ -------- --------
FISCAL 1998:
First Quarter............................. $ 88.00 $23.59 DM159.70 DM41.50
Second Quarter............................ $ 78.88 $52.00 DM147.30 DM89.00
Third Quarter............................. $ 68.75 $42.69 DM123.50 DM72.00
Fourth Quarter............................ $ 78.25 $30.00 DM121.50 DM49.00
FISCAL 1999
First Quarter............................. $ 94.75 $60.75 DM168.20 DM110.11
Second Quarter............................ $ 75.88 $40.75 DM132.02 DM79.60
Third Quarter............................. $ 51.63 $38.50 DM97.79 DM69.92
Fourth Quarter............................ $ 71.13 $40.63 DM131.04 DM75.69
FISCAL 2000
First Quarter............................. $128.50 $49.50 DM258.17 DM101.90
Second Quarter............................ $101.38 $53.63 DM204.97 DM113.24
Third Quarter............................. $ 61.75 $36.56 DM130.26 DM82.38
Fourth Quarter............................ $ 41.63 $24.63 DM95.84 DM55.35
FISCAL 2001
First Quarter (through March 22, 2001).... $ 34.13 $15.75 DM69.42 DM30.90
On March 22, 2001, the closing prices of our common stock were $17.31 per
share as reported by the Nasdaq National Market and DM35.60 per share as
reported by the Neuer Markt of the Frankfurt Stock Exchange. As of March 20,
2001, we had approximately 2,331 stockholders of record and beneficial
stockholders.
We have never declared or paid cash dividends on our common stock or other
securities. Our U.S. line of credit requires us to obtain the bank's prior
written consent in order to declare or pay any cash dividends. We currently
anticipate that we will retain all of our future earnings for use in the
expansion and operation of our business and do not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue.................................... $157,834 $127,288 $85,009 $46,423 $30,152
Cost of revenue................................ 104,863 82,624 57,148 30,213 21,030
-------- -------- ------- ------- -------
Gross profit................................... 52,971 44,664 27,861 16,210 9,122
Operating Expenses:
Research and development..................... 13,525 8,900 6,356 4,501 3,196
Selling and marketing........................ 23,373 13,322 8,904 5,923 4,459
General and administrative................... 19,087 11,293 8,819 3,872 2,375
Amortization of goodwill and intangibles..... 5,466 1,265 469 -- --
In-process research and development.......... 4,867 900 3,101 -- --
Impairment of goodwill....................... -- -- 5,211 -- --
Other acquisition and restructuring
charges................................... 657 1,168 3,153 -- --
-------- -------- ------- ------- -------
Total operating expenses............. 66,975 36,848 36,013 14,296 10,030
-------- -------- ------- ------- -------
Income (loss) from operations.................. (14,004) 7,816 (8,152) 1,914 (908)
Interest income (expense), net............... 5,930 6,365 5,832 815 (309)
Foreign currency transaction gains and other
income.................................... 1,946 314 192 688 288
-------- -------- ------- ------- -------
Income (loss) before income taxes and minority
interest in earnings......................... (6,128) 14,495 (2,128) 3,417 (929)
Benefit (provision) for income taxes......... 1,032 (4,801) (2,845) (1,068) (19)
Minority interest in loss (earnings) of
consolidated subsidiaries................. 387 (586) -- -- --
-------- -------- ------- ------- -------
Net income (loss).............................. $ (4,709) $ 9,108 $(4,973) $ 2,349 $ (948)
======== ======== ======= ======= =======
Accretion on redeemable convertible preferred
stock........................................ -- -- -- (802) (287)
-------- -------- ------- ------- -------
Net income (loss) applicable to common
stockholders................................. $ (4,709) $ 9,108 $(4,973) $ 1,547 $(1,235)
======== ======== ======= ======= =======
Basic net income (loss) per share.............. $ (0.32) $ 0.65 $ (0.38) $ 0.35 $ (0.67)
======== ======== ======= ======= =======
Diluted net income (loss) per share............ $ (0.32) $ 0.60 $ (0.38) $ 0.28 $ (0.67)
======== ======== ======= ======= =======
Shares used in computations:
Basic net income (loss) per share............ 14,641 14,082 13,253 4,394 1,838
======== ======== ======= ======= =======
Diluted net income (loss) per share.......... 14,641 15,086 13,253 5,614 1,838
======== ======== ======= ======= =======
DECEMBER 31,
--------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 66,926 $125,409 $129,918 $56,073 $ 2,666
Working capital (deficit)..................... 123,745 150,491 146,950 62,363 (1,442)
Total assets.................................. 252,395 210,984 183,320 75,602 13,820
Redeemable convertible preferred stock........ -- -- -- -- 5,068
Total stockholders' equity (deficit).......... 210,160 175,796 158,779 65,183 (5,428)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. SCM's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in this section as well as those discussed under the
heading "Factors That May Affect Future Operating Results" and elsewhere in this
document. This discussion should be read together with the financial statements
and the related notes thereto set forth in "Item 8. Financial Statements and
Supplementary Data."
OVERVIEW
SCM Microsystems designs, develops and sells hardware, software and silicon
that enables people to conveniently and securely access digital content and
services, including content and services that have been protected through
digital encryption. We sell our products primarily into the Digital Television,
Digital Video, PC Security and Digital Media Transfer markets. Our target
customers are end user consumers as well as manufacturers in the consumer
electronics, computer, digital appliance, digital media and conditional access
system industries. We sell and license our products through a direct sales and
marketing organization, both to the retail channel and to original equipment
manufacturers. We also sell through distributors, value added resellers and
systems integrators worldwide. Operationally, we have organized our business
around three divisions: Digital Television and Video, PC Security and Digital
Media and Connectivity. We were organized in Delaware in 1996.
ACQUISITIONS
Intermart and ICS
On May 19, 1998, SCM Microsystems completed the acquisition of Intermart
Systems K.K. ("Intermart") based in Tokyo, Japan. Intermart designs and sells
memory card readers and adapters used primarily in digital photography and other
digital media transfers. Total consideration paid was $7.7 million, with $4.9
million paid in cash and the balance paid through the issuance of 46,551 shares
of SCM stock.
On June 3, 1998, we completed the acquisition of Intellicard Systems Pte.
Ltd. ("ICS"), based in Singapore. ICS is a contract manufacturing company that
manufactures certain of our products, including smart card readers, DVB
conditional access modules, and PC Card adapters. Total consideration paid was
$18.4 million, of which $14.9 million was paid in cash and $3.5 million was paid
through the issuance of 61,185 shares of SCM stock. Approximately $11.4 million
of the cash portion of the consideration was paid in exchange for cash and a
$2.0 million shareholder note held by ICS at the closing of the transaction. The
note was repaid by the shareholder prior to June 30, 1998.
The acquisitions of Intermart and ICS were accounted for pursuant to the
purchase method of accounting. Accordingly, the historical financial statements
of SCM exclude the assets and liabilities, results of operation and cash flows
of Intermart and ICS for all periods ending at or prior to the respective dates
of acquisition. The assets and liabilities of Intermart and ICS were recorded at
their fair values at the respective acquisition dates.
In the second quarter of 1998, in connection with these acquisitions, SCM
originally allocated approximately $5.9 million of the $26.2 million purchase
price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete research and development projects. At the date of acquisition,
this amount was expensed as a non-recurring charge as the in-process technology
had not yet reached technological feasibility and had no alternative future
uses. In light of the Securities and Exchange Commission's interpretation of the
accounting for acquired in-process research and development, as discussed in
Note 2 to the consolidated financial statements, during the fourth quarter of
1998 we revised the amount of purchase price allocated to in-process research
and development relating to these acquisitions. Accordingly, our consolidated
financial statements for the nine months ended September 30, 1998 were
voluntarily restated to reduce the in-process research and development charge by
$2.8 million and to increase goodwill by a like amount. ICS and Intermart had
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approximately ten projects in progress at the time of the acquisition including
USB interface readers for CompactFlash, SmartMedia and now defunct mini-card
media, higher speed digital media readers for CompactFlash, SmartMedia and
mini-card formats, digital media readers redesigned for lower cost and
complementary product compatibilities, and improved high-speed PC Card modems.
The percentage completion of the projects at the time of acquisition were
as follows:
USB readers (three projects)................................ 50%
Higher speed readers (three projects)....................... 90%
Lower cost/high compatibility readers (three projects)...... 10%
High-speed PC Card modems (one project)..................... 40%
The fair value assigned to purchased in-process technology was determined
by estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the projects
and discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and the elapsed portion of the total project time.
The fair value of the in-process research and development was allocated to the
projects as follows (in thousands):
USB readers (three projects)................................ $ 676
Higher speed readers (three projects)....................... 1,468
Lower cost/high compatibility readers (three projects)...... 256
High-speed PC Card modems (one project)..................... 701
------
$3,101
======
The revenue projection used to value the in-process research and
development is based on unit sales forecasts for worldwide sales territories and
adjusted to consider only the revenue related to development achievements
completed at the acquisition date. Projected annual revenues for each of the
in-process development projects were assumed to increase from product release
through 2000, decline somewhat in 2001 and 2002, and decline significantly from
2003 and 2004. An insignificant amount of revenue is projected for the USB
readers in 2005 through 2007, which is estimated to be the end of the in-process
technology's economic life. Gross profit was assumed to be 45% for the USB
products, 30% on the higher speed readers, and 40% on the higher compatibility
products and the high-speed PC Card modems. The projected gross margins were
based on estimated costs of revenues which primarily include printed circuit
boards, integrated circuits and related electronic components, plastic molding
and tooling costs, assembly and testing costs, and packaging. These projections
were based on SCM's experience with similar products. Estimated operating
expenses, income taxes and capital charges to provide a return on other acquired
assets were deducted from gross profit to arrive at net operating income for
each of the in-process development projects. Operating expenses were estimated
as a percentage of revenue and included sales and marketing expenses,
administrative expenses, and development costs to maintain the technology once
it has achieved technological feasibility. In addition, net cash flow estimates
were adjusted to allow for fair return on working capital and fixed assets,
charges for franchise and technology leverage and return on other intangibles. A
30% discount rate, which represents a premium to SCM's cost of capital, was used
to discount the net cash flows back to their present value. If these projects
were not successfully developed, we would not have been able to realize the
value assigned to the in-process research and development projects. All these
projects had been completed or terminated at December 31, 2000.
Shuttle
On November 4, 1998, SCM issued approximately 828,000 shares of its common
stock to the shareholders of Shuttle Technology Group Ltd., a privately-held
company based in England, in exchange for all of the outstanding share capital
of Shuttle. The Shuttle merger has been accounted for as a pooling of interests
and, accordingly, our consolidated financial statements have been restated for
all periods prior to the
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merger to include the results of operations, financial position and cash flows
of Shuttle. No significant adjustments were required to conform the accounting
policies of SCM and Shuttle.
In connection with the Shuttle merger, in the fourth quarter of 1998 we
recorded nonrecurring charges totaling $9.7 million, consisting of $2.3 million
of expenses for attorneys, accountants, financial printing, due diligence,
filing fees and other regulatory costs; $5.2 million for accelerated
amortization of goodwill resulting from its impairment due to product line and
sales channel redundancies, and $2.2 million for impaired and redundant assets
and personnel severance costs. Of this amount, $1.9 million was included in
costs of revenues and the remainder included in operating expenses.
As separate companies, total revenues and net loss for the individual
entities were as follows (in thousands):
YEAR ENDED
DECEMBER 31,
1998
------------
Total revenue:
SCM....................................................... $64,755
Shuttle................................................... 20,254
-------
$85,009
=======
Total net loss:
SCM....................................................... $(4,424)
Shuttle................................................... (549)
-------
$(4,973)
=======
Dazzle Multimedia Inc.
On June 30, 1999, we acquired a 51% interest in Dazzle Multimedia, Inc., a
privately held company based in Fremont, California, in a transaction that was
accounted for under the purchase method of accounting. Prior to the acquisition,
SCM had an investment in Dazzle totaling approximately $6.5 million consisting
primarily of a $2.5 million convertible loan, a $0.2 million equity investment
and accounts receivable of $3.8 million from Dazzle resulting from sales to
Dazzle during 1998 and 1999 prior to the acquisition date.
The 51% interest was acquired by SCM directly from Dazzle in exchange for
the conversion of the convertible loan and $2.0 million of the receivables
discussed above and upon the exercise by SCM of a common stock warrant of $0.1
million. The warrant was originally issued by Dazzle in connection with the
convertible loan financing transaction. Based on an independent valuation of
Dazzle at the time of closing the transaction, which included a weighting of
projected future discounted cash flows and market comparables, the net
investment of $6.6 million (initial investment of $6.5 million plus $0.1 million
warrant exercise) for a 51% stake in Dazzle, was reduced by an impairment charge
of $0.6 million to reflect a fair value of $6.0 million. Included in other
acquisition and restructuring charges is the $0.6 million impairment charge,
$0.3 million of headcount termination costs and $0.3 million of other costs.
At the date of the transaction, Dazzle had outstanding convertible notes,
convertible preferred stock and stock options that were potentially dilutive
securities. To the extent Dazzle issued additional common shares related to
these potentially dilutive securities, SCM would receive an equivalent number of
shares at no additional costs, to retain our 51% ownership interest.
Effective January 1, 2000, SCM and Dazzle entered into an additional
agreement related to Dazzle options granted and new stock issuances subsequent
to the date SCM acquired its majority interest. Under this agreement, in
connection with each Dazzle equity issuance, each time Dazzle issued additional
capital stock SCM automatically purchased shares under similar terms to retain
SCM's 51% ownership interest in Dazzle.
At the time of the acquisition, the estimated aggregate fair value of
Dazzle's research and development efforts that had not reached technological
feasibility as of the acquisition date and had no alternative future
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uses was estimated by an independent valuation specialist to be approximately
$0.9 million, and was expensed at the acquisition date. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to incomplete research and development projects. Dazzle had two projects
considered to be in-process technology at the time of the acquisition. These
projects were for Dazzle's MPEG 1 and MPEG 2 products, both due for completion
in the first quarter of 2000.
The percentage completion of these projects at the time of acquisition were
as follows:
MPEG 1...................................................... 70%
MPEG 2...................................................... 33%
The fair value assigned to purchased in-process technology was determined
by estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the projects
and discounting the net cash flows to their present value. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process research and
development was based on units sales forecasts for worldwide sales territories
and was adjusted to consider only the revenue related to development
achievements completed at the acquisition date. Projected annual revenues for
the in-process development projects were assumed to increase from product
release through 2003 and decline significantly in 2004. Gross profit was assumed
to be 37% in 2000 and 40% from 2001 through 2004. The projected gross margins
were based on estimated costs of revenues which primarily include printed
circuit boards, integrated circuits and related electronic components, plastic
molding and tooling costs, assembly and testing costs, and packaging. These
projections were based on Dazzle's experience with similar products. Estimated
operating expenses, income taxes and capital charges to provide a return on
other acquired assets were deducted from gross profit to arrive at net operating
income for the in-process development projects. Operating expenses were
estimated as a percentage of revenue and included sales and marketing expenses,
administrative expenses, and development costs to maintain the technology once
it has achieved technological feasibility. In addition, net cash flows estimates
were adjusted to allow for fair return on working capital and fixed assets. A
40% discount rate was used to discount the net cash flows back to their present
value. If these projects had not been successfully developed, we would not have
been able to realize the value assigned to the in-process research and
development projects. Total costs incurred and estimated to complete both
projects as of the acquisition date were approximately $1.9 million. As of
December 31, 2000, all of these estimated costs had been incurred.
In the third and fourth quarter of 2000, SCM acquired an additional 46.2%
of Dazzle's outstanding common stock for $14.6 million in cash and 533,000 of
SCM common stock valued at approximately $19.8 million at the acquisition. SCM
also assumed Dazzle's stock option program resulting in an increase in goodwill
of approximately $1.6 million. Legal costs were estimated at $0.1 million.
At the time of the acquisition, the estimated aggregate fair value of
Dazzle's research and development efforts that had not reached technological
feasibility as of the acquisition date and had no alternative future uses was
estimated by SCM's management to be approximately $2.1 million, and was expensed
at the acquisition date. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to incomplete research and development
projects. Dazzle had four major projects considered to be in-process technology
at the time of the acquisition. These projects were MovieStar, EmMe II, Mojave
and My TV. EmMe II and Mojave had a planned January 2001 release while MovieStar
and My TV had a planned March 2001 release.
The percentage completion of these projects at the time of acquisition were
as follows:
MovieStar................................................... 56%
EmMe II..................................................... 59%
Mojave...................................................... 57%
My TV....................................................... 57%
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The fair value assigned to purchased in-process technology was determined
by estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the projects
and discounting the net cash flows to their present value. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process research and
development is based on units sales forecasts for worldwide sales territories
and adjusted to consider only the revenue related to development achievements
completed at the acquisition date. Projected annual revenues for the in-process
development projects were assumed to increase from product release through 2003
and decline significantly in 2004 and, except for MovieStar DVC II, generate no
revenue in 2005. Gross profit was assumed to be 48% in 2001, 49% in 2002, 50% in
2003 and 51% in 2004 for the highest priced products. Gross profit was assumed
to be 30% in 2001, 31% in 2002 and 32% thereafter for the mid-tier priced
products. For the lower priced products, gross profit was assumed to be 25% for
all years projected. The projected gross margins were based on estimated costs
of revenues which primarily include printed circuitry, integrated circuits and
related electronic components, plastic molding and tooling costs, assembly and
testing costs, and packaging. These projections were based on Dazzle's
experience with similar products. Estimated operating expenses, income taxes and
capital charges to provide a return on other acquired assets were deducted from
gross profit to arrive at net operating income for the in-process development
projects. Operating expenses were estimated as a percentage of revenue and
included sales and marketing expenses and administrative expenses. Development
costs are assumed to be applicable for 2001 only once technological feasibility
has been achieved. In addition, net cash flows estimates were adjusted to allow
for fair return on working capital and fixed assets. A 24.5% to 31.5% discount
rate was used to discount the net cash flows back to their present value based
on the risks associated with each project. If these projects are not
successfully developed, we may not realize the value assigned to the in-process
research and development projects. Total costs incurred as of the acquisition
date for the MovieStar, EmMe, Mojave and My TV projects were approximately
$350,000, $100,000, $316,000 and $75,000, respectively. Expenses to be incurred
of $280,000, $70,000, $243,000 and $200,000, respectively, were estimated to
complete the projects at the date of acquisition. As of December 31, 2000,
MovieStar had incurred costs of approximately $472,000 and was 75% complete with
an estimated $158,000 to finish. EmMe had incurred costs of approximately
$153,000 and was 90% complete with an estimated $17,000 to finish. Mojave had
incurred costs of approximately $503,000 and was 90% complete with an estimated
$56,000 to finish. My TV had incurred costs of approximately $206,000 and was
75% complete with an estimated $69,000 to finish.
Microtech International
On June 27, 2000, SCM paid $7.5 million in cash and issued approximately
98,700 shares of its common stock, valued at $91.19 per share, to the
shareholders of Microtech International, a privately held company in North
Branford, Connecticut, in exchange for all of the outstanding share capital of
Microtech. Microtech is a provider of digital photography solutions for the
consumer and business markets. The transaction has been accounted for under the
purchase method of accounting and the results of operations of Microtech have
been included in SCM's results of operations since the date of acquisition. In
connection with the acquisition, SCM incurred acquisition costs of $1.0 million.
Additional payments of up to $5.0 million, in equal amounts of cash and stock,
can be paid to Microtech's former shareholders if Microtech meets certain
revenue and earnings goals to be measured for the last six months of 2000 and
the first six months of 2001. The goals for the period ended December 31, 2000
were not met.
Intangible assets from the acquisition approximated $17.7 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The intangible assets have a life
of five years and are amortized on a straight-line basis.
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Personal Video Division of FAST Multimedia
Effective July 1, 2000, Dazzle acquired the Personal Video Division ("PVD")
of FAST Multimedia AG ("FAST"), a developer of digital video production hardware
and software for professional markets, headquartered in Munich, Germany. The
transaction was accounted for under the purchase method of accounting and the
results of operations of this division were included in SCM's results of
operations since its acquisition. Under the terms of the agreement, Dazzle
acquired FAST's PVD and all the assets of the PVD division, including its
research and development, marketing, sales, distribution and administrative
operations. Dazzle paid FAST approximately $4.0 million in cash for the
division. SCM common stock or cash of approximately $4.0 million could be issued
to FAST if the PVD division meets certain financial performance criteria for the
twelve months ended June 30, 2001.
Intangible assets from the acquisition approximated $4.6 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired. The in-process research and development costs of $0.9 million
were expensed in the third quarter of 2000. These intangible assets are being
amortized on a straight-line basis over their estimated useful lives ranging
from three to five years.
At the time of the acquisition, the estimated aggregate fair value of PVD's
research and development efforts that had not reached technological feasibility
and had no alternative future uses was estimated to be approximately $0.9
million. This amount was expensed in the third quarter of 2000 and represented
the estimated fair value based on risk-adjusted cash flows related to incomplete
research and development projects. PVD had three projects considered to be
in-process technology at the time of the acquisition. These projects were DV.now
AV, DV.twin and TV-Master. As of the date of acquisition, these projects were
estimated to be 80%, 90% and 50% complete, respectively, and were completed in
the fourth quarter of 2000.
The fair value assigned to purchased in-process technology was determined
by estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the projects
and discounting the net cash flows to their present value. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process technology was based on
sales forecasts for worldwide sales territories and was adjusted to consider
only the revenue related to development achievements completed at the
acquisition date. Projected revenues for the in-process technology projects were
assumed to increase from product release to 2002 and to decline significantly in
2003 and 2004. Gross margins were projected to range from 42% for the remainder
of 2000 to 40% for 2001 through to 2004. Projected gross margins were based on
estimated cost of revenues including component costs, tooling costs, assembly
and testing costs and packaging based on PVD's experience with similar products.
Estimated operating costs, income taxes and capital charges to provide a return
on other acquired assets were deducted from gross profit to arrive at net
operating income for the in-process development projects. Operating expenses
were estimated as a percentage of revenues and included sales and marketing
expenses, administrative expenses and development costs to maintain the
technology once technological feasibility was achieved. In addition, net cash
flow estimates were adjusted to allow a fair return on working capital and fixed
assets. A 30% discount rate was used to discount the net cash flows back to
their present value. If these projects were not successfully developed, we would
not realize the value assigned to the in-process research and development
projects. Total costs incurred for the DV.now AV project were approximately
$125,000 as of the acquisition date with an anticipated $35,000 needed for
completion. Total costs incurred for the DV.twin project were approximately
$36,000 as of the acquisition date with an anticipated $5,000 needed for
completion. Total costs incurred for the TV-Master product were approximately
$120,000 as of the acquisition date. These projects were completed by December
31, 2000.
2-Tel BV
On September 28, 2000, SCM paid $4.1 million in cash and issued
approximately 106,229 shares of our common stock, valued at $36.56 per share, to
the shareholders of 2-Tel BV, a privately held company in the
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Netherlands, in exchange for all of the outstanding share capital of 2-Tel.
2-Tel is a provider of hardware and software solutions for the chip and smart
card-based electronic commerce applications. The transaction has been accounted
for under the purchase method of accounting. In connection with the acquisition,
SCM incurred acquisition costs of approximately $0.3 million.
Intangible assets from the acquisition approximated $8.5 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The in-process research and
development costs of $1.9 million were expensed in the last half of 2000. The
intangible assets are being amortized on a straight-line basis over an estimated
useful life of five years.
At the time of the acquisition, the estimated aggregate fair value of
2-Tel's research and development efforts that had not reached technological
feasibility and had no alternative future uses was approximately $1.9 million.
This amount was expensed in the last half of 2000 and represented the estimated
fair value based on risk-adjusted cash flows related to incomplete research and
development projects. 2-Tel had three projects considered to be in-process
technology at the time of the acquisition. These projects were E-Gate 2000,
Retail Application Terminal and the Transmobile Wallet. The E-Gate 2000 and
Retail Application Terminal projects are due to be completed in the fourth
quarter of 2000 while the Transmobile Wallet is scheduled for completion in the
second quarter of 2001. As of the date of the acquisition, the percentage
completion of these projects were estimated to be 79% for the E-Gate 2000, 81%
for the Retail Application project and 31% for the Transmobile Wallet. As of
December 31, 2000, the E-Gate and Retail Application projects were complete and
the Transmobile Wallet was estimated to be 60% complete.
The fair value assigned to purchased in-process technology was determined
by estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the projects
and discounting the net cash flows to their present value. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process technology was based on
sales forecasts for worldwide sales territories and was adjusted to consider
only the revenue related to development achievements completed at the
acquisition date. Since the projected debt-free cash flow for the E-Gate 2000
product was considered to be slightly negative, no in-process technology value
was ascribed to this product. Projected revenues for the two remaining
in-process technology projects were assumed to increase from product release to
2003 and to decline significantly in 2004 and 2005. Gross margins were projected
to range from 62% in the first few years to 54% in 2004 and 2005 for the Retail
Application Terminal and 41% in 2001 to 46% for the following years for the
Transmobile Wallet. Projected gross margins were based on estimated cost of
revenues including component costs, tooling costs, assembly and testing costs
and packaging based on 2-Tel's experience with similar products. Estimated
operating costs, income taxes and capital charges to provide a return on other
acquired assets were deducted from gross profit to arrive at net operating
income for the in-process development projects. Operating expenses were
estimated as a percentage of revenues and included sales and marketing expenses,
administrative expenses and development costs to maintain the technology once it
has achieved technological feasibility. In addition, net cash flow estimates
were adjusted to allow a fair return on working capital and fixed assets. A 45%
discount rate was used to discount the net cash flows back to their present
value for the Retail Application Terminal while a 50% rate was used for the
Transmobile Wallet. The higher rate for the Transmobile Wallet relates to the
additional risk related to technological similarity to existing products and its
stage of completion. If these projects are not successfully developed, we may
not realize the value assigned to the in-process research and development
projects. The calculated value of the in-process technology for the Retail
Application Terminal was $1.7 million and $0.2 million for the Transmobile
Wallet. Total costs incurred for the E-Gate 2000 project were approximately
$360,000 as of the acquisition date with an anticipated $120,000 needed for
completion. Total costs incurred for the Retail Application Terminal were
approximately $324,000 as of the acquisition date with an anticipated $108,000
needed for completion. Total costs incurred for the Transmobile Wallet were
approximately $180,000 as of the acquisition date with an anticipated $200,000
needed for completion. As of December 31, 2000, the E-Gate and Retail
Application Terminal projects were complete and an additional $200,000 was
anticipated to complete the Transmobile Wallet project.
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RESULTS OF OPERATIONS
The following table sets forth certain items from SCM's consolidated
statement of operations as a percentage of total revenue for the periods
indicated:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Net revenue:
Digital TV and Video Products............................. 50.0% 36.6% 31.0%
PC Security Products...................................... 10.2 15.0 21.9
Digital Media and Connectivity Products................... 39.8 48.4 47.1
----- ----- -----
Total net revenue................................. 100.0 100.0 100.0
Cost of revenue............................................. 66.4 64.9 67.2
----- ----- -----
Gross profit................................................ 33.6 35.1 32.8
Operating expenses:
Research and development.................................. 8.6 7.0 7.5
Selling and marketing..................................... 14.8 10.5 10.5
General and administrative................................ 12.1 8.8 10.4
Amortization of goodwill and intangibles.................. 3.5 1.0 0.5
In-process research and development....................... 3.1 0.7 3.6
Impairment of goodwill.................................... -- -- 6.1
Other acquisition and restructuring charges............... 0.4 0.9 3.7
----- ----- -----
Total operating expenses.......................... 42.5 28.9 42.3
----- ----- -----
Income (loss) from operations............................... (8.9) 6.2 (9.5)
Interest income, net........................................ 3.8 5.0 6.8
Foreign currency transaction gains and other income......... 1.2 0.2 0.2
----- ----- -----
Income (loss) before income taxes and minority interest in
earnings.................................................. (3.9) 11.4 (2.5)
Benefit (provision) for income taxes........................ 0.7 (3.8) (3.3)
Minority interest in (loss) earnings of consolidated
subsidiaries.............................................. 0.2 (0.4) --
----- ----- -----
Net income (loss)........................................... (3.0)% 7.2% (5.8)%
===== ===== =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenue. Revenue from product sales is recognized upon product
shipment, when a purchase order has been received, the sales price is fixed and
determinable and collection of the resulting receivable is probable. Provisions
for estimated warranty repairs and returns and allowances are provided for at
the time products are shipped. Net revenue for the twelve months ended December
31, 2000 was $157.8 million compared to $127.3 million in 1999, an increase of
24%. The increase in revenue in 2000 over 1999 was due primarily to increased
shipments of our digital TV and video products, offset by decreased sales of our
PC security products. Revenues from digital TV and video products were $78.9
million in 2000 compared with sales of $46.4 million in 1999. Increases in our
digital TV revenues primarily consisted of increased shipments of our
conditional access modules for digital television broadcasts in Europe.
Increases in our digital video revenues were driven by increased demand for our
Dazzle branded products worldwide. Revenues from Dazzle branded digital video
products have been consolidated in SCM's results since we took a majority
interest in Dazzle Multimedia on June 30, 1999. No Dazzle product sales were
included in the first six months of 1999. Revenues from our PC security products
were $16.0 million in 2000 compared with $19.2 million in 1999. This decrease
was primarily due to reduced demand from the U.S. government for our legacy
SwapBox products in the last three quarters of 2000.
For all product groups, average unit prices remained relatively stable, and
increases in net revenue were due to increased volume shipments. We expect that
quarterly revenues will continue to be higher in the second half of the year
than the first half based on the purchasing patterns of our OEM and retail
customers.
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Gross Profit. Gross profit for 2000 was $53.0 million, or 34% of total net
revenue, compared to $44.7 million, or 35% in 1999. The increase in gross profit
in absolute dollars for the year was due to our increase in net revenue. The
decrease in gross profit as a percentage of net revenue from the 1999 level was
due to lower unit gross margins in all SCM's divisions, caused primarily by a
shift in product mix within those divisions. In the fourth quarter, gross profit
was impacted by higher than expected sales of some older Dazzle digital video
products that carried lower margins, made lower still by a rebate program with
higher than anticipated participation. Digital media and connectivity margins in
1999 also included a $1.1 million charge resulting from the write down of excess
inventory in that division and costs associated with the ramp up of production
of certain digital media and connectivity products in the second quarter of
1999. The write down of inventory resulted from a review of SCM's products in
the digital media and connectivity division, which was conducted following a
slow down in sales of certain products. These declining sales were attributed to
an overlap in SCM's product lines. SCM's gross profit has been and will continue
to be affected by a variety of factors, including competition, the volume of
sales in any given quarter, product configuration and mix, the availability of
new products, product enhancements, software and services, and the cost and
availability of components. Accordingly, gross profit percentages are expected
to continue to fluctuate from period to period.
Research and Development. Research and development expenses consist
primarily of employee compensation and fees for the development of prototype
products. Research and development costs are primarily related to hardware and
chip development, and to a lesser degree, software development. To date, the
period between achieving technological feasibility and completion of software
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, SCM has not capitalized any software
development costs. For 2000, research and development expenses were $13.5
million, compared with $8.9 million in 1999, an increase of 52%. As a percentage
of total net revenue, research and development expenses were 9% in 2000 compared
to 7% for 1999. The increase in absolute amounts in 2000 was primarily due to
increased engineering headcount and related product development costs at SCM's
development centers in France and India, and due to research and development
expenses of Dazzle Multimedia, in which we acquired a majority stake in June of
1999. Personnel related expenses increased by $3.4 million and prototype
expenses increased by $0.6 million in 2000 compared with 1999. Research and
development expenses in 2000 also included $0.5 million in stock-based
compensation expenses related to the assumption of Dazzle's stock option program
following our acquisition of the minority interest of Dazzle in the fourth
quarter of 2000. We believe that the absolute amount of research and development
expenses in 2001 will be higher than in 2000 due to projected increases in
personnel involved in our new product development and customer projects, and
that such expenses will fluctuate as a percentage of total net revenue.
Selling and Marketing. Sales and marketing expenses consist primarily of
employee compensation as well as advertising and other marketing costs. Sales
and marketing expenses for 2000 were $23.4 million, or 15% of revenue, compared
with $13.3 million in 1999, or 11% of revenue, an increase of 75%. The increase
in absolute amounts in 2000 included an increase of $4.6 million in marketing
program costs associated with the retail sales strategy of Dazzle and Microtech
and increases in personnel related expenses including sales headcount and sales
personnel compensation expenses in SCM's U.S. and European offices of $ 3.4
million. Also, sales commissions and travel increased by $0.7 million and $0.4
million, respectively, in 2000 compared to 1999 levels. Sales and marketing
expenses in 2000 also included $0.4 million in stock-based compensation expenses
related to the assumption of Dazzle's stock option program following our
acquisition of the minority interest of Dazzle in the fourth quarter of 2000.
Sales and marketing expenses in 2001 are expected to increase in absolute
amounts as we continue to expand our sales and business development efforts on a
worldwide basis.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing SCM's administrative
functions, professional fees arising from legal, auditing and other consulting
services and charges for allowances for doubtful accounts receivable. In 2000,
general and administrative expenses were $19.1 million, an increase of 69%
compared with $11.3 million in 1999, representing 12% and 9% of total net
revenue for 2000 and 1999, respectively. These increases in absolute amounts
were primarily due to an increase in personnel related expenses of $1.2 million
to support higher levels of business activities; contract termination, dispute
resolution settlement and legal costs in the fourth quarter of 2000 of
approximately $5.0 million; an increase in travel costs of $0.4 million; and an
increase
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in rent expense of $0.4 million. General and administrative expenses in 2000
also included $0.8 million in stock-based compensation expenses related to the
assumption of Dazzle's stock option program following our acquisition of the
minority interest of Dazzle in the fourth quarter of 2000. These increases in
2000 compared to 1999 were offset by a $2.0 million non-recurring allowance for
doubtful accounts recorded in 1999 as a result of cash flow difficulties
experienced by one of our customers. An initial provision of $2.3 million for
bad debt from this customer was made in December 1998. The customer continued to
trade during the first quarter of 1999. During the second quarter of 1999, the
customer filed bankruptcy. As of December 31, 1999 all outstanding balances due
from this customer had been written off. We believe the headcount-driven
component of our general and administrative expenses in 2001 will increase in
absolute amount over 2000 levels due primarily to compensation increases to
existing employees and increases in headcount to support increased levels of
business activity. We expect such costs will fluctuate as a percentage of total
net revenue.
Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles in 2000 was $5.5 million, compared with $1.3 million in 1999. The
increase of $4.2 million in intangible asset amortization resulted from our
acquisitions of Microtech, 2-Tel and Dazzle and from Dazzle's acquisition of
FAST's Personal Video Division.
In-Process Research and Development. In-process research and development
costs of $4.9 million in 2000 were included in SCM's results as one-time charges
for write-off of development efforts that had not yet reached technological
feasibility within our recently acquired companies and had no alternative future
uses as of the various acquisition dates. Of these expenses, $0.9 million
related to the acquisition of FAST's Personal Video Division, approximately $1.9
million related to the acquisition of 2-Tel, and approximately $2.1 million
related to the acquisition of the minority interest of Dazzle. These amounts
were determined by independent appraisals. The $0.9 million recorded in 1999
related to our purchase of 51% of Dazzle's outstanding stock in the second
quarter of 1999.
Other Acquisition and Restructuring Charges. SCM recorded other acquisition
and restructuring charges of $0.7 million in 2000 for the relocation and closure
of certain SCM facilities and asset write-offs associated with those moves. In
1999, in connection with the acquisition of a majority interest in Dazzle
Multimedia, SCM incurred a non-recurring charge of $0.6 million resulting from
the write down of the Dazzle investment at the date of the acquisition,
headcount termination costs of $0.3 million and legal and other costs of $0.3
million.
Interest Income, Net. Interest income, net consists of interest earned on
invested cash, offset by interest paid or accrued on outstanding debt. In 2000,
interest income, net was $5.9 million, compared to $6.4 million in 1999. Lower
average investable cash balances in 2000 resulted in the decrease in interest
income, net in 2000 compared to 1999. We expect continued investment of cash
balances to generate future net investment income in 2001.
Foreign Currency Transaction Gains and Other Income. Foreign currency
transaction gains were $1.6 million in 2000 compared to $0.3 million in 1999.
These foreign currency transaction gains were primarily from gains in
Germany/France ($0.8 million) and Singapore ($0.8 million) being partially
offset by losses in the U.S. ($0.5 million) and other subsidiaries. These gains
and losses resulted primarily from the revaluation of receivables (especially
U.S. dollar denominated receivables) to the functional currency of the
subsidiary. Other income in 2000 included a gain on the sale of Impleo of
approximately $0.4 million offset by other expenses of $0.1 million. There was
no other income in 1999.
Income Taxes. The benefit from income taxes was $1.0 million in 2000, or a
17% benefit compared to a tax provision with a federal statutory rate of 34%.
This benefit resulted principally from net losses generated in the United States
which were partially offset by taxable income generated in foreign
jurisdictions. The effective tax benefit was further reduced by expenses not
deductible for tax purposes primarily consisting of the amortization of
intangibles and goodwill and in-process research and development. As of December
31, 2000, SCM had net operating loss carryforwards of approximately $38.4
million and $11.2 million for U.S. federal and California state income tax
purposes, respectively, and approximately $0.6 million of net operating loss
carryforwards available to offset taxable income in Japan.
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Minority Interest. The minority interest of $0.4 million in 2000 and $(0.6)
million in 1999 reflects the proportion of losses and profits from Dazzle
Multimedia that are attributable to the minority shareholders of Dazzle.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenue. Revenue from product sales is recognized upon product
shipment, when a purchase order has been received, the sales price is fixed and
determinable and collection of the resulting receivable is probable. Provisions
for estimated warranty repairs and returns and allowances are provided for at
the time products are shipped. Net revenue for the twelve months ended December
31, 1999 was $127.3 million compared to $85.0 million in 1998, an increase of
50%. The increase in revenues in 1999 over 1998 was due primarily to increased
shipments of SCM's digital TV products of $16.0 million, which include revenues
to third parties from the acquisition of a majority interest in Dazzle
Multimedia as of June 30, 1999, and an increase in shipments of our digital
media and connectivity products of $26.1 million. The main contributor to
increases in shipments of digital media and connectivity products was shipments
of digital media readers for digital camera and digital music applications.
Sales of our PC security products remained relatively flat at $19.2 million in
1999 compared to $19.1 million in 1998. For all product groups, average unit
prices remained relatively stable, and increases in net revenue were due to
increased volume shipments.
Gross Profit. Gross profit for 1999 was $44.7 million, or 35% of total net
revenue, compared to $27.9 million, or 33% in 1998. The increase in gross profit
in absolute dollars for the year was due to our increase in net revenue. The
increase in gross profit as a percentage of net revenue from the 1998 level was
due to improved unit gross margins in all SCM's divisions caused by increased
sales of development contracts and test tools in the Digital TV and Video and PC
Security divisions, and lower unit costs with stable average selling prices for
certain high volume products in the Digital Media and Connectivity division.
Research and Development. Research and development expenses consist
primarily of employee compensation and prototype expenses. To date, the period
between achieving technological feasibility and completion of software has been
short, and software development costs qualifying for capitalization have been
insignificant. Accordingly, we have not capitalized any software development
costs. For 1999, research and development expenses were $8.9 million, compared
with $6.4 million in 1998, an increase of 40%. As a percentage of total net
revenue, research and development expenses were 7% in 1999 compared to 8% for
1998. The increase in absolute amounts in 1999 was primarily due to increased
engineering headcount and related product development costs at SCM's development
centers in France and India, and due to research and development expenses of
Dazzle Multimedia, in which we acquired a majority stake in June of 1999.
Selling and Marketing. Sales and marketing expenses consist primarily of
employee compensation as well as trade show and other marketing costs. Sales and
marketing expenses for 1999 were $13.3 million, or 10% of revenue, compared with
$8.9 million in 1998, or 11% of revenue, an increase of 50%. The increase in
absolute amounts in 1999 was primarily due to increased sales headcount and
sales personnel compensation expenses in SCM's U.S. and European offices,
increased trade show expenses, and sales and marketing costs of Dazzle
Multimedia, including personnel, trade show and collateral material costs.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing our administrative
functions, third-party administrative services costs such as legal, auditing and
other consulting fees and charges for allowances for doubtful accounts
receivable. For 1999, general and administrative expenses were $11.3 million, an
increase of 28% compared with $8.8 million in 1998, representing 9% and 11% of
total net revenue for 1999 and 1998, respectively. These increases in absolute
amounts were primarily due to increases in administrative headcount in the
company's U.S., UK and German offices to support higher levels of business
activities.
In the second quarter of 1999, SCM recorded a non-recurring allowance for
doubtful accounts totaling $2.0 million as a result of cash flow difficulties
experienced by one of our customers. An initial provision of $2.3 million for
bad debt from this customer was made in December 1998. The customer continued to
trade during the first quarter of 1999. During the second quarter of 1999, the
customer filed bankruptcy. As of December 31, 1999 all outstanding balances due
from this customer had been written off.
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Amortization of Goodwill and Intangibles. Amortization of goodwill and
intangibles in 1999 was $1.3 million, compared with $0.5 million in 1998. The
increase of $0.8 million in intangible asset amortization resulted from the
acquisition of a majority interest in Dazzle Multimedia.
In-Process Research and Development. The aggregate fair value of Dazzle
Multimedia's research and development efforts that had not reached technological
feasibility as of the date of acquisition and had no alternative future uses was
determined by independent appraisal to be approximately $0.9 million, and was
expensed at the date of the acquisition.
Other Acquisition and Restructuring Charges. In connection with the
acquisition of a majority interest in Dazzle Multimedia, SCM incurred a
non-recurring charge of $0.6 million resulting from the write down of the Dazzle
investment at the date of the acquisition, headcount termination costs of $0.3
million and legal and other costs of $0.3 million.
In connection with the Intermart and ICS acquisitions in the second quarter
of 1998 and the merger of Shuttle Technology Group in the fourth quarter of
1998, SCM incurred unusual expenses totaling $3.2 million, consisting of $2.5
million of expenses for attorneys, accountants, financial printing, due
diligence, filing fees and other regulatory costs and $0.7 million for impaired
and redundant assets and personnel severance costs.
Interest Income, Net. Interest income, net consists of interest earned on
invested cash, offset by interest paid or accrued on outstanding debt. In 1999,
interest income and other, net, was $6.4 million, compared to $5.8 million in
1998. Higher average investable cash balances in 1999 and minimal debt service
requirements resulted in the increase in interest income, net in 1999 over 1998.
Income Taxes. The provision for income taxes was $4.8 million in 1999
resulting principally from tax liabilities associated with domestic and foreign
operations of SCM. The increase in the provision over 1998 is due to higher
taxable income in 1999.
Minority Interest. The minority interest of $0.6 million reflects the
proportion of profits from Dazzle Multimedia from June 30, 1999 through December
31, 1999 that are attributable to the minority shareholders of Dazzle.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, SCM's working capital was $123.7 million. Working
capital decreased in 2000 by approximately $26.7 million, primarily because the
increase of accounts receivable of $22.7 million and inventory of $20.9 million
was more than offset by a decrease of cash, cash equivalents and short-term
securities of $58.5 million and an increase in accounts payable of $9.5 million.
In 2000, cash and cash equivalents decreased by $12.0 million primarily due
to cash used in operating activities of $21.9 million being offset by increases
in cash from investing activities of $5.5 million and cash provided by financing
activities of $6.2 million. The use of cash in operating activities primarily
resulted from a net loss of $4.7 million and an increase in deferred income
taxes of $1.0 million, accounts receivable of $22.2 million and inventory of
$18.3 million being only partially offset by the adding back of depreciation and
amortization of $8.3 million, in-process research and development of $4.9
million, the issuance of stock for a contract cancellation of $1.2 million and
an increase in accounts payable of $6.2 million. The increase of cash from
investing activities of $5.5 million consisted primarily of net proceeds of
short-term investments of $46.8 million being partially offset by purchases of
long-term investments of $3.4 million, capital expenditures of $7.0 million and
$31.4 million used to purchase Dazzle, Microtech, 2-Tell and FAST's PVD. Cash
provided by financing activities was $6.2 million consisted primarily of
proceeds for the issuance of equity securities of $10.7 million was partially
offsetting by payment of debt of $4.5 million.
In 1999, cash and cash equivalents decreased by $1.5 million primarily due
to cash used in investing activities of $6.8 million being offset by increases
in cash from operations of $2.0 million and proceeds of stock exercises of $3.6
million. The decrease of cash from investing activities of $6.8 million
consisted primarily of net proceeds of short-term investments of $2.9 million,
and net cash received from businesses acquired of
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$0.8 million that were offset by purchases of long-term investments of $6.0
million and capital expenditures of $4.4 million. The increase of cash from
operations of $2.0 million resulted primarily from income of $9.1 million, an
adjustment for the non-cash effect of depreciation and amortization of $3.2
million and increases in income taxes payable of $0.6 million, accruals of $1.9
million and accounts payable of $1.7 million being only partially offset by an
increase in accounts receivable of $10.3 million and prepaid expenses of $3.0
million.
SCM has revolving lines of credit with two banks in Germany providing total
borrowings of up to DM 3.0 million (approximately $1.4 million as of December
31, 2000). Both lines have no expiration dates. The German lines of credit bear
interest at rates ranging from 7.5% to 10.0%, and borrowings under these lines
of credit are unsecured. We have an unsecured line of credit in France of FF 2.0
million (approximately $0.3 million as of December 31, 2000) which bears
interest at 5.59% and expires in August 2001. In the United States, we have an
unsecured $3.0 million line of credit which bears interest at 8.5% and expires
in May 2001. In addition, we have a Singapore $1.2 million (approximately $0.7
million as of December 31, 2000) overdraft facility with a local bank due on
demand. The Singapore line is secured by a U.S. $0.4 million fixed deposit and
has a base interest rate of 7.5%. Our Japanese subsidiary also has a 67 million
yen (approximately $0.6 million as of December 31, 2000) line of credit with no
expiration date. The Japanese line has an interest rate of 1.75% and is secured
by a 67 million yen deposit. There were no amounts outstanding under any of
these credit facilities as of December 31, 2000 and 1999.
We currently expect that our current capital resources and available
borrowings should be sufficient to meet our operating and capital requirements
through at least the end of 2001. We may, however, seek additional debt or
equity financing prior to that time. There can be no assurance that additional
capital will be available to SCM on favorable terms or at all. The sale of
additional debt or equity securities may cause dilution to existing
stockholders.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition, results of operations or product market share could be materially
adversely affected. In such case, the trading price of our common stock could
decline and you could lose all or part of your investment.
WE HAVE INCURRED OPERATING LOSSES AND MAY NOT REMAIN PROFITABLE.
After considering one-time charges, we have a history of losses with an
accumulated deficit of $6.1 million as of December 31, 2000. Although we were
profitable for each quarter during the year ended December 31, 2000 (before one
time items), we may be unable to sustain profitability on an annual or quarterly
basis in the future.
OUR QUARTERLY OPERATING RESULTS WILL LIKELY FLUCTUATE.
Our quarterly operating results have varied greatly in the past and will
likely vary greatly in the future depending upon a number of factors. Many of
these factors are beyond our control. Our revenues, gross margins and operating
results may fluctuate significantly from quarter to quarter due to, among other
things:
- the timing and amount of orders we receive from our customers which, in
the case of our consumer products and products sold to the government,
may be tied to seasonal demand or budgetary cycles;
- cancellations or delays of customer product orders, or the loss of a
significant customer;
- our backlog and inventory levels;
- our customer and distributor inventory levels and product returns;
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- new product announcements or introductions by us or our competitors;
- our ability to develop, introduce and market new products and product
enhancements on a timely basis, if at all;
- the sales volume, product configuration and mix of products that we sell;
- our success in expanding our sales and marketing organization and
programs;
- technological changes in the market for our products;
- increased competition or reductions in the average selling prices that we
are able to charge;
- fluctuations in the value of foreign currencies against the U.S. dollar;
- the timing and amount of marketing and research and development
expenditures;
- our investment experience related to our strategic minority equity
investments;
- costs related to events such as acquisitions, litigation and write-off of
investments; and
- general business and economic conditions in our markets.
Due to these and other factors, our revenues may not increase or remain at
their current levels. In addition, because a high percentage of our operating
expenses are fixed, a small variation in our revenue can cause significant
variations in our earnings from quarter to quarter and our operating results may
vary significantly in future periods. Therefore, our historical results may not
be a reliable indicator of our future performance.
THE TIMING AND AMOUNT OF OUR REVENUES ARE SUBJECT TO A NUMBER OF FACTORS THAT
MAKE IT DIFFICULT TO ESTIMATE OPERATING RESULTS PRIOR TO THE END OF A QUARTER.
We do not typically maintain a significant level of backlog. As a result,
revenues in any quarter are dependent on contracts entered into or orders booked
and shipped in that quarter. In recent periods, customers, including
distributors of our consumer products, have tended to make a significant portion
of their purchases towards the end of the quarter, in part because they are
able, or believe that they are able, to negotiate lower prices and more
favorable terms. This trend makes predicting revenues more difficult. The timing
of closing larger orders increases the risk of quarter-to-quarter fluctuation.
If orders forecasted for a specific group of customers for a particular quarter
are not realized or revenues are not otherwise recognized in that quarter, our
operating results for that quarter could be materially adversely affected.
OUR LISTING ON THE NEUER MARKT OF THE FRANKFURT STOCK EXCHANGE IN ADDITION TO
OUR LISTING ON THE NASDAQ NATIONAL MARKET EXPOSES OUR STOCK PRICE TO ADDITIONAL
RISKS OF FLUCTUATION.
Our common stock experiences a significant volume of trading on the Neuer
Markt of the Frankfurt Stock Exchange. Because of this, factors which would not
otherwise affect a stock traded solely on Nasdaq may cause our stock price to
fluctuate. Investors outside the United States may react differently and more
negatively than investors in the U.S. to events such as acquisitions, one-time
charges, lower than expected revenue or earning announcements. Any negative
reaction by investors in Europe to such events could cause our stock price to
decrease. In addition, European market conditions in general, or downturns on
the Neuer Markt specifically, regardless of the Nasdaq market conditions, could
negatively impact our stock price.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO REMAIN VOLATILE.
The stock market has recently experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies. During the 12-month period from March 22, 2000 to March
22, 2001, the reported last sale price for our common stock on the Nasdaq market
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ranged from $15.75 to $111.88 per share. Volatility in our stock price may
result from a number of factors, including:
- variations in our or our competitors' financial and/or operational
results;
- comments and forecasts by securities analysts;
- expected or announced relationships with other companies;
- any loss of key management;
- announcements of technological innovations or new products by us or our
competition;
- litigation developments; and
- general market downturns.
In addition, we may not discover, or be able to confirm, revenue or
earnings shortfalls until the end of a quarter, which could result in an
immediate drop in our stock price. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
OUR SALES ARE DEPENDENT ON SEVERAL EMERGING MARKETS, WHICH MAY NOT DEVELOP.
We sell our products primarily to emerging markets which have not yet
reached a stage of mass adoption or deployment. If demand for products in the
Digital TV, Digital Video, PC Security and/or Digital Media Transfer markets
does not develop and grow sufficiently, our revenues and profit margins could
level off or decline. We cannot predict the future growth rate, if any, or size
or composition of the market of our products in any of these markets. The demand
and market acceptance for our products, as is common for new technologies, will
be subject to high levels of uncertainty and risk and may be influenced by
several factors including:
- the slow pace and uncertainty of country-by-country adoption in Europe of
the DVB-CI standard for conditional access modules such as ours;
- the strength of entrenched security and set-top receiver suppliers in the
U.S. who may resist the opening of the U.S. digital television market to
greater competition through the use of removable conditional access
modules such as ours;
- the ability of financial institutions and the U.S. government to create
and deploy smart card-based applications that will drive demand for smart
card readers such as ours;
- the ability of flash memory card manufacturers to develop higher capacity
memory cards that will drive demand for readers that enable rapid
transfer of large amounts of data such as ours; and
- general economic conditions.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL
CHANGE AND MEET THE NEEDS OF OUR TARGET MARKETS AND CUSTOMERS.
The markets for our Digital TV, Digital Video, PC Security and Digital
Media Transfer products are characterized by rapidly changing technology. Our
customers' needs change and new products are introduced frequently. Product life
cycles are short and industry standards are still evolving. These rapid changes
in technology or the adoption of new industry standards could render our
existing products obsolete and unmarketable. Therefore, our future success will
depend upon our ability to enhance our current products and to develop and
introduce new products on a timely basis that address the increasingly
sophisticated needs of our customers and that keep pace with technological
developments, new competitive product offerings and emerging industry standards.
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For example, in the Digital TV market, our products provide a means of
controlling access to digital television broadcasts. We are currently
developing, with Microsoft, technology that will allow software-based
entertainment set-top boxes to access premium digital television broadcasts. If
we are not successful in making this technology highly reliable and easy to
implement, we may not be able to sell it to potential customers such as consumer
electronics companies or broadcasters.
In the PC Security market, our SmartReady, SmartSecure, SmartTrust and
SmartRetail product families are designed to provide smart card-based security
for PCs. Smart cards are beginning to be widely deployed by financial
institutions, the U.S. government, corporations and other large organizations,
in advance of anticipated security-oriented applications. However, the market
for network and electronic commerce security applications is still emerging and
the smart card may not become the industry standard. In this case, demand for
our readers will not grow. In addition, standards for smart card readers are
still emerging. We may not be able to comply with emerging standards in a timely
manner or at all. If we cannot meet the standards requirements of the market or
our prospective customers, we would likely lose orders to competitors.
Because we operate in markets for which industry-wide standards have not
yet emerged, it is possible that any standards eventually adopted could prove
disadvantageous to or incompatible with our business model and product lines. If
any of the standards supported by us do not achieve or sustain market
acceptance, our business and operating results would be materially and adversely
affected.
OUR MARKETS ARE HIGHLY COMPETITIVE AND OUR CUSTOMERS MAY PURCHASE PRODUCTS FROM
OUR COMPETITORS.
The market for our products is intensely competitive and characterized by
rapidly changing technology. We believe that the principal competitive factors
affecting the market for digital data security and connectivity products
include:
- the extent to which products support existing industry standards and
provide interoperability;
- technical features;
- ease of use;
- quality and reliability;
- level of security;
- brand name, particularly in retail channels;
- strength of distribution channels; and
- price.
We believe that competition in our markets is likely to intensify as a
result of increasing demand for digital data security, access control and
connectivity products. We currently experience competition from a number of
sources, including:
- Pinnacle in digital video capture and conversion products;
- ActionTec, Carry Computer Engineering and Greystone in PC Card adapters;
- Advanced Card Systems and O2 Micro in smart card interface chips;
- Advanced Card Systems, Gemplus, Infineer, Litronic, PubliCard and
Towitoko in smart card readers and universal smart card reader
interfaces; and
- Carry Computer Engineering, DataFab, Lexar, SanDisk, Simple Technology
and SmartDisk for digital media and connectivity.
We also experience indirect competition from some of our customers who sell
alternative products or are expected to introduce competitive products in the
future. We may in the future face competition from these competitors and new
competitors, such as Motorola, that develop digital information security
products. In
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addition, the market for digital data security, access control and connectivity
products may ultimately include technological solutions other than ours.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources 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, 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.
WE FACE RISKS RELATED TO OUR INCREASED DEPENDENCE ON A RETAIL DISTRIBUTION
MODEL.
Historically, we sold substantially all our products directly to OEM
customers. Following our acquisition of Dazzle Multimedia and Microtech, we now
sell a significant percentage of our products directly to the retail channel.
Direct retail distribution is a relatively new model for us and we face
additional risks and requirements including:
- generally lower margins for products due to, among other factors, greater
price competition and increased promotional and distribution costs;
- the need to develop, and the related marketing expense of developing
brand recognition for our products including our Dazzle and Microtech
branded products;
- the need to protect the reputation of our brands for quality and value;
and
- the need to successfully and cost-effectively develop new retail
distribution channels for these products.
We are contractually obligated to accept returned products from our
distributors and OEM customers only on a limited basis. However, if consumer
demand is less than anticipated our distributors and OEMs may seek to return
products to us. We may determine that it is in our best interest to accept
returns in order to maintain good relations. While we have experienced very
limited product returns to date, returns may increase in the future.
Our retail distributors may have limited capital to invest in inventory,
and their decisions to purchase our products are partly a function of pricing,
terms and special promotions offered by us and our competitors over which we
have no control and which we cannot predict. Our distributor agreements are
generally nonexclusive and may be terminated by either party without cause.
Certain distributors have experienced financial difficulties in the past.
Distributors that account for significant sales of our consumer products may
experience financial difficulties in the future, which could lead to reduced
sales or write-offs.
WE HAVE GLOBAL OPERATIONS WHICH REQUIRE SIGNIFICANT MANAGERIAL AND
ADMINISTRATIVE RESOURCES.
Operating in diverse geographic locations imposes significant burdens on
our managerial resources. In particular our management must divert a significant
amount of time and energy to manage employees and contractors from diverse
cultural backgrounds and who speak different languages, manage different product
lines for different markets, manage our supply and distribution channels across
different countries and business practices, and coordinate these efforts to
produce an integrated business effort, focus and vision. In addition, we are
subject to the difficulties associated with operating in a number of time zones
which may subject us to additional unforeseen difficulties or logistical
barriers. Operating in widespread geographic locations requires us to implement
and operate complex information and operational systems. In the future we may
have to exert managerial resources and implement new systems which may be
costly. Any failure or delay in implementing needed systems, procedures and
controls on a timely basis or in expanding current systems in an efficient
manner could have a material adverse effect on our business and operating
results.
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MANY OF OUR CUSTOMERS ARE LOCATED IN OTHER COUNTRIES WHICH EXPOSES OUR BUSINESS
TO RISKS RELATED TO INTERNATIONAL SALES.
We were originally a German corporation and we continue to conduct a
substantial portion of our business in Europe. Approximately 48%, 52%, and 62%
of our revenues for the years ended December 31, 2000, 1999, and 1998,
respectively, were derived from customers located outside the United States.
Because a significant number of our principal customers are located in other
countries, we anticipate that international sales will continue to account for a
substantial portion of our revenues. As a result, a significant portion of our
sales and operations may continue to be subject to certain risks, including:
- foreign currency exchange rate changes, especially since we do not
currently engage in hedging activities with respect to our foreign
currency exposure;
- tariffs and other trade barriers, including import and export
restrictions;
- potential adverse tax consequences;
- political or economic instability;
- compliance with foreign laws;
- difficulties in protecting intellectual property rights in foreign
countries; and
- transportation delays and interruptions.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND WE
MAY NOT BE ABLE TO MANAGE THIS GROWTH OR ANY FUTURE GROWTH.
Our business has grown substantially, with net revenue increasing from
$23.6 million in 1995 to $157.8 million in 2000. We have expanded our business
from the PC Security market to include the Digital TV, Digital Video and Digital
Media Transfer markets. Managing businesses in each of these markets requires
skilled management and substantial resources. To address our need for additional
resources and because of various acquisitions, we have increased in size from 67
employees at December 31, 1995 to 549 as of December 31, 2000.
Our growth and our growth plans have placed and are likely to continue to
place a significant burden on our operating and financial systems and increase
responsibility for senior management and other personnel. Our existing
management or any new members of management may not be able to improve our
existing systems and controls or implement new systems and controls in response
to our anticipated growth.
OUR OEM CUSTOMERS MAY DEVELOP TECHNOLOGY SIMILAR TO OURS, RESULTING IN A
REDUCTION IN RELATED CUSTOMER PURCHASES AND DIRECT COMPETITION FROM THESE
CUSTOMERS.
We sell our products to many original equipment manufacturers who
incorporate our products into their offerings or who resell our products in
order to provide a more complete solution to their customers. If our OEM
customers develop their own products to replace ours, this would result in both
a loss of sales to those customers as well as increased competition for our
products in the marketplace. For example, SanDisk Corporation purchases various
Digital Media Transfer products from us and markets them under the SanDisk
brand. Recently, SanDisk developed a Digital Media Transfer product of its own
and has begun marketing it. In future periods, SanDisk may significantly reduce
or eliminate its purchases of our Digital Media Transfer products, decreasing
our revenues. In addition, SanDisk may market its competing products to other
potential customers.
SEASONAL TRENDS IN SALES OF OUR PRODUCTS MAY AFFECT OUR QUARTERLY OPERATING
RESULTS.
Our business and operating results reflect seasonal trends. We have
typically experienced lower revenue and operating income in the first quarter
and second quarter and higher revenue in the third quarter and fourth quarter of
each calendar year. We believe that the seasonal trends in our business and
operating results are primarily due to the retail selling cycles of our
consumer-oriented products, including our Digital Video and
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Digital Media Transfer products. Because the market for consumer products is
stronger in the second half of the year, we expect that our sales to retail
distributors and to consumer-oriented OEMs will increase during that period.
WE FACE RISKS ASSOCIATED WITH OUR PAST AND FUTURE ACQUISITIONS.
A component of our business strategy is to seek to buy businesses, products
and technologies that complement or augment our existing businesses, products
and technologies. In 2000, we completed four acquisitions:
- Microtech in June 2000;
- 2-Tel B.V. in September 2000;
- Dazzle Multimedia in December 2000, by acquiring substantially all of the
outstanding minority interest; and
- the Personal Video Division of FAST Multimedia in July 2000, an
acquisition completed through Dazzle Multimedia.
The integration of the business and operations of any past or future
acquisition is a complex, time consuming and expensive process. In order to
successfully integrate any acquisition, we must, among other things,
successfully:
- attract and retain key management and other personnel;
- integrate, both from an engineering and a sales and marketing
perspective, the acquired products into our product offerings;
- coordinate research and development efforts;
- integrate sales forces; and
- consolidate duplicate facilities.
Past and future acquisitions may disrupt ongoing operations, divert
management from day-to-day business and adversely impact our results of
operations. In addition, these types of transactions often result in charges to
earnings for such things as transaction expenses, amortization of goodwill, or
expensing of in-process research and development. Our available cash and our
securities may be used to buy or invest in companies or products, which could
result in significant acquisition-related charges to earnings and dilution to
our stockholders. Moreover, if we buy a company, we may have to incur or assume
that company's liabilities, including liabilities that are unknown at the time
of acquisition. We may be unable to complete any given acquisition which may
limit our future revenues.
WE WILL EXPERIENCE SIGNIFICANT AMORTIZATION CHARGES AND FACE THE RISK OF FUTURE
NON-RECURRING CHARGES AS A RESULT OF PAST ACQUISITIONS.
In connection with our previous acquisitions accounted for under the
purchase method of accounting, in future periods we will experience significant
charges related to the amortization of purchased technology and goodwill. In
addition, if we later determine that this purchased technology and goodwill is
impaired, we will be required to take a related non-recurring charge to
earnings.
WE COULD LOSE MONEY AND OUR STOCK PRICE COULD DECREASE AS A RESULT OF OUR
STRATEGIC INVESTMENTS.
We have made strategic minority investments in private and public companies
and in the future we may make additional strategic minority investments. Our
strategic investments involve a number of risks and we may not realize the
expected benefits of these transactions. We may lose all or a portion of our
investment, particularly in the case of our private investments. If we were to
lose these investments, or if the investments were determined to be impaired, we
would be forced to write off all or a portion of these investments.
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OUR KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND SUCH KEY PERSONNEL MAY NOT
REMAIN WITH US IN THE FUTURE.
We depend on the continued employment of our senior executive officers and
other key management and technical personnel. If any of our key personnel leave
and are not adequately replaced, our business would be adversely affected. We
provide compensation incentives such as bonuses, benefits and option grants
(which are typically subject to vesting over four years) to attract and retain
qualified employees. In addition, certain of our executive officers are subject
to one-year non-compete agreements. Non-compete agreements are, however,
generally difficult to enforce. Even though we provide competitive compensation
arrangements to our executive officers and other employees, we cannot be certain
that we will be able to retain them, including those individuals that are
subject to non-compete agreements.
We believe that our future success will depend in large part on our
continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and we may not
be able to retain our key technical and management employees or to attract,
assimilate or retain other highly qualified technical and management personnel
in the future.
WE MAY BE EXPOSED TO RISKS OF INTELLECTUAL PROPERTY INFRINGEMENT BY THIRD
PARTIES.
Our success depends significantly upon our proprietary technology. We
currently rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect our
proprietary rights. Our software, documentation and other written materials are
protected under trade secret and copyright laws, which afford only limited
protection. We generally enter into confidentiality and non-disclosure
agreements with our employees and with key vendors and suppliers. For example,
our SmartOS and SmartReady trademarks are registered in the United States. We
continuously evaluate the registration of additional trademarks as appropriate.
We currently have patents issued in both the United States and Europe and have
other patent applications pending worldwide. In addition, we have licenses for
various other United States and European patents associated with our products.
Although we often seek to protect our proprietary technology through patents, it
is possible that no new patents will be issued, that our proprietary products or
technologies are not patentable, and that any issued patent will fail to provide
us with any competitive advantages.
There has been a great deal of litigation in the technology industry
regarding intellectual property rights. Litigation may be necessary to protect
our proprietary technology. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
use our proprietary information and software. In addition, the laws of some
foreign countries do not protect proprietary and intellectual property rights to
as great an extent as do the laws of the United States. Because many of our
products are sold and a portion of our business is conducted overseas, primarily
in Europe, our exposure to intellectual property risks may be higher. Our means
of protecting our proprietary and intellectual property rights may not be
adequate.
WE MAY FACE CLAIMS OF INFRINGEMENT OF THE INTELLECTUAL RIGHTS OF THIRD PARTIES,
WHICH COULD SUBJECT US TO COSTLY LITIGATION, SUPPLIER AND CUSTOMER
INDEMNIFICATION CLAIMS AND THE POSSIBLE RESTRICTION ON THE USE OF OUR
INTELLECTUAL PROPERTY.
We have from time to time received claims that we are infringing upon third
parties' intellectual property rights. Our suppliers and customers may also
receive similar claims. We have historically agreed to indemnify suppliers and
customers for alleged patent infringement. The scope of this indemnity varies,
but may, in some instances, include indemnification for damages and expenses,
including attorney's fees. We may periodically engage in litigation as a result
of these indemnification obligations. Our insurance policies exclude coverage
for third party claims for patent infringement.
As the number of products and competitors in our target markets grows, the
likelihood of infringement claims also increases. Any claims or litigation may
be time-consuming and costly, cause product shipment delays, or require us to
redesign our products or enter into royalty or licensing agreements. If we are
unable to modify our products or obtain a license on commercially reasonable
terms, or at all, a competitor of ours or a
36
37
claimant against us or our customers may stop us or our customers from selling
the allegedly infringing products.
If we decide to incorporate third party technology into our products or if
we are found to infringe on others' intellectual property, we could be required
to license intellectual property from a third party. We may also need to license
some of our intellectual property to others in order to enable us to obtain
cross-licenses to third party patents. We cannot be certain that licenses will
be offered when we need them, or that the terms offered will be acceptable. If
we do obtain licenses from third parties, we may be required to pay license fees
or royalty payments. In addition, if we are unable to obtain a license that is
necessary to the manufacture of our products, we could be required to suspend
the manufacture of products or stop our suppliers from using processes that may
infringe the rights of third parties. We may be unsuccessful in redesigning our
products or in obtaining the necessary licenses under reasonable terms or at
all.
OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE, AND
RESULT IN LIABILITY TO US.
Highly complex products such as our Digital Video hardware and software
solutions may contain defects for many reasons, including defective design or
defective material. Often, these defects are not detected until after the
products have been shipped. If any of our products contains defects, or has
reliability, quality or compatibility problems, our reputation might be damaged
significantly, we could lose or experience a delay in market acceptance of the
affected product or products, and we might be unable to retain existing
customers or attract new customers. In addition, these defects could interrupt
or delay sales. We may have to invest significant capital, technical, managerial
and other resources to correct potential problems and potentially divert these
resources from other development efforts. If we fail to provide solutions to
potential problems, we could also incur product recall, repair or replacement
costs. These potential problems might also result in claims against us by our
customers or others.
WE MAY FACE CLAIMS BASED ON PRODUCT LIABILITY THAT WOULD SUBJECT US TO COSTLY
LITIGATION AND DECREASED PRODUCT DEMAND.
Customers rely on our token-based security products to prevent unauthorized
access to their digital information. A malfunction of or design defect in our
products could result in legal or warranty claims. Although we place warranty
disclaimers and liability limitation clauses in our sales agreements and
maintain product liability insurance, these measures may be ineffective in
limiting our liability. Liability for damages resulting from security breaches
could be substantial and could have a material adverse effect on our business
and operating results. In addition, a well-publicized security breach involving
token-based and other security systems could adversely affect the market's
perception of products like ours in general, or our products in particular,
regardless of whether the breach is actual or attributable to our products. In
that event, the demand for our products could decline, which would cause our
business and operating results to suffer.
A SIGNIFICANT PORTION OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS AND
THE LOSS OF ONE OF MORE OF THESE CUSTOMERS COULD NEGATIVELY IMPACT OUR OPERATING
RESULTS.
Our products are generally targeted at OEM consumer electronics, computer,
digital appliance, digital media and conditional access system customers. Sales
to a relatively small number of customers historically have accounted for a
significant percentage of our total sales. For example, sales to our top 10
customers accounted for approximately 37% of our total net revenues in 2000,
with no customer accounting for 10% or more of our revenues. We expect that
sales of our products to a limited number of customers will continue to account
for a high percentage of our total sales for the foreseeable future. The loss or
reduction of orders from a significant customer, including losses or reductions
due to manufacturing, reliability or other difficulties associated with our
products, changes in customer buying patterns, or market, economic or
competitive conditions in the digital information security business, could harm
our business and operating results.
37
38
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLE COULD RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
When we obtain a new OEM customer or retail distributor, our initial sales
to that customer usually take six to nine months. During this sales cycle, we
may expend substantial financial resources and our management's time and effort
with no assurance that a sale will ultimately result. The length of a new
customer's sales cycle depends on a number of factors that we may not be able to
control. These factors include the customer's product and technical requirements
and the level of competition we face for that customer's business. Any delays in
the sales cycle for new customers would limit our receipt of new revenue and
might cause us to expend more resources to obtain new customer wins.
OUR BUSINESS COULD SUFFER IF WE OR OUR CONTRACT MANUFACTURERS CANNOT MEET
PRODUCTION REQUIREMENTS.
Most of our products are manufactured outside the United States because we
believe that global sourcing enables us to achieve greater economies of scale,
improve gross margins and maintain uniform quality standards for our products.
Any significant delay in our ability to obtain adequate supplies of our products
from our current or alternative sources would materially and adversely affect
our business and operating results. In an effort to reduce our manufacturing
costs, we have shifted volume production of many of our product components to
our wholly owned subsidiary in Singapore, SCM Microsystems (Asia) Pte. Ltd. In
addition, we utilize contract manufacturers in Europe and Asia. Foreign
manufacturing poses a number of risks, including transportation delays and
interruptions, difficulties in staffing, currency fluctuations, potentially
adverse tax consequences and unexpected changes in regulatory requirements,
tariffs and other trade barriers, and political and economic instability. If we
or any of our contract manufacturers cannot meet our production requirements, we
may have to rely on other contract manufacturing sources or identify and qualify
new contract manufacturers. Despite efforts to do so, we may be unable to
identify or qualify new contract manufacturers in a timely manner and these new
manufacturers may not allocate sufficient capacity to us in order to meet our
requirements.
We design and manufacture new products and technologies to address emerging
markets that are early in their life cycles. In many cases our products are the
first of their kind to address the evolving business requirements of our
customers. While we perform initial beta testing on all our products, in certain
cases we are unable to test the efficacy of the design or functionality of our
products for mass production. If we are successful in securing large contracts
for our products, we cannot be certain that we will be able to produce them in
sufficient quantities and that they will meet customer specifications.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS.
We rely upon a limited number of suppliers of several key components of our
products. For example, we currently purchase ASICs for our Digital TV modules
exclusively from TEMIC, Philips and Atmel, smart card connectors exclusively
from ITT Canon and another supplier and DTV/SwapSmart mechanical components
exclusively from Stocko. Our reliance on only one supplier could impose several
risks, including an inadequate supply of components, price increases, late
deliveries and poor component quality. Disruption or termination of the supply
of these components could delay shipments of our products which could have a
material adverse effect on our business and operating results. These delays
could also damage relationships with current and prospective customers.
FACTORS BEYOND OUR CONTROL COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES.
We face a number of potential business interruption risks that are beyond
our control. The State of California has recently experienced intermittent power
shortages, sharp increases in the cost of energy and even interruptions of
service to some business customers. If power shortages continue to be a problem
our business may be materially adversely effected. Additionally, we may
experience natural disasters that could interrupt our business. Our corporate
headquarters is located near a major earthquake fault. The impact of a major
earthquake on our facilities, infrastructure and overall operations is not
known. Safety precautions have been implemented; however there is no guarantee
that an earthquake would not seriously disturb our entire business process.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCIES
SCM Microsystems transacts business in various foreign currencies,
primarily in certain European countries, the United Kingdom, Singapore and
Japan. Accordingly, we are subject to exposure from adverse movements in foreign
currency exchange rates. This exposure is primarily related to yen denominated
sales in Japan and local currency denominated operating expenses in the UK,
Europe and Singapore, where we sell in both local currencies and U.S. dollars.
We currently do not use financial instruments to hedge local currency activity
at any of our foreign locations. Instead, we believe that a natural hedge
exists, in that local currency revenues substantially offset the local currency
denominated operating expenses. We assess the need to utilize financial
instruments to hedge foreign currency exposure on an ongoing basis.
SCM's foreign currency transactions gains or losses are primarily the
result of the revaluation of intercompany receivables/payables (denominated in
U.S. dollars) and trade receivables (denominated in a currency other than the
functional currency) to the functional currency of the subsidiary.
A 10% adverse change in the U.S. dollar compared to the Company's other
functional currency would have had an effect of $1.1 million on its 2000 net
income.
FIXED INCOME INVESTMENTS
SCM's exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments for speculative or trading purposes. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy. The policy also limits the amount of credit exposure to any
one issue, issuer and type of instrument. We do not expect any material loss
with respect to our investment portfolio.
We do not use derivative financial instruments in our investment portfolio
to manage interest rate risk. We do, however, limit our exposure to interest
rate and credit risk by establishing and strictly monitoring clear policies and
guidelines for our fixed income portfolios. At the present time, the maximum
duration of all portfolios is limited to two years. The guidelines also
establish credit quality standards, limits on exposure to one issue, issuer, as
well as the type of instrument. Due to the limited duration and credit risk
criteria we have established, our exposure to market and credit risk is not
expected to be material.
At December 31, 2000, we had $33.7 million in cash and cash equivalents,
and $33.2 million in short-term investments. Based on our cash, cash equivalents
and short-term investments at December 31, 2000, a hypothetical 10%
increase/decrease in interest rates would increase/decrease our interest income
and cash flows by approximately $0.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages
F-1 through F-28 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is set forth under the caption
"Election of Directors" and "Matters Relating to the Board of Directors" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
39
40
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption
"Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement, which
information is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. Financial Statements
The following Consolidated Financial Statements and Independent
Auditors' Reports are incorporated by reference to pages F-1 through
F-28 of this Form 10-K.
The consolidated balance sheets as of December 31, 2000 and 1999, and
the consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three year period ended December 31, 2000, together with the notes
thereto.
The reports of Deloitte & Touche LLP and KPMG LLP, independent auditors,
dated February 27, 2001 and February 23, 1999, respectively.
2.Financial Statement Schedules
The following financial statement schedule should be read in conjunction
with the consolidated financial statements and the notes thereto.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF FROM END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS ACQUISITION* PERIOD
-------------- ------------ --------- ---------- ------------ ----------
Accounts receivable allowances
Year ended December 31, 1998............. $ 190 $2,606 $ -- $ -- $2,796
Year ended December 31, 1999............. 2,796 2,867 4,669 1,839 2,833
Year ended December 31, 2000............. 2,833 1,205 589 251 3,700
Warranty accrual
Year ended December 31, 1998............. $ 101 $ 5 $ -- $ -- $ 106
Year ended December 31, 1999............. 106 768 24 -- 850
Year ended December 31, 2000............. 850 237 558 166 695
- ---------------
* Represents additional allowances from the Microtech and 2-Tel acquisition in
2000 and the Dazzle acquisition in 1999.
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3. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* Bylaws, as amended, of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
9.1* Form of Director and Officer Indemnification Agreement.
9.2* 1997 Stock Plan.
10.1* 1997 Employee Stock Purchase Plan.
10.2* 1997 Director Option Plan.
10.3* 1997 Stock Option Plan for French Employees.
10.4* 1997 Employee Stock Purchase Plan for Non-U.S. Employees.
10.5*** 2000 Non-statutory Stock Option Plan.
10.6*** LA Vision, Inc. 1997 Option Plan.
10.7*** Dazzle Multimedia, Inc. 1998 Stock Plan.
10.8*** Dazzle Multimedia, Inc. 2000 Stock Option Plan.
10.9** Revolving Credit Loan and Security Agreement, dated
September 26, 1997, between Registrant and Comerica Bank.
10.10* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank.
10.11* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank.
10.12* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen.
10.13* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant.
10.14 Sublease Agreement, dated March 15, 2000 between Dazzle
Multimedia, Inc. and Zitec Corporation.
10.15 Sublease Agreement, dated December 14, 2000, between
Microtech International and Golden Goose LLC.
10.16* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors.
10.17* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier.
10.18*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS.
10.19*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant.
10.20*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.21*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant and Sun Microsystems,
Inc.
10.22* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels und Sohn
GmbH & Co.
10.23*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
GmbH and Registrant.
10.24* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant.
10.25* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended.
10.26* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant.
10.27*+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant.
10.28*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM.
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EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.29* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus.
10.30* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus.
10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.32* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.33* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
- ---------------
* Filed previously as an exhibit to SCM's Registration Statement on Form S-1
(See SEC File No. 333-29073).
** Filed previously as an exhibit to SCM's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (See SEC File No. 000-22689).
*** Filed previously as an exhibit to SCM's Registration Statement on Form S-8
(See SEC File No. 333-51792).
+ Certain information in these exhibits has been omitted pursuant to a
confidential treatment request under 17 C.F.R. Section Section 200.80(b)(4),
200.83 and 230.46.
(b) Reports on Form 8-K
None
(c) See response to Item 14(a)(3) above.
(d) See response to Item 14(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Registrant
SCM MICROSYSTEMS, INC.
March 29, 2001 By: /s/ STEVEN HUMPHREYS
------------------------------------
Steven Humphreys
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
/s/ STEVEN HUMPHREYS Chairman of the Board March 29, 2001
- -----------------------------------------------------
Steven Humphreys
/s/ ROBERT SCHNEIDER Chief Executive Officer March 29, 2001
- ----------------------------------------------------- (Principal Executive Officer)
Robert Schneider and Director
/s/ BERND MEIER President, Chief Operations March 29, 2001
- ----------------------------------------------------- Officer And Director
Bernd Meier
/s/ ANDREW WARNER Vice President, Finance and March 29, 2001
- ----------------------------------------------------- Chief Financial Officer
Andrew Warner (Principal Financial and
Accounting Officer)
/s/ FRIEDRICH BORNIKOEL Director March 29, 2001
- -----------------------------------------------------
Friedrich Bornikoel
/s/ OYSTEIN LARSEN Director March 29, 2001
- -----------------------------------------------------
Oystein Larsen
/s/ POH CHUAN NG Director March 29, 2001
- -----------------------------------------------------
Poh Chuan Ng
/s/ ANDREW VOUGHT Director March 29, 2001
- -----------------------------------------------------
Andrew Vought
/s/ SIMON TURNER Director March 29, 2001
- -----------------------------------------------------
Simon Turner
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44
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report -- Deloitte & Touche LLP....... F-2
Independent Auditors' Report -- KPMG LLP.................... F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-5
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended December
31, 2000, 1999 and 1998................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of SCM Microsystems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SCM
Microsystems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related statements of operations, stockholders' equity and comprehensive income
(loss) and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 2000 and 1999 consolidated financial statements present
fairly, in all material respects, the financial position of SCM Microsystems,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 27, 2001
F-2
46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SCM Microsystems, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and comprehensive loss, and cash flows of SCM Microsystems,
Inc. and subsidiaries for the year ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of SCM Microsystems, Inc. and subsidiaries for the year ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Mountain View, California
February 23, 1999
F-3
47
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 33,699 $ 45,662
Short-term investments.................................... 33,227 79,747
Accounts receivable, net of allowances of $3,700 and
$2,833 as of December 31, 2000 and 1999,
respectively........................................... 54,913 32,215
Inventories............................................... 36,799 15,934
Deferred income taxes..................................... 2,744 3,732
Prepaid expenses.......................................... 2,748 5,104
-------- --------
Total current assets.............................. 164,130 182,394
Property and equipment, net................................. 10,476 6,372
Investments................................................. 8,070 13,945
Long term deferred income taxes............................. 5,086 --
Intangible assets, net of accumulated amortization of $7,651
and $2,186 as of December 31, 2000 and 1999,
respectively.............................................. 64,129 8,006
Other assets................................................ 504 267
-------- --------
Total assets................................................ $252,395 $210,984
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 27,167 $ 17,679
Accrued compensation and related benefits................. 2,348 1,751
Accrued settlement and professional fees.................. 3,724 659
Accrued royalties......................................... 2,059 1,026
Other accrued expenses.................................... 3,940 4,370
Income taxes payable...................................... 1,147 4,906
Short-term debt........................................... -- 1,512
-------- --------
Total current liabilities......................... 40,385 31,903
-------- --------
Deferred tax liability...................................... 1,214 3,201
Minority interest........................................... 636 84
Commitments and contingencies (see Note 14)
Stockholders' equity:
Common stock, $0.001 par value: 40,000 shares authorized;
15,237 and 14,194 shares issued and outstanding as of
December 31, 2000 and 1999, respectively............... 15 14
Additional paid-in capital................................ 223,677 173,048
Deferred stock compensation............................... (4,001) (25)
Accumulated deficit....................................... (6,061) (1,504)
Other cumulative comprehensive income (loss).............. (3,470) 4,263
-------- --------
Total stockholders' equity........................ 210,160 175,796
-------- --------
Total liabilities and stockholders' equity........ $252,395 $210,984
======== ========
See notes to consolidated financial statements
F-4
48
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Net revenue................................................. $157,834 $127,288 $85,009
Cost of revenue............................................. 104,863 82,624 57,148
-------- -------- -------
Gross profit................................................ 52,971 44,664 27,861
-------- -------- -------
Operating expenses:
Research and development.................................. 13,525 8,900 6,356
Selling and marketing..................................... 23,373 13,322 8,904
General and administrative................................ 19,088 11,293 8,819
Amortization of goodwill and intangibles.................. 5,465 1,265 469
In-process research and development....................... 4,867 900 3,101
Impairment of goodwill.................................... -- -- 5,211
Other acquisition and restructuring charges............... 657 1,168 3,153
-------- -------- -------
Total operating expenses.......................... 66,975 36,848 36,013
-------- -------- -------
Income (loss) from operations............................... (14,004) 7,816 (8,152)
Interest income, net........................................ 5,930 6,365 5,832
Foreign currency transaction gains and other income......... 1,946 314 192
-------- -------- -------
Income (loss) before income taxes and minority interest... (6,128) 14,495 (2,128)
Benefit (provision) for income taxes........................ 1,032 (4,801) (2,845)
Minority interest in loss (earnings) of consolidated
subsidiaries.............................................. 387 (586) --
-------- -------- -------
Net income (loss)........................................... $ (4,709) $ 9,108 $(4,973)
======== ======== =======
Basic net income (loss) per share........................... $ (0.32) $ 0.65 $ (0.38)
======== ======== =======
Diluted net income (loss) per share......................... $ (0.32) $ 0.60 $ (0.38)
======== ======== =======
Shares used to compute basic net income (loss) per share.... 14,641 14,082 13,253
======== ======== =======
Shares used to compute diluted net income (loss) per
share..................................................... 14,641 15,086 13,253
======== ======== =======
See notes to consolidated financial statements.
F-5
49
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
OTHER
COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE TOTAL
--------------- PAID-IN STOCK ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) EQUITY
------ ------ ---------- ------------ ----------- ------------- -------------
Balances, January 1, 1998............. 11,503 $12 $ 72,027 $ (125) $ (6,225) $ (506) $ 65,183
Issuance of common stock upon exercise
of warrants and options............. 939 1 6,859 -- -- -- 6,860
Sale of common stock, net of issuance
costs............................... 1,450 1 83,066 -- -- -- 83,067
Issuance of common stock in exchange
for the net assets of business
acquired............................ 108 -- 5,976 -- -- -- 5,976
Issuance of common stock under
Employee Stock Purchase Plan........ 6 -- 204 -- -- -- 204
Tax benefits resulting from stock
options............................. -- -- 765 -- -- -- 765
Amortization of deferred stock
compensation........................ -- -- -- 53 -- -- 53
Foreign currency translation
adjustment.......................... -- -- -- -- -- 1,644 1,644
Net loss.............................. -- -- -- -- (4,973) -- (4,973)
Comprehensive loss.................... -- -- -- -- -- -- --
------ --- -------- ------- -------- ------- --------
Balances, December 31, 1998........... 14,006 14 168,897 (72) (11,198) 1,138 158,779
Issuance of common stock upon exercise
of options.......................... 171 -- 2,947 -- -- -- 2,947
Issuance of common stock under
Employee Stock Purchase Plan........ 17 -- 593 -- -- -- 593
Tax benefits resulting from stock
options............................. -- -- 611 -- -- -- 611
Amortization of deferred stock
compensation........................ -- -- -- 47 -- -- 47
Unrealized gain on investments, net,
of deferred taxes................... -- -- -- -- -- 4,496 4,496
Foreign currency translation
adjustment.......................... -- -- -- -- -- (1,371) (1,371)
Earnings allocable to minority
interest with negative basis........ -- -- -- -- 586 -- 586
Net income............................ -- -- -- -- 9,108 -- 9,108
Comprehensive income.................. -- -- -- -- -- -- --
------ --- -------- ------- -------- ------- --------
Balances, December 31, 1999........... 14,194 14 173,048 (25) (1,504) 4,263 175,796
Issuance of common stock upon exercise
of options.......................... 291 -- 9,917 -- -- -- 9,917
Issuance of common stock under
Employee Stock Purchase Plan........ 14 -- 512 -- -- -- 512
Issuance of common stock in exchange
for the net assets of businesses
acquired............................ 738 1 34,555 -- -- -- 34,556
Deferred compensation related to
assumption of Dazzle's stock plan... -- -- 5,645 (5,645) -- -- --
Amortization of deferred stock
compensation........................ -- -- -- 1,669 -- -- 1,669
Unrealized loss on investments, net of
deferred taxes...................... -- -- -- -- -- (5,894) (5,894)
Foreign currency translation
adjustment.......................... -- -- -- -- -- (1,839) (1,839)
Earnings allocable to minority
interest with negative basis........ -- -- -- -- 152 -- 152
Net loss.............................. -- -- -- -- (4,709) -- (4,709)
Comprehensive loss.................... -- -- -- -- -- -- --
------ --- -------- ------- -------- ------- --------
Balances, December 31, 2000........... 15,237 $15 $223,677 $(4,001) $ (6,061) $(3,470) $210,160
====== === ======== ======= ======== ======= ========
COMPREHENSIVE
INCOME
(LOSS)
-------------
Balances, January 1, 1998.............
Issuance of common stock upon exercise
of warrants and options.............
Sale of common stock, net of issuance
costs...............................
Issuance of common stock in exchange
for the net assets of business
acquired............................
Issuance of common stock under
Employee Stock Purchase Plan........
Tax benefits resulting from stock
options.............................
Amortization of deferred stock
compensation........................
Foreign currency translation
adjustment.......................... $ 1,644
Net loss.............................. (4,973)
--------
Comprehensive loss.................... $ (3,329)
========
Balances, December 31, 1998...........
Issuance of common stock upon exercise
of options..........................
Issuance of common stock under
Employee Stock Purchase Plan........
Tax benefits resulting from stock
options.............................
Amortization of deferred stock
compensation........................
Unrealized gain on investments, net,
of deferred taxes................... $ 4,496
Foreign currency translation
adjustment.......................... (1,371)
Earnings allocable to minority
interest with negative basis........ --
Net income............................ 9,108
--------
Comprehensive income.................. $ 12,233
========
Balances, December 31, 1999...........
Issuance of common stock upon exercise
of options..........................
Issuance of common stock under
Employee Stock Purchase Plan........
Issuance of common stock in exchange
for the net assets of businesses
acquired............................
Deferred compensation related to
assumption of Dazzle's stock plan...
Amortization of deferred stock
compensation........................
Unrealized loss on investments, net of
deferred taxes...................... $ (5,894)
Foreign currency translation
adjustment.......................... (1,839)
Earnings allocable to minority
interest with negative basis........ --
Net loss.............................. (4,709)
--------
Comprehensive loss.................... $(12,442)
========
Balances, December 31, 2000...........
See notes to consolidated financial statements.
F-6
50
SCM MICROSYSTEMS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
Cash flows from operating activities:
Net income (loss)......................................... $ (4,709) $ 9,108 $ (4,973)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes................................... (983) (1,125) (1,231)
Depreciation and amortization........................... 8,347 3,188 7,831
Issuance of common stock for contract cancellation...... 1,163 -- --
In-process research and development..................... 4,867 900 3,101
Loss on sale of fixed assets............................ 270 -- --
Gain on sale of Impleo.................................. (420) -- --
Write-off of impairment charge related to Dazzle
acquisition........................................... -- 600 --
Minority interest in (loss) earnings of consolidated
subsidiaries.......................................... (387) 586 --
Amortization of deferred stock compensation............. 1,712 47 53
Changes in operating assets and liabilities:
Accounts receivable................................... (22,204) (10,324) (9,058)
Inventories........................................... (18,282) (2,292) (5,070)
Prepaid expenses and other assets..................... 2,053 (2,973) (887)
Accounts payable...................................... 6,244 1,741 4,565
Accrued expenses...................................... 3,798 1,910 1,815
Income taxes payable.................................. (3,385) 588 3,395
-------- -------- ---------
Net cash provided by (used in) operating
activities....................................... (21,916) 1,954 (459)
-------- -------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (6,971) (4,393) (2,985)
Proceeds from disposal of fixed assets.................... 457 -- --
Proceeds from sale of Impleo.............................. 39 -- --
Purchase of long-term investments......................... (3,359) (6,046) --
Businesses acquired, net of cash received................. (31,420) 836 (9,875)
Maturities of short-term investments...................... 135,253 79,719 61,779
Purchases of short-term investments....................... (88,468) (76,867) (114,184)
Purchase of convertible note.............................. -- -- (2,500)
-------- -------- ---------
Net cash provided by (used in) investing
activities....................................... 5,531 (6,751) (67,765)
-------- -------- ---------
Cash flows from financing activities:
Payments on line of credit and other current debt......... (3,325) (34) (770)
Payment on short-term debt................................ (1,183) -- --
Proceeds from issuance of Dazzle equity securities, net... 230 -- --
Proceeds from issuance of equity securities, net.......... 10,429 3,624 90,131
-------- -------- ---------
Net cash provided by financing activities.......... 6,151 3,590 89,361
-------- -------- ---------
Effect of exchange rates on cash and cash equivalents....... (1,729) (308) 303
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ (11,963) (1,515) 21,440
Cash and cash equivalents, beginning of year................ 45,662 47,177 25,737
-------- -------- ---------
Cash and cash equivalents, end of year...................... $ 33,699 $ 45,662 $ 47,177
======== ======== =========
Supplemental disclosures of cash flow information -- cash
paid for:
Income taxes.............................................. $ 6,106 $ 5,006 $ 601
======== ======== =========
Interest.................................................. $ 434 $ 56 $ 113
======== ======== =========
Noncash investing and financing activities:
Businesses acquired for common stock...................... $ 34,556 $ -- $ 5,976
======== ======== =========
Tax benefits from employee stock transactions............. $ -- $ 611 $ 765
======== ======== =========
Short-term debt converted to Dazzle preferred stock....... $ 235 $ -- $ --
======== ======== =========
See notes to consolidated financial statements.
F-7
51
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SCM Microsystems (the "Company" or "SCM") designs, develops and sells
products used to control access to computers, networks and digital television
broadcasts, conduct secure electronic commerce, and exchange digital information
from devices such as digital cameras and audio recorders. The Company's target
customers are end user customers as well as manufacturers in the consumer
electronics, computer, digital appliance, digital media and conditional access
system industries. The Company sells and licenses its products through a direct
sales and marketing organization, both to the retail channel and to original
equipment manufacturers (OEMs). We also sell through distributors, value-added
resellers and system integrators worldwide. The Company maintains its corporate
headquarters in California and maintains its international headquarters in
Germany.
Principles of Consolidation and Basis of Presentation -- The accompanying
consolidated financial statements include the accounts of the Company and its
wholly and majority owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Significant Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 these estimates.
Cash Equivalents -- The Company considers all highly liquid debt
investments with maturities of three months or less at the date of acquisition
to be cash equivalents.
Short-Term Investments -- Short-term investments consist of United States
Treasury notes, corporate bonds, corporate notes, market auction preferred
securities and United States government agency instruments, and are stated at
fair value based on quoted market prices. Short-term investments are classified
as available-for-sale. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
stockholders' equity as other cumulative comprehensive income (loss). Gains and
losses on sales of investments are determined on a specific identification
basis.
Long-Term Investments -- Corporate equity securities included in long-term
investments are stated at fair value based on quoted market prices. Long-term
investments are classified as available-for-sale. The difference between
amortized cost and fair value representing unrealized holding gains or losses
are recorded as a component of stockholders' equity as other cumulative
comprehensive income (loss). Gains and losses on sales of investments are
determined on a specific identification basis. The Company's investments in
Spyrus and Satup are accounted for by the cost method.
Fair Value of Financial Instruments -- The Company's financial instruments
include cash and cash equivalents, short-term investments, long-term investments
and short-term debt. At December 31, 2000 and 1999, the fair value of cash and
cash equivalents and short-term debt approximated their financial statement
carrying amounts. (See Note 3 for fair value of investments.)
Inventories -- Inventories are stated at the lower of cost or market, using
the first-in, first-out method.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives of three to five years. Leasehold improvements are
amortized over the shorter of the lease term or their useful life.
Intangible Assets -- Intangible assets include acquired workforce, customer
relations, non-compete agreements, tradenames, core technology and goodwill
associated with acquisitions accounted for under the
F-8
52
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
purchase method. Such amounts are being amortized using the straight-line method
over the useful lives of the related assets, from three to seven years.
Long-Lived Assets -- The Company evaluates its long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net undiscounted
cash flows expected to be generated by an asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Revenue Recognition -- Revenue from product sales is recognized upon
product shipment, when a purchase order has been received, the sales price is
fixed and determinable and collection of the resulting receivable is probable.
Provisions for estimated warranty repairs and returns and allowances are
provided for at the time products are shipped. Nonrecurring engineering contract
revenue is recognized using the percentage of completion method.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, which requires the asset and liability approach for financial
accounting and reporting of income taxes. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Stock-Based Compensation -- The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees and FASB
Interpretation No. 44 Accounting for Certain Transactions Involving Stock
Compensation. Accordingly, no compensation is recognized for employee stock
options granted with exercise prices greater than or equal to the fair value of
the underlying common stock at date of grant. If the exercise price is less than
the market value at the date of grant, the difference is recognized as deferred
compensation expense which is amortized over the vesting period of the options.
The Company accounts for stock options issued to non-employees in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation and
Emerging Issues Task Force ("EITF") Issue No. 96-18 under the fair value based
method.
Net Income (Loss) Per Share -- Basic net income (loss) per share excludes
dilution and is computed by dividing net income (loss) by the weighted average
common shares outstanding for the period. Diluted net income (loss) per common
share reflects the potential dilution that could occur if securities or other
contracts (including subsidiary options) to issue common stock were exercised or
converted into common stock. Common share equivalents are excluded from the
computation in loss periods as their effect would be antidilutive.
Foreign Currency Translation -- The functional currencies of the Company's
foreign subsidiaries are the local currencies. Accordingly, translation
adjustments for the subsidiaries have been included in stockholders' equity.
Gains and losses from transactions denominated in currencies other than the
functional currencies of the Company or its subsidiaries are included in other
income and expense.
Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, accounts receivable, short term investments and long term
investments. The Company's cash equivalents primarily consist of Money Market
Accounts and commercial paper with maturities of less than 3 months. The Company
primarily sells its products to companies in the United States, Asia and Europe.
The Company does not require collateral or other security to support accounts
receivable. To reduce risk, management performs ongoing credit evaluations of
its customer' financial condition. The Company maintains allowances for
potential credit losses.
F-9
53
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Certain Significant Risks and Uncertainties -- The Company sells its
products primarily into the Digital Television, Digital Video, PC Security and
Digital Media Transfer markets. SCM believes that the following factors could
have a material adverse effect on the Company's future financial position,
results of operations or cash flows: revenues and operating results are
difficult to estimate on a quarterly basis; our listing on the Neuer Markt could
expose our stock to additional risks of fluctuation; our stock price has been
and will likely remain volatile; our sales are dependent on several emerging
markets, which may not develop; our ability to keep pace with technological
change and meet customer needs; our markets are highly competitive; our
increased dependence on a retail distribution model; our global operations
require significant resources; many of our customers are located outside the US;
our ability to manage our growth; our OEM customers may become our competitors;
seasonal trends may effect our quarterly operating results; risks associated
with acquisitions; the loss of key personnel; intellectual property
infringement; product defects could damage our reputation and decrease market
acceptance; product liability could create future problems; a significant
portion of our sales comes from a small number of customers; delays in our
normally lengthy sales cycle; we may not be able to meet production
requirements; we have a limited number of suppliers for key components; and
factors beyond our control could disrupt operations and increase our expenses.
Comprehensive Income (Loss) -- Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income requires an enterprise to
report, by major components and as a single total, the change in net assets
during the period from nonowner sources. Comprehensive income (loss) for the
years ended December 31, 2000, 1999 and 1998 has been disclosed within the
consolidated statements of stockholders' equity and comprehensive income (loss).
Recently Issued Accounting Standards -- SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company will adopt SFAS No. 133
effective January 1, 2001. Management does not expect SFAS No. 133 to have a
significant impact on its financial position, the results of its operations or
its cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. This bulletin summaries certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the Securities and Exchange Commission in administering the
disclosure requirements of the federal securities laws in applying accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. The adoption of SAB No. 101 in 2000 had no
impact on the Company's financial position, results of operation or cash flow.
Reclassifications -- Certain reclassifications have been made to the 1998
and 1999 financial statement presentation to conform to the 2000 presentation.
2. ACQUISITIONS AND DIVESTITURES
Dazzle Multimedia, Inc.
On June 30, 1999, the Company acquired a 51% interest in Dazzle Multimedia,
Inc. ("Dazzle"), a privately held company based in Fremont, California, in a
transaction that was accounted for under the purchase method of accounting.
Prior to the acquisition, the Company had an initial investment in Dazzle
totaling approximately $6.5 million consisting primarily of a $2.5 million
convertible loan, a $0.2 million equity investment and receivables of $3.8
million from Dazzle resulting from sales to Dazzle during 1998 and 1999 prior to
the acquisition date.
F-10
54
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
The 51% interest was acquired by the Company directly from Dazzle in
exchange for the conversion of the convertible loan and $2.0 million of the
receivables discussed above, and upon the exercise by the Company of a common
stock warrant for $0.1 million. The warrant was originally issued by Dazzle in
connection with the convertible loan financing transaction. Based on an
independent valuation of Dazzle at the time of closing the transaction, which
included a weighting of projected future discounted cash flows and market
comparables, the total investment of $6.6 million (initial investment of $6.5
million plus $0.1 million warrant exercise) for a 51% stake in Dazzle, was
reduced by an impairment charge of $0.6 million to reflect a fair value of $6.0
million. Included in other acquisition related charges is the $0.6 million
impairment charge, $0.3 million of headcount termination costs and $0.3 million
of other costs.
At the date of the transaction Dazzle continued to have outstanding
convertible notes, convertible preferred stock and stock options (potentially
dilutive securities). To the extent Dazzle issued additional common shares
related to these potentially dilutive securities, SCM received an equivalent
number of shares at no additional cost, to retain its 51% ownership interest.
Effective January 1, 2000, SCM and Dazzle entered into an additional
agreement, related to Dazzle options granted and new stock issuances subsequent
to the date SCM acquired its majority interest. Under this agreement, in
connection with each Dazzle equity issuance, SCM would automatically purchase
shares under similar terms to retain SCM's 51% ownership interest in Dazzle.
A summary of the allocation of the $6.0 million purchase price is as
follows (in thousands):
In-process research and development......................... $ 900
Cash........................................................ 963
Tangible assets............................................. 4,897
Assumed liabilities......................................... (5,197)
Core technology............................................. 2,550
Trade name.................................................. 400
Acquired workforce.......................................... 200
Goodwill.................................................... 1,278
-------
Total....................................................... $ 5,991
=======
At the time of the acquisition, the estimated aggregate fair value of
Dazzle's research and development efforts that had not reached technological
feasibility as of the acquisition date and, as of that date, had no alternative
future uses was estimated by an independent valuation specialist to be $0.9
million, and was expensed at the acquisition date. Goodwill for the acquisition
approximated $1.3 million and represented the excess of the purchase price over
the fair value of identifiable tangible and intangible assets acquired less
liabilities assumed. The estimated live of the acquired intangibles is five
years.
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations with Dazzle's result of operations
for the years ended December 31, 1999 and 1998, as if Dazzle had been acquired
as of the beginning of 1998. The table includes the impact of certain
adjustments including the elimination of the special charge for acquired
in-process research and development, elimination of
F-11
55
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
intercompany profit and additional amortization relating to intangible assets
acquired (in thousands, except per share data):
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
Revenues............................................... $130,113 $ 90,689
Net income (loss)...................................... $ 9,464 $(11,769)
Net income (loss) per share:
Basic................................................ $ 0.67 $ (0.89)
Diluted.............................................. $ 0.63 $ (0.89)
Shares used in per share computations:
Basic................................................ 14,082 13,253
Diluted.............................................. 15,086 13,253
In the third quarter and fourth quarter of 2000, SCM acquired an additional
46.2% of Dazzle's outstanding share capital for $14.6 million in cash and
533,000 shares of SCM common stock valued at approximately $19.8 million at the
acquisition. Direct acquisition costs were estimated at $0.1 million.
In connection with the acquisition of Dazzle, the Company issued options to
purchase 200,746 shares of SCM common stock to Dazzle employees to replace their
outstanding options granted under the Dazzle Stock Option Plan. Options to
purchase 52,193 shares of SCM common stock were granted to replace Dazzle
options that were outstanding when SCM first acquired a controlling interest in
Dazzle. All of these options were fully vested. The fair value of these options
of approximately $1.8 million was included in the purchase price of the Dazzle
acquisition according to APB Opinion No. 16, Business Combinations and Financial
Accounting Standards Board ("FASB") Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. Options to purchase 148,553
shares of SCM common stock were granted to replace Dazzle options granted
subsequent to the date SCM first acquired a controlling interest in Dazzle. The
intrinsic value as of the grant date of $5.6 million was recorded as deferred
stock-based compensation expense according to APB Opinion No. 25, Accounting for
Stock Issued to Employees and EITF Issue No. 00-23. The intrinsic value of $1.4
million related to these options that were vested on the date of grant was
expensed on the grant date. The remaining deferred stock-based compensation is
being amortized over the remaining vesting period of these options.
A summary of the allocation of the purchase price for the additional 46.2%
of Dazzle's outstanding share capital is as follows (in thousands):
In-process research and development......................... $ 2,070
Core technology............................................. 3,588
Trade name.................................................. 1,840
Acquired workforce.......................................... 782
Minority interest acquired.................................. 447
Goodwill.................................................... 27,597
-------
Total....................................................... $36,324
=======
At the time of the acquisition, the estimated aggregate fair value of
Dazzle's research and development efforts that had not reached technological
feasibility as of the acquisition date and, as of that date, had no alternative
future uses was estimated by an independent valuation to be approximately $2.1
million, and was expensed at the acquisition date. Goodwill for the acquisition
approximated $27.6 million and represented the excess of the purchase price over
the fair value of identifiable intangible assets acquired. The estimated lives
of the acquired intangibles is five years.
F-12
56
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
2-Tel BV
On September 28, 2000, SCM paid $4.1 million in cash and issued
approximately 106,229 shares of its common stock, valued at $36.56 per share, to
the shareholders of 2-Tel BV ("2-Tel"), a privately held company in The
Netherlands, in exchange for all of the outstanding share capital of 2-Tel.
2-Tel is a provider of hardware and software solutions for the chip- and smart
card-based electronic commerce applications. The transaction has been accounted
for under the purchase method of accounting and the results of operations were
included in SCM's results of operations since the date of acquisition. In
connection with the acquisition, SCM incurred acquisition costs of approximately
$0.3 million.
A valuation of the intangible assets related to the acquisition was
completed in the fourth quarter of 2000. A summary of the allocation of the
purchase price is as follows (in thousands):
In-process research and development......................... $1,920
Cash........................................................ 10
Tangible assets............................................. 423
Assumed liabilities......................................... (636)
Acquired workforce.......................................... 120
Customer relations.......................................... 240
Core technology............................................. 2,060
Goodwill.................................................... 4,187
------
Total............................................. $8,324
======
Intangible assets from the acquisition approximated $8.5 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The in-process research and
development costs of $1.9 million were expensed in the last half of fiscal 2000.
The intangible assets are being amortized on a straight-line basis over an
estimated useful life of five years.
Proforma results of operations to reflect the acquisition as if it had
occurred on the first date of all periods presented would not be significantly
different than SCM's results of operations as stated.
Personal Video Division of FAST Multimedia
Effective July 1, 2000, Dazzle acquired the Personal Video Division ("PVD")
of FAST Multimedia AG ("FAST"), a developer of digital video production hardware
and software for professional markets, headquartered in Munich, Germany. The
transaction was accounted for under the purchase method of accounting and the
results of operations of this division were included in SCM's results of
operations since its acquisition. Under the terms of the agreement, Dazzle
acquired FAST's PVD and all the assets of the PVD division, including its
research and development, marketing, sales, distribution and administrative
operations. Dazzle paid FAST approximately $4.0 million in cash for the
division. SCM common stock or cash of approximately $4.0 million could be issued
to PVD if the division meets certain financial performance criteria for the
twelve months ended June 30, 2001.
F-13
57
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Acquisition costs related to this acquisition were $0.2 million. A
valuation of the assets acquired was finalized in the fourth quarter of 2000. A
summary of the allocation of the purchase price is as follows (in thousands):
In-process research and development......................... $ 877
Tangible assets............................................. 120
Deferred tax liability...................................... (474)
Trade name.................................................. 373
Acquired workforce.......................................... 749
Core technology............................................. 146
Developed technology........................................ 671
Goodwill.................................................... 1,736
------
Total............................................. $4,198
======
Intangible assets from the acquisition approximated $4.6 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired. The in-process research and development costs of $0.9 million
were expensed in the third quarter of 2000. These intangible assets are being
amortized on a straight-line basis over their estimated useful lives ranging
from three to five years.
Proforma results of operations to reflect the acquisition as if it had
occurred on the first date of all periods presented would not be significantly
different than SCM's results of operations as stated.
Microtech International
On June 27, 2000, SCM paid approximately $7.5 million in cash and issued
approximately 98,700 shares of its common stock, valued at $91.19 per share, to
the shareholders of Microtech International ("Microtech"), a privately held
company in North Branford, Connecticut, in exchange for all of the outstanding
share capital of Microtech. Microtech is a provider of digital photography
solutions for the consumer and business markets. The transaction has been
accounted for under the purchase method of accounting and the results of
operations of Microtech have been included in SCM's results of operations since
the date of acquisition. In connection with the acquisition, SCM incurred
acquisition costs of approximately $1.0 million. Additional payments of up to
$5.0 million, in equal amounts of cash and stock, can be paid to Microtech's
former shareholders if Microtech meets certain revenue and earnings goals to be
measured for the last six months of 2000 and the first six months of 2001. These
goals were not met for the last six months of 2000.
A valuation of the intangible assets related to the acquisition was
completed in the fourth quarter of 2000. A summary of the allocation of the
purchase price is as follows (in thousands):
Cash acquired............................................... $ 447
Tangible assets............................................. 7,160
Assumed liabilities......................................... (7,872)
Trade name.................................................. 3,500
Acquired workforce.......................................... 700
Customer relations.......................................... 2,100
Non-compete agreements...................................... 900
Goodwill.................................................... 10,528
-------
Total.................................................. $17,463
=======
F-14
58
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Intangible assets from the acquisition approximated $17.7 million and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The intangible assets are being
amortized on a straight-line basis over their estimated useful lives of five
years. On the date of the acquisition Microtech had deferred tax assets of
approximately $3.6 million, mainly related to net operating loss (NOL)
carryforwards. A full valuation allowance was provided against this asset due to
certain limitations on the annual amounts of NOL to be used in the future.
Subsequent to the acquisition, the valuation allowance was reduced by $0.3
million and recorded as a reduction to goodwill.
The following summary, prepared on a pro forma basis, combines SCM's
consolidated results of operations with Microtech's results of operations for
each of the three years ended December 31, 2000, as if Microtech had been
acquired at January 1, 1998. The table includes the impact of certain
adjustments including the elimination of intercompany profit and additional
amortization relating to intangible assets acquired (in thousands, except per
share data):
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Revenues........................................... $170,900 $150,323 $106,598
Net income (loss).................................. $ (9,067) $ 3,748 $(10,476)
Net income (loss) per share:
Basic............................................ $ (0.62) $ 0.26 $ (0.78)
Diluted.......................................... $ (0.62) $ 0.25 $ (0.78)
Shares used in per share computations:
Basic............................................ 14,690 14,181 13,352
Diluted.......................................... 14,690 15,185 13,352
Shuttle
On November 4, 1998, the Company issued approximately 828,000 shares of its
common stock to the shareholders of Shuttle Technology Group Ltd. (Shuttle), a
privately held company based in England, in exchange for all of the outstanding
share capital of Shuttle. The merger has been accounted for as a pooling of
interests and, accordingly, the accompanying consolidated financial statements
have been restated for all periods prior to the merger to include the results of
operations, financial position and cash flows of Shuttle. No significant
adjustments were required to conform the accounting policies of the Company and
Shuttle.
In connection with the merger with Shuttle, in the fourth quarter of 1998
the Company recorded nonrecurring charges totaling $9.7 million, which consisted
of the following (in thousands):
TOTAL
------
Legal, accounting, regulatory and other due diligence
costs..................................................... $2,253
Severance costs relating to five redundant personnel........ 23
Costs relating to closure of redundant facilities........... 160
Costs relating to elimination of redundant equipment........ 136
Lower of cost or market reserves on redundant product
lines..................................................... 1,900
Accelerated amortization of goodwill resulting from product
line redundancies......................................... 5,211
------
$9,683
======
Of these amounts, the $1.9 million charge relating to inventory was
included in costs of revenues and the remainder was included in operating
expenses. The Company incurred a charge of $5.2 million for accelerated
amortization of goodwill resulting from the impairment of goodwill relating to
the Intermart and Memory acquisitions. Memory was a previous acquisition of
Shuttle. Following the Company's merger with Shuttle,
F-15
59
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
management determined that the Memory product offerings were not consistent with
its core businesses, and that a significant portion of the Intermart products
were redundant to lower cost products provided by Shuttle. As a result, the
Company evaluated the prospects for the Intermart and Memory products and
concluded that the revenues to be generated from future sales of these products
would not be sufficient to recover the carrying amount of the related goodwill.
Accordingly, the unamortized amount of this goodwill at the time of the Shuttle
merger of $5.2 million was written off.
As separate companies, total revenues and net income (loss) for the
individual entities were as follows (in thousands):
YEAR ENDED
DECEMBER 31,
1998
------------
Total revenue:
SCM....................................................... $64,755
Shuttle................................................... 20,254
-------
$85,009
=======
Total net income (loss):
SCM....................................................... $(4,424)
Shuttle................................................... (549)
-------
$(4,973)
=======
Intermart and ICS
In the second quarter of 1998, the Company acquired all of the outstanding
capital stock of Intermart and Intellicard Systems Pte. Ltd. (ICS). A summary of
the purchase price for the acquisitions is as follows (in thousands):
Cash........................................................ $19,751
Common stock................................................ 5,976
Direct acquisition costs.................................... 433
-------
Total....................................................... $26,160
=======
The acquisitions of Intermart and ICS were accounted for pursuant to the
purchase method of accounting. At the time of the respective acquisitions, the
aggregate fair value of Intermart's and ICS' research and development efforts
that had not reached technological feasibility as of the respective dates of
acquisition and had no alternative future uses at that time was determined by
appraisal to be $5.9 million, and was expensed at the respective dates of the
acquisitions. At that time, goodwill for the acquisitions approximated $7.4
million and represented the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired. During the fourth quarter
of 1998, the Company's management revised the amount of purchase price allocated
to in-process research and development relating to the acquisition of Intermart
in order to reflect the recently announced views of the Securities and Exchange
Commission regarding the measurement of in-process research and development. As
a result, the Company restated its quarterly consolidated financial statements
for the quarters ended June 30, 1998 and September 30, 1998 to reflect this
revision. The effect of this restatement increased net income in the June 1998
quarter by approximately $2.8 million, or $0.22 per share, and decreased net
income in the September 1998 quarter by approximately $0.1 million, or $0.01 per
share.
F-16
60
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
A summary of the original and restated allocations of the purchase price is
as follows (in thousands):
INTERMART/ ICS
--------------------
ORIGINAL RESTATED
-------- --------
In-process research and development...................... $ 5,941 $ 3,101
Cash acquired............................................ 9,876 9,876
Tangible assets.......................................... 2,980 2,980
Goodwill................................................. 7,363 10,203
------- -------
Total.................................................... $26,160 $26,160
======= =======
The following summary, prepared on a pro forma basis, combines the
Company's consolidated results of operations with Intermart's and ICS' results
of operations for the year ended December 31, 1998 as if each company had been
acquired as of the beginning of 1998. The table includes the impact of certain
adjustments including the elimination of the one-time charge for acquired
in-process research and development, elimination of intercompany profit and
additional amortization relating to intangible assets acquired (in thousands,
except per share data):
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues.................................................... $89,263
Net income (loss)........................................... $ (526)
Net income (loss) per share:
Basic..................................................... $ (0.04)
Diluted................................................... $ (0.04)
Shares used in per share computation:
Basic..................................................... 13,360
Diluted................................................... 13,360
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been effected for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
Divestiture
In April 2000, SCM sold to SmartDisk its interest in Impleo, a UK-based
company, for $39,000 in cash and 24,579 shares of SmartDisk common stock,
resulting in a net gain of $0.4 million. The gain is included in foreign
currency transaction gain and other income in the statement of operations.
3. SHORT-TERM INVESTMENTS
The fair value of short-term investments was as follows (in thousands):
DECEMBER 31, 2000
----------------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED GAIN ON LOSS ON FAIR
COST INVESTMENTS INVESTMENTS VALUE
--------- ----------- ----------- ---------
Corporate notes................................. $24,532 $42 $-- $24,574
Certificates of deposit......................... 2,519 1 -- 2,520
U.S. government agencies........................ 6,139 -- (6) 6,133
------- --- --- -------
Total........................................... $33,190 $43 $(6) $33,227
======= === === =======
F-17
61
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
DECEMBER 31, 1999
----------------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED GAIN ON LOSS ON FAIR
COST INVESTMENTS INVESTMENTS VALUE
--------- ----------- ----------- ---------
Corporate bonds................................. $32,161 $-- $ (77) $32,084
Commercial paper................................ 25,941 13 -- 25,954
Corporate notes................................. 2,711 -- (5) 2,706
Certificates of deposit......................... 6,383 -- (5) 6,378
Treasury notes.................................. 5,569 -- (16) 5,553
Market auction preferreds....................... 3,096 -- (72) 3,024
U.S. government agencies........................ 4,114 -- (66) 4,048
------- --- ----- -------
Total........................................... $79,975 $13 $(241) $79,747
======= === ===== =======
The contractual maturities of available-for-sale debt securities at
December 31, 2000 are as follows:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
Within one year......................................... $ 8,704 $ 8,714
One year to two years................................... 24,486 24,513
------- -------
Total short-term investments............................ $33,190 $33,227
======= =======
4. LONG-TERM INVESTMENTS
Long-term investments consist of the following (in thousands):
DECEMBER 31,
-----------------
2000 1999
------ -------
Investment in Smartdisk, at fair value.................... $1,306 $10,234
Investments in Spyrus, at cost............................ 4,046 3,546
Investment in ActivCard, at fair value.................... 1,551 --
Investments in SATUP, at cost............................. 859 --
Other..................................................... 308 165
------ -------
Total..................................................... $8,070 $13,945
====== =======
The investment in SmartDisk and ActivCard represent the quoted market value
of the Company's investment in their common stock.
In 1999, SCM made loans to Spyrus, a privately held company which provides
Internet identification and encryption solutions for e-business. In March 2000,
SCM converted its loans into shares of Spyrus' Series B convertible preferred
stock. In the fourth quarter of 2000, SCM invested an additional $0.5 million in
Spyrus Series B convertible preferred stock. This additional investment brings
SCM's ownership of all outstanding shares of Spyrus to approximately 16.4%.
In September 2000, SCM loaned $0.8 million to SATUP Databroadcasting AG
("Satup"), a privately held satellite content distributor located in Weinstadt,
Germany. In the fourth quarter, the loan was converted into common shares of
Satup and an additional $0.1 million was invested into common shares to bring
its ownership in Satup to approximately 10%. Satup is also a customer of SCM.
(See Note 15).
F-18
62
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
5. INVENTORIES
Inventories consist of (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Raw materials............................................ $20,599 $ 9,077
Finished goods........................................... 16,200 6,857
------- -------
$36,799 $15,934
======= =======
6. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
DECEMBER 31,
-----------------
2000 1999
------- ------
Land...................................................... $ 151 $ 157
Building and leasehold improvements....................... 4,169 1,829
Furniture, fixtures and office equipment.................. 10,329 6,430
Automobiles............................................... 405 424
Purchased software........................................ 3,002 2,218
------- ------
Total..................................................... 18,056 11,058
Accumulated depreciation.................................. (7,580) (4,686)
------- ------
Property and equipment, net............................... $10,476 $6,372
======= ======
7. INTANGIBLE ASSETS
Intangible assets, net consist of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Acquired workforce....................................... $ 2,551 $ 200
Customer relations....................................... 2,340 --
Trade name............................................... 6,113 400
Core technology.......................................... 9,015 2,550
Non-compete agreements................................... 900 --
Goodwill................................................. 50,861 7,042
------- -------
71,780 10,192
Accumulated amortization................................. (7,651) (2,186)
------- -------
Intangible assets, net................................... $64,129 $ 8,006
======= =======
8. SHORT-TERM DEBT
As of December 31, 1999, Dazzle had $1.4 million of convertible promissory
notes outstanding, which were repaid in June 2000 with $1.2 million of cash with
the remaining balance converted into 117,431 shares of Dazzle Series B preferred
stock.
F-19
63
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Short-term debt at December 31, 1999 consisted of the following (in
thousands):
Notes payable............................................... $1,418
Other....................................................... 94
------
Total....................................................... $1,512
======
9. LINES OF CREDIT
The Company has revolving lines of credit with two banks in Germany
providing total borrowings of up to DM 3.0 million (approximately $1.4 million
as of December 31, 2000). Both lines have no expiration date. The German lines
of credit bear interest at rates ranging from 7.5% to 10.0%, and borrowings
under these lines of credit are unsecured. The Company has an unsecured line of
credit in France of FF 2.0 million (approximately $0.3 million as of December
31, 2000) which bears interest at 5.59% and expires in August 2001. In the
United States, the Company has an unsecured $3.0 million line of credit which
bears interest at 8.5% and expires in May 2001. In addition, the Company has a
Singapore $1.2 million (approximately $0.7 million as of December 31, 2000)
overdraft facility with a local bank due on demand. The Singapore line is
secured by a US $0.4 million fixed deposit and has a base interest rate of 7.5%.
The Company's Japanese subsidiary also has a 67 million yen (approximately $0.6
million as of December 31, 2000) line of credit with a local bank in Japan which
has no expiration date. The Japanese line of credit has an interest rate of
1.75% and is secured by a 67 million yen deposit. There were no amounts
outstanding under any of these credit facilities as of December 31, 2000 and
1999.
10. SHAREHOLDERS' EQUITY
Stock Options
Under the Company's stock plans (the Plans), employees, directors and
consultants may be granted incentive or nonqualified stock options for the
purchase of the Company's common stock and stock purchase rights. Options
granted under the Plans are generally granted at fair market value, generally
vest over a four-year period and are generally exercisable for a term of ten
years after issuance. A total of 3,189,568 shares of common stock are currently
reserved for future grant under the Plans.
1997 Employee Stock Purchase Plan -- Under the Company's Employee Stock
Purchase Plan (the Purchase Plan), up to 175,000 shares of the Company's common
stock may be issued. The Purchase Plan permits eligible employees to purchase
common stock through payroll deductions at a purchase price of 85% of the lower
of fair market value of the common stock at the beginning or end of each
offering period. During 2000, 1999 and 1998, a total of 13,920, 16,500 and 6,982
shares, respectively, were issued under the plan. As of December 31, 2000,
137,598 shares were available under the Purchase Plan for future issuance.
F-20
64
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Stock option activity during the periods indicated is as follows:
OUTSTANDING OPTIONS
---------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
Balances as of January 1, 1998.............................. 1,196,002 $ 6.58
Options granted (weighted average fair value of $23.12 per
share).................................................... 988,421 33.83
Options canceled............................................ (182,275) 44.41
Options exercised........................................... (506,080) 2.85
---------
Balances as of December 31, 1998............................ 1,496,068 21.23
Options granted (weighted average fair value of $34.49 per
share).................................................... 1,174,148 50.93
Options canceled............................................ (81,339) 22.15
Options exercised........................................... (190,629) 15.97
---------
Balances as of December 31, 1999............................ 2,398,248 36.25
Options granted (weighted average fair value of $34.01 per
share).................................................... 2,035,287 46.63
Options canceled............................................ (589,541) 48.33
Options exercised........................................... (291,041) 34.07
---------
Balances as of December 31, 2000............................ 3,552,953 $40.37
=========
The following table summarizes information about options outstanding as of
December 31, 2000:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------- ----------- ------------ -------- ----------- --------
$ 1.56 - $ 1.56 12,471 8.00 $1.56 12,471 $1.56
$ 3.90 - $ 4.68 103,156 8.40 4.38 83,097 4.31
$ 8.10 - $ 9.50 308,212 6.60 9.01 249,613 9.00
$13.00 - $17.84 89,272 8.00 15.30 43,247 15.54
$21.98 - $32.00 906,406 8.90 30.62 133,369 30.03
$39.06 - $57.88 1,802,613 9.20 48.29 161,662 45.52
$61.25 - $83.00 330,823 8.70 72.57 67,646 63.82
--------- ---- ----- ------- -----
$ 1.56 - $83.00 3,552,953 8.99 40.37 751,105 25.67
========= =======
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires
the disclosure of pro forma net income and net income per share as if the
Company had adopted the fair value method. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the terms of the Company's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were
F-21
65
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
made using the Black-Scholes option pricing model with the following weighted
average assumptions for the Company's stock option grants:
2000 1999 1998
-------- -------- --------
Expected life....................................... 4 years 5 years 4 years
Risk-free interest rate............................. 5.76% 4.64% 4.57%
Volatility.......................................... 84% 77% 96%
Dividend yield...................................... None None None
The following weighted average assumptions are included in the estimated
grant date fair value calculations for rights to purchase stock under the
Purchase Plan:
2000 1999 1998
-------- -------- --------
Expected life....................................... 6 months 6 months 6 months
Risk-free interest.................................. 5.72% 5.29% 4.91%
Volatility.......................................... 84% 77% 96%
Dividend yield...................................... None None None
The weighted-average fair value of purchase rights granted under the
Purchase Plan in 2000, 1999 and 1998 was $36.78, $51.27 and 33.17 per share.
If the computed fair values of the 2000, 1999 and 1998 awards under the
Stock Option Plans and Employee Stock Purchase Plan had been amortized to
expense over the vesting period of the awards, the Company's pro forma net loss
and earnings per share for the three fiscal years in the period ended December
31, 2000 would have been as follows (in thousands):
2000 1999 1998
-------- ------- -------
Pro forma net loss................................... $(13,312) $(1,192) $(7,529)
Pro forma earnings per share:
Basic net loss per share........................... $ (0.91) $ (0.08) $ (0.57)
Diluted net loss per share......................... $ (0.91) $ (0.08) $ (0.57)
Deferred Stock-based Compensation - Employees
In July and October 1996, the Company granted options and restricted stock
to employees of the Company with exercise prices below fair market value on the
grant date. The Company has recorded deferred stock expense of $0.4 million in
1996 for the difference at the grant date between the exercise price and the
fair value, as determined by an independent valuation, as to the restricted
stock and the common stock underlying the options. This amount is being
amortized on the straight-line basis over the vesting period of the individual
options and the restricted stock, generally four years. For the years ended
December 31, 2000, 1999 and 1998, the Company expensed approximately $25,000,
$47,000 and $53,000, respectively, of the deferred stock compensation.
During fiscal 2000, Dazzle granted options to purchase 1,026,000 shares of
Dazzle common stock with exercise prices below fair market value to employees.
The Company recorded compensation expense of $30,000 related to these options in
fiscal 2000. All of these options were replaced with options to purchase SCM
options in connection with the acquisition of Dazzle. (See Note 2.)
In connection with the acquisition of Dazzle, the Company issued options to
purchase 200,746 shares of SCM common stock to Dazzle employees to replace their
outstanding options granted under the Dazzle Stock Option Plan. Options to
purchase 52,193 shares of SCM common stock were granted to replace Dazzle
options that were outstanding when SCM first acquired a controlling interest in
Dazzle. All these options were
F-22
66
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
fully vested. The fair value of these options of approximately $1.8 million was
included in the purchase price of the Dazzle acquisition according to APB
Opinion No. 16, Business Combinations and FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation. Options to purchase
148,553 shares of SCM common stock were granted to replace Dazzle options
granted subsequent to the date SCM first acquired a controlling interest in
Dazzle. The intrinsic value as of the grant date of $5.6 million was recorded as
deferred stock-based compensation according to APB Opinion No. 25, Accounting
for Stock Issued to Employees and EITF Issue No. 00-23. The intrinsic value of
$1.4 million related to these options that were vested on the date of grant were
expensed on the grant date. The remaining deferred stock-based compensation is
being amortized over the remaining vesting periods of these options. For the
year ended December 31, 2000, the Company expensed approximately $1.6 million of
the deferred stock-based compensation.
Deferred Stock-based Compensation - Non-employees
In May 2000, the Company granted a stock option to purchase 4,811 shares of
common stock to a vendor. These options vest over a four-year period and expire
ten years from the date of grant. The vesting of this award is not contingent
upon the performance of future services. The fair value of this option at the
grant date was estimated to be $99,000 using the Black-Scholes option pricing
model. During the year ended December 31, 2000, $14,000 was recognized as
compensation expense.
In October 2000, the Company issued 28,871 shares of common stock in
connection with the termination of a distribution agreement. (See Note 16).
11. INCOME TAXES
Income (loss) before income taxes for domestic and non-U.S. operations is
as follows (in thousands):
2000 1999 1998
-------- ------- -------
Net income (loss) before income taxes:
U.S. .............................................. $(15,663) $(5,013) $(8,807)
Foreign............................................ 9,535 19,508 6,679
-------- ------- -------
Total income (loss) before income taxes.............. $ (6,128) $14,495 $(2,128)
======== ======= =======
The benefit (provision) for income taxes consisted of the following (in
thousands):
2000 1999 1998
------ ------- -------
Deferred:
Federal.............................................. $ 981 $ 1,243 $ 1,607
State................................................ 393 281 389
Foreign.............................................. (391) 10 --
------ ------- -------
983 1,534 1,996
------ ------- -------
Current:
Federal.............................................. -- (733) (2,480)
State................................................ -- (208) (420)
Foreign.............................................. 49 (5,394) (1,941)
------ ------- -------
49 (6,335) (4,841)
------ ------- -------
Total benefit (provision) for income taxes............. $1,032 $(4,801) $(2,845)
====== ======= =======
F-23
67
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
Significant items making up deferred tax assets and liabilities are as
follows (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Deferred tax assets:
Accounts receivable allowances............................ $ 683 $ 555
Inventory adjustment...................................... 759 1,109
Net operating loss carryforwards.......................... 9,041 4,446
Unrealized loss on investment............................. 941 --
Foreign currency translation adjustment................... 1,147 --
Other accruals............................................ 1,499 1,149
------- -------
14,070 7,259
Less valuation allowance.................................... (6,240) (3,527)
------- -------
7,830 3,732
Deferred tax liability:
Intangibles and other assets.............................. (1,031) --
Unrealized gain on investments............................ -- (3,094)
Other..................................................... (183) (107)
------- -------
Net deferred tax asset...................................... $ 6,616 $ 531
======= =======
Net operating losses of $11.4 million for federal and state tax purposes
attributable to the tax benefit relating to the exercise of nonqualifying stock
options and disqualifying dispositions of incentives stock options are excluded
from the components of deferred income tax assets. The tax benefit associated
with this net operating loss will be recorded as an adjustment to stockholders'
equity when the Company generates taxable income.
The increased valuation allowance in 2000 relates primarily to net
operating losses of Microtech, which was acquired during the year (see Note 2).
Management believes the realizability of the net deferred tax asset of $6.6
million as of December 31, 2000 is likely considering the amounts available in
carryback periods and SCM's projections of future taxable income. The Company
has provided a valuation allowance of $6.2 million as of December 31, 2000 due
to the uncertainty of the use of the net operating loss carryforwards due
primarily to certain limitations.
The benefit (provision) for taxes reconciles to the amount computed by
applying the statutory federal rate to income (loss) before income taxes as
follows:
2000 1999 1998
---- ---- ----
Computed expected tax benefit (provision)................... 34% (35)% 34%
State taxes, net of federal benefit......................... 4% -- (6)%
Foreign taxes benefits provided for at rates other than U.S.
statutory rate............................................ 17% 10% 16%
Foreign research and development credit..................... 30% -- --
Benefits of U.S. net operating loss carryforwards........... -- -- 18%
Expenses not currently deductible for tax purposes.......... (62)% (8)% (205)%
Change in the valuation allowance for deferred tax assets at
beginning of year allocated to income tax expense......... -- -- 9%
Other....................................................... (6)% -- --
--- --- ----
Provision for income taxes.................................. 17% (33)% (134)%
=== === ====
F-24
68
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
The Company had net operating loss carryforwards of approximately $38.4
million and $11.2 million for federal and state income tax purposes,
respectively. Additionally, the Company's Japanese subsidiary had net operating
loss carryforwards of approximately $0.6 million as of December 31, 2000 for
Japanese tax purposes. The Japanese net operating loss carryforward will expire
approximately in the years 2001 and 2002. The U.S. federal net operating loss
carryforwards will expire in the years 2008 through 2013, and the California net
operating loss carryforwards will expire in the years 2000 through 2005. Federal
and California tax laws impose significant restrictions on the utilization of
net operating loss carryforwards in the event of a shift in the ownership of the
Company, which constitutes an "ownership change" as defined by the Internal
Revenue Code, Section 382. An ownership change occurred in 1996, resulting in
the U.S. subsidiary's federal and California net operating loss carryforwards
being subject to an annual limitation of approximately $0.3 million. Another
ownership change resulted from the Company's IPO. Any unused annual limitations
may be carried forward to increase the limitations in subsequent years.
Additionally, the use of net operating loss carryforwards of Dazzle and
Microtech are both limited to approximately $0.6 million per year.
12. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net income (loss) per share from continuing
operations (in thousands).
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Net income (loss) (numerator), basic.................. $(4,709) $ 9,108 $(4,973)
Dilutive effect of Dazzle options..................... -- (93) --
------- ------- -------
Net income (loss) (numerator), diluted................ $(4,709) $ 9,015 $(4,973)
======= ======= =======
Shares (denominator):
Weighted average common shares outstanding used in
computation of basic............................. 14,641 14,082 13,253
Dilutive effect of common stock equivalents using
the treasury stock method........................ -- 1,004 --
------- ------- -------
Shares used in computation, diluted................... 14,641 15,086 13,253
======= ======= =======
Net income (loss) per share:
Basic............................................... $ (0.32) $ 0.65 $ (0.38)
======= ======= =======
Diluted............................................. $ (0.32) $ 0.60 $ (0.38)
======= ======= =======
Excluded from the computation of diluted EPS for the year ended December
31, 2000 are common equivalent shares resulting from the effect of 3,552,953 and
15,798 shares issuable under stock options and warrants, respectively, because
their inclusion would be antidilutive. Such options and warrants had weighted
average exercise prices of $40.37 and $5.72 per share, respectively. Excluded
from the computation of diluted EPS for the year ended December 31, 1999 are
common equivalent shares resulting from the effect of 404,707 shares issuable
under stock options because their inclusion would be antidilutive. These options
had a weighted average exercise price of $62.89 for 1999. Excluded from the
computation of diluted EPS for the year ended December 31, 1998 are common
equivalent shares resulting from the effect of 1,496,068 and 16,731 shares
issuable under the stock options and warrants, respectively, because their
inclusion would be antidilutive. Such options and warrants had weighted average
exercise prices of $21.23 and $5.72 per share, respectively.
F-25
69
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
13. SEGMENT REPORTING, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company has adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, in 1998. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operating decisions and assessing financial performance. The
Company's chief operating decision maker is considered to be its executive
staff, consisting of the Chief Executive Officer, Chief Operating Officer and
Executive Chairman.
The executive staff aligned the Company's organization along three product
segments: Digital TV and Video, Digital Media and Connectivity and PC Security.
The executive staff reviews financial information and business performance along
these three product segments. The Company evaluates the performance of its
segments at the revenue and gross margin level. The Company's reporting systems
do not track or allocate operating expenses or assets by segment. The Company
does not include intercompany transfers between segments for management
purposes.
Summary information by segment for the years ended December 31, 2000, 1999
and 1998 is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Digital TV and Video:
Revenues.......................................... $ 78,940 $ 46,396 $30,348
Gross margin...................................... 27,784 17,712 12,192
Digital Media and Connectivity:
Revenues.......................................... $ 62,890 $ 61,717 $35,594
Gross margin...................................... 18,373 18,404 10,051
PC Security:
Revenues.......................................... $ 16,004 $ 19,175 $19,067
Gross margin...................................... 6,814 8,548 5,618
Total:
Revenues.......................................... $157,834 $127,288 $85,009
Gross margin...................................... 52,971 44,664 27,861
Additional information regarding revenue by geographic region is as follows
(in thousands):
2000 1999 1998
-------- -------- -------
United States....................................... $ 81,873 $ 60,536 $32,686
Europe.............................................. 51,442 42,501 35,467
Asia-Pacific........................................ 24,519 24,251 16,856
-------- -------- -------
$157,834 $127,288 $85,009
======== ======== =======
Geographic revenues are based on the country where the customers are
located.
No customers exceeded 10% of total net revenues for 2000 and 1999. One
customer represented 17% of the Company's total net revenues in 1998.
F-26
70
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
14. COMMITMENTS
The Company leases its facilities, certain equipment, and automobiles under
noncancelable operating lease agreements. These lease agreements expire at
various dates during the next sixteen years. Rent expense was $1.9 million, $1.5
million, and $0.7 million in 2000, 1999, and 1998, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 2000 are as follows for the years ending (in thousands):
2001........................................................ $ 2,991
2002........................................................ 3,185
2003........................................................ 1,706
2004........................................................ 1,326
2005........................................................ 1,050
Thereafter.................................................. 4,381
-------
Total minimum lease payments................................ $14,639
=======
15. RELATED PARTY TRANSACTIONS
In September 2000, SCM loaned $0.8 million to SATUP Databroadcasting AG
("Satup"), a privately held satellite content distributor located in Weinstadt,
Germany. In the fourth quarter, the loan was converted into common shares of
Satup and an additional $0.1 million was invested to bring its ownership in
Satup to approximately 10%. During 2000, SCM recognized $0.3 million in revenue
from Satup and had an accounts receivable of $0.4 million as December 31, 2000.
In 1999, SCM loaned $3.6 million to Spyrus, Inc., a privately held company
which provides Internet identification and encryption solutions for e-business.
In March 2000, Spyrus consummated a $20.2 million preferred stock financing. In
this transaction, SCM acquired 35,500,000 shares of Spyrus' Series B preferred
stock at a price of $0.10 per share through the conversion of the loan. This
represented approximately 15.8% of Spyrus' outstanding common stock on an as
converted basis. In connection with this transaction, three directors of SCM
acquired additional Spyrus Series B preferred stock on the same terms as SCM.
Shares held by these individuals represent approximately 3.6% of Spyrus'
outstanding common stock on an as converted basis. SCM has the right to appoint
a director to Spyrus' board of directors and a member of SCM's Board currently
serves as SCM's appointee.
In the fourth quarter of 2000, SCM invested an additional $0.5 million in
Series B preferred stock bringing its ownership of Spyrus to approximately 16.4%
on an as converted basis. Shares held by SCM's directors remained unchanged and
represented approximately 2.8% of Spyrus' outstanding common stock on an as
converted basis.
16. LEGAL PROCEEDINGS
The Company from time to time could be subject to claims arising in the
ordinary course of business or a defendant in lawsuits. While the outcome of
such claims or other proceedings can not be predicted with certainty, management
expects that any such liabilities, to the extent not provided for by insurance
or otherwise, will not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
In 2000, SCM issued 28,871 shares of common stock and paid cash for a
contract termination, dispute resolution settlement and legal fees. The total
amounts recorded for these items was $5.0 million. Such amounts are included in
General and Administrative expenses.
F-27
71
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 2000 and 1999 (in thousands, except per share data):
QUARTER ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
(UNAUDITED)
2000
Net revenue................................ $32,072 $30,048 $43,263 $ 52,451
Gross profit............................... 11,966 9,964 14,266 16,775
Income (loss) from operations.............. 2,354 (536) (3,734) (12,088)
Net income (loss).......................... 2,678 1,247 (2,411) (6,223)
Net income (loss) per share
Basic.................................... 0.19 0.09 (0.17) (0.41)
Diluted.................................. 0.17 0.08 (0.17) (0.41)
1999
Net revenue................................ $24,361 $26,383 $36,401 $ 40,143
Gross profit............................... 8,345 7,149 13,353 15,817
Income (loss) from operations.............. 1,944 (4,501) 4,151 6,222
Net income (loss).......................... 2,410 (3,256) 3,824 6,130
Net income (loss) per share
Basic.................................... 0.17 (0.23) 0.27 0.43
Diluted.................................. 0.16 (0.23) 0.26 0.40
F-28
72
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* Bylaws, as amended, of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
9.1* Form of Director and Officer Indemnification Agreement.
9.2* 1997 Stock Plan.
10.1* 1997 Employee Stock Purchase Plan.
10.2* 1997 Director Option Plan.
10.3* 1997 Stock Option Plan for French Employees.
10.4* 1997 Employee Stock Purchase Plan for Non-U.S. Employees.
10.5*** 2000 Non-statutory Stock Option Plan.
10.6*** LA Vision, Inc. 1997 Option Plan.
10.7*** Dazzle Multimedia, Inc. 1998 Stock Plan.
10.8*** Dazzle Multimedia, Inc. 2000 Stock Option Plan.
10.9** Revolving Credit Loan and Security Agreement, dated
September 26, 1997, between Registrant and Comerica Bank.
10.10* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank.
10.11* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank.
10.12* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen.
10.13* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant.
10.14 Sublease Agreement, dated March 15, 2000 between Dazzle
Multimedia, Inc. and Zitec Corporation.
10.15 Sublease Agreement, dated December 14, 2000, between
Microtech International and Golden Goose LLC.
10.16* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors.
10.17* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier.
10.18*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS.
10.19*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant.
10.20*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.21*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant and Sun Microsystems,
Inc.
10.22* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels und Sohn
GmbH & Co.
10.23*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
GmbH and Registrant.
10.24* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant.
10.25* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended.
10.26* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant.
10.27*+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant.
10.28*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM.
73
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.29* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus.
10.30* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus.
10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.32* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.33* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
- ---------------
* Filed previously as an exhibit to SCM's Registration Statement on Form S-1
(See SEC File No. 333-29073).
** Filed previously as an exhibit to SCM's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 (See SEC File No. 000-22689).
*** Filed previously as an exhibit to SCM's Registration Statement on Form S-8
(See SEC File No. 333-51792).
+ Certain information in these exhibits has been omitted pursuant to a
confidential treatment request under 17 C.F.R. Section Section 200.80(b)(4),
200.83 and 230.46.
(b) Reports on Form 8-K
None
(c) See response to Item 14(a)(3) above.
(d) See response to Item 14(a)(2) above.