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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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: 000-27257
SMARTDISK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-0733580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3506 MERCANTILE AVENUE, NAPLES, FLORIDA 34104
(Address of principal executive offices) (Zip Code)
(941) 436-2500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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 [ ].
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 incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 29, 2000, there were 16,004,297 shares of the
Registrant's Common Stock outstanding, and the aggregate market value of such
shares held by non-affiliates of the Registrant as of February 29, 2000 was
$284,466,000. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders to be held on May 23, 2000 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
SMARTDISK CORPORATION
FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT
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TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Business ........................................................................................ 3
Item 2. Properties ...................................................................................... 19
Item 3. Legal Proceedings ............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ............................................. 19
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .......................... 19
Item 6. Selected Financial Data ......................................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...................................... 40
Item 8. Financial Statements and Supplementary Data .................................................... 40
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............ 40
PART III.
Item 10. Directors and Executive Officers of the Registrant .............................................. 41
Item 11. Executive Compensation .......................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management .................................. 41
Item 13. Certain Relationships and Related Transactions .................................................. 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................ 42
Signatures ...................................................................................... 75
2
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K
and the documents incorporated herein by reference contain forward-looking
statements. These forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those in such
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements included in this document, which are based on
information available to the Company on the date hereof. The Company undertakes
no obligation to update any such forward-looking statements or to disclose any
facts, events, or circumstances after the date hereof that may affect the
accuracy of any forward-looking statement. Readers should carefully review the
risks described in other documents we file from time to time with the Securities
and Exchange Commission, including our Prospectus dated October 5, 1999 and our
Quarterly Reports on Form 10-Q to be filed in 2000.
PART I
ITEM 1. BUSINESS
OVERVIEW
SmartDisk designs, develops and distributes products that enable
consumers to easily share digital data among advanced consumer electronic
products, PCs and the Internet. Consumers are increasingly relying on the
transfer of digital information between electronic devices as an important part
of their daily lifestyles. We believe that our products provide an easy-to-use,
cost-effective and versatile solution for the exchange of digital data. Our
patented products, FlashPath and Smarty, allow consumers to use the familiar
3.5-inch floppy drive found on most PCs worldwide to simplify the exchange of
images, audio and other digital data. This widely recognized format reduces
consumer intimidation frequently created by new technologies, facilitating the
adoption of our products and various consumer-oriented digital appliances.
Our FlashPath and Smarty products can be used with a variety of PC
hardware platforms and software environments. Our driver software is included
with our products and can also be downloaded free of charge from the Internet.
The software enables our products to operate with Windows 95, Windows 98,
Windows 2000, Windows NT, NEC Windows and Macintosh operating systems. The
versatility of our products will become more important as consumers increase
their reliance on flash memory cards to store and transfer digital data where
traditional memory storage devices such as floppy disks are inadequate due to
capacity or form factor constraints. FlashPath transfers digital data to the PC
without cables or hardware installation and without using limited desktop space
or personal computer ports.
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Our FlashPath for SmartMedia product is used primarily to transfer
images to PCs from digital cameras using the Toshiba SmartMedia flash memory
card. SmartMedia cards are used in cameras made by a number of leading camera
manufacturers, including FujiFilm, Olympus, Ricoh, Sanyo, Sharp and Toshiba. The
FlashPath for SmartMedia can also be used for other products that utilize
SmartMedia cards such as digital camcorders and digital dictation recorders.
During the fourth quarter of 1999 we introduced two new FlashPath
products, which support the latest flash memory cards to be introduced to the
market - Sony's Memory Stick and SanDisk's MultiMediaCard. These flash memory
cards are expected to have applications in "smart" cellular phones, digital
cameras and camcorders, digital audio players and video game devices. We began
shipping the Memory Stick FlashPath in the fourth quarter of 1999 and have
orders from SanDisk for the MultiMediaCard FlashPath for delivery during the
first half of 2000.
We also have strategic relationships with a number of key electronics
industry companies, including Hitachi, NEC, SanDisk, Sony and Toshiba. These
strategic partners actively participate in the development, distribution and
marketing of our products.
We were incorporated in Delaware on March 5, 1997 as "Fintos, Inc." and
changed our name to "SmartDisk Corporation" on September 26, 1997. Our
predecessor, SmartDisk Security Corporation, was incorporated on May 18, 1993.
We commenced significant operations related to our current products in January
1998, and we received our first significant capital contributions in May 1998.
Our executive offices are located at 3506 Mercantile Avenue, Naples, Florida
34104, and our telephone number is (941) 436-2500. Our home page can be located
on the World Wide Web at http://www.smartdisk.com. The contents of our website
are not part of this Annual Report on Form 10-K.
INDUSTRY OVERVIEW
Consumer lifestyles are being transformed by the increasing use of
digital information in the home and workplace. Individuals increasingly rely
upon PCs, computer networks and the Internet to access digital information for
entertainment and productivity purposes. The proliferation of PCs in both the
home and office, as well as the explosive growth of Internet use, has led to
widespread consumer familiarity with the storage, manipulation, transfer and
management of digital data.
In recent years, digital computing and processing have expanded beyond
the boundaries of desktop computer systems to include a broader array of
sophisticated consumer electronic products. These products, often referred to as
digital appliances, include digital cameras, digital voice recorders, digital
camcorders, digital music players, electronic photo albums, personal digital
assistants (PDA's) and "smart" phones. We believe that approximately 18 million
digital appliances were shipped in 1999. This number is expected to grow to
approximately 78 million by 2002. One of the most popular digital appliances
today is the digital camera. Approximately 5 million digital cameras were
shipped in 1999, and this number is expected to grow to 20 million in 2002.
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The convergence of advanced consumer electronic products, PCs and the
Internet offers consumers the opportunity to personalize and exchange digital
data generated from a wide range of sources. This convergence has precipitated
greater demand for connectivity. While significant resources have focused on
increasing the speed and capacity of the connection between PCs and the
Internet, the connection between digital appliances and PCs has yet to achieve
the compatibility, simplicity and convenience sought by consumers.
One of the principal barriers to connectivity is the variety of
non-standardized flash memory cards available in the market today. Flash memory
cards are the miniature devices used by many of the emerging consumer electronic
products to store digital data. There are currently five major removable flash
memory cards, none of which has emerged as an industry standard and none of
which is compatible or operable with any of the others:
/bullet/ the Toshiba SmartMedia card;
/bullet/ the SanDisk CompactFlash card;
/bullet/ the SanDisk MultiMediaCard;
/bullet/ the Sony Memory Stick; and
/bullet/ the SanDisk, Toshiba and Matsushita Secure Digital (SD) Card.
A second major barrier is the current lack of convenient connection
methods. 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 they are intimidated by 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 stored digital data,
which is captured by digital appliances. The popularity of the PalmPilot was
also largely fueled by the ability of consumers to easily connect and transfer
data to and from their PCs. Therefore, one of the principal challenges faced by
manufacturers of consumer digital appliances is the interface between their
appliances and PCs or other digital appliances.
There are currently a number of interfaces used to transfer data from
digital appliances to personal computers:
/bullet/ cable interfaces that connect to the Universal Serial Bus
(USB), IEEE 1394 (FireWire), serial ports and parallel ports;
and
/bullet/ non-cable interfaces such as infrared interfaces and PCMCIA
and floppy disk drive slots.
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We believe that serial port and parallel port interfaces have disadvantages
that make them less desirable for use with consumer-oriented digital appliances.
Those interfaces require the use of limited PC peripheral ports, which are
frequently dedicated to connecting the PC to devices such as printers, scanners,
modems, PalmPilots and other peripherals. In addition, direct digital
appliance-to-PC connections via serial or parallel ports consume the appliances'
battery power and render the appliances unusable while data is being
transferred.
While USB solutions offer direct cable connection, they do not have the
same limitations of serial or parallel port interfaces. For example, USB has the
ability to provide a direct source of power to the digital appliance and
therefore does not drain the appliance's batteries. However, while most new
computers are shipped with USB support, much of the current installed base of
desktop PCs worldwide are not equipped with a USB port.
Some of the non-cable interfaces also have inherent limitations. For
example, while virtually all portable PCs being sold today contain a PCMCIA slot
or infrared interface as a standardized feature, we believe that neither the
PCMCIA slot nor the infrared interface is generally available on desktop
computers.
THE SMARTDISK SOLUTION
We design, develop and distribute easy-to-use, portable and low cost
devices that facilitate data exchange between digital appliances, PCs and the
Internet. Our patented products connect through the most widely-accepted and
user-friendly PC interface, the 3.5-inch floppy disk drive, allowing the OEMs
that market their and our consumer products to reach a large installed base of
potential users.
Our current and planned FlashPath and Smarty products are designed to
offer the following principal benefits:
EASE OF USE. Our products are easy to use and install. FlashPath
transfers digital data to the PC without cables or hardware installation and
without using limited desktop space or personal computer ports. A consumer using
a digital camera removes the flash memory card that serves as the camera's
digital film, places that flash memory card into our FlashPath product, and then
inserts the FlashPath into the PC's 3.5-inch floppy disk drive. FlashPath easily
transfers to the PC the images that are captured by the digital camera and
stored on the flash memory card. The consumer can then use the PC to edit and
print the image, add sound or text, transmit the image over the Internet or
incorporate the image in advertisements, newsletters, reports or other documents
produced using the PC.
PRODUCTS COMPATIBLE WITH MULTIPLE MEDIA. We believe that our
established ability to design products that support competing flash memory cards
is critical because of the lack of flash memory industry standards. Our initial
FlashPath product was designed to transfer digital photographs from the Toshiba
SmartMedia card to the PC for transmission over the Internet. Our latest
FlashPath products designed for the Sony Memory Stick and SanDisk
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MultiMediaCard will permit users to easily transfer data, images and audio data
between a standard 3.5-inch floppy disk drive and these flash memory cards. Our
ability to design products compatible with multiple media is enhanced by our
strategic relationships with the three leading manufacturers of flash memory
storage cards - SanDisk, Sony and Toshiba. By supporting various media, we will
be able to address the data transfer needs of purchasers of existing and
emerging digital appliances that use different flash memory cards. In addition,
our Smarty product supports various smart card formats.
FAMILIAR FORM. Our products are shaped like a 3.5-inch floppy disk and
use the floppy disk drive slot familiar to most PC users. This widely recognized
format reduces consumer intimidation frequently created by new technologies,
facilitating the adoption of our products and various consumer-oriented digital
appliances.
VERSATILE. Our FlashPath and Smarty products can be used with a variety
of PC hardware platforms and software environments. Our driver software is
included with our products and can also be downloaded free of charge from the
Internet. The software enables our products to operate with Windows 95, Windows
98, Windows NT, NEC Windows and Macintosh operating systems. As a result, the
same FlashPath that is used to transfer images from one digital camera to a
Microsoft-based PC can be used to transfer images from another digital camera to
an Apple computer. Similarly, the same FlashPath that is used to transfer images
may also be used to transfer voice and other digital data from a variety of
digital appliances that use the same flash memory card. The versatility of our
products will become more important as consumers increase their reliance on
flash memory cards to store and transfer digital data where traditional memory
storage devices such as floppy disks are inadequate due to capacity or form
factor constraints.
INDEPENDENT POWER SOURCE. Unlike cables, our FlashPath and Smarty
products do not rely upon a digital appliance's power source to transfer digital
data from a flash memory card to a PC. Each of our products runs on two
replaceable batteries. This is important because digital appliances, such as
digital cameras, consume significant amounts of power and require frequent
battery replacement or recharging. The use of cable interfaces quickly drains
power from digital appliances, making those competing products less attractive.
BUSINESS STRATEGY
Our objective is to use our proprietary and patented technologies to
capitalize on the growing demand for digital devices and increased usage of the
Internet. Key elements of our business strategy include:
CAPITALIZE ON TECHNOLOGY EXPERTISE TO EXPAND OUR PRODUCT OFFERINGS. We
have developed extensive expertise, intellectual property and core capabilities
in flash memory data transfer and smart card technologies. Each of our products
is developed using a building block approach that employs previously developed
technologies. This ability to modify our existing technologies allows us to
quickly respond to industry developments, providing first-to-market advantages
and reducing development costs for future products. We expect to capitalize on
our technology base and patent portfolio to design, develop and manufacture a
broad range of data
7
transfer devices that can operate across a variety of flash memory products,
hardware platforms and software environments. In the short-term, we are
developing products to transfer digital data between PCs and different flash
memory cards and are expanding our applications to support digital audio
players. In addition, we are using our technology expertise, patents and trade
secrets to develop application-specific, non-PC-based devices that will permit
flash memory cards to be used with other existing technologies. We will also
strive to capitalize on our past design experience to develop products that
support computer interfaces other than the 3.5-inch floppy disk drive.
EXPAND CUSTOMER AND STRATEGIC INDUSTRY RELATIONSHIPS. We have formed
strategic relationships with a number of leading consumer product OEMs and other
key industry players, including FujiFilm, Hitachi, NEC, Olympus, SanDisk, Sony
and Toshiba. We intend to continue to develop long-term alliances with a
diversified base of OEMs and other industry participants in additional consumer
electronics segments. We believe that these relationships provide significant
operating leverage and a number of other important benefits:
/bullet/ Our OEM customers advertise, promote, package, sell and
distribute our products under some of the world's most
recognized brand names. These include FujiFilm, Hitachi,
Olympus, SanDisk, Sharp, Sony and Toshiba. As a result, we
have access to extraordinary market clout without the need to
invest heavily in our own marketing infrastructure and
programs.
/bullet/ Our product development relationships frequently provide
access to flash memory card manufacturers early in the design
phase of their product development process. This allows us to
anticipate these manufacturers' future technological
requirements and to develop long-term relationships across a
number of products and through multiple product generations.
In addition, these partners often assist with engineering and
design for manufacturability, which helps assure that
mechanical and electrical considerations are integrated into a
total systems approach to achieve a high quality and
cost-effective product.
MAINTAIN MEDIA NEUTRALITY. We are using our flexible technology
architecture and core capabilities to create products that enable consumers to
use all leading flash memory cards. There is a rapidly growing number of digital
appliances that use competing flash memory technologies, none of which we
currently expect to become an industry standard. We are committed to maintaining
media neutrality to enable users of various leading flash memory technologies to
transfer data quickly and easily among devices that use different flash memory
card formats.
PROMOTE BRAND AWARENESS OF OUR PRODUCTS. We believe that of the total
amount of our products, marketed and distributed by OEMs, approximately 75% are
sold on a stand-alone basis, and the remainder are either packaged with the
OEMs' products or are shipped by them upon presentation of a coupon that is
provided, and paid for, by the OEMs. Accordingly, it is critical that we obtain
ultimate consumer acceptance of and demand for our products independent of sales
that occur in conjunction with sales of our OEMs' products. To this end, we
intend to build upon our initial success by promoting the FlashPath brand names.
Our brands are
8
often displayed on the packaging of the OEM products and, as a result, we are
able to benefit from the powerful advertising and promotion of our products by
the OEMs while simultaneously building our brand identity. In addition, we
intend to expand our use of advertising and other marketing programs designed to
promote our brand and enhance brand awareness. We also intend to increase
distribution channels for our products by promoting direct sales via the
Internet and through retailers. Recently we formed a strategic relationship with
Tech Data Corporation, a leading global provider of IT products and logistics
services. Under the agreement, Tech Data will distribute our FlashPath for
SmartMedia to its customers. This agreement was a crucial step toward bringing
our products to electronics retailers in the U.S. and around the world.
EMPHASIZE USER-FRIENDLY PRODUCTS. We are committed to capitalizing on
our patent portfolio to enable consumers to conveniently transfer images, music,
voice and other types of digital data between consumer electronic devices, the
Internet and PCs.
TECHNOLOGY
Since our inception, we have focused our research and development
efforts on designing and developing products that facilitate the transfer of
data from digital appliances using flash memory cards and smart cards to PCs. We
have been actively involved in all aspects of this development process,
including the development of a proprietary technology architecture, which
supports all of our FlashPath and Smarty products and can be used as the basis
for new products. We believe that our patents provide substantial proprietary
protection relating to the transfer of digital data through floppy disk
interfaces. We also believe that we have developed particular expertise in
research, product design and product development.
Our products are compatible with a broad range of hardware platforms
and software environments. Our floppy disk drive interface architecture builds
upon key elements of our technology, including digital and analog ASICs, driver
software and key mechanical components, and allows us to develop products that
support different flash memory and smart cards. In addition, we believe that
this architecture improves reliability, decreases time to market and lowers new
product development costs. For example, the development of our FlashPath product
for SmartMedia flash memory cards took approximately 18 months from determining
product feasibility to commencing commercial production. Our time for the
development of our products for the MultiMediaCard and Sony Memory Stick was
shortened to less than 12 months. We believe that we will take advantage of
similar opportunities to utilize our core technological capabilities as we
continue our efforts to develop products to conveniently transfer digital data
from competing flash memory cards to existing, non-PC technologies and, in the
future, products that support computer interfaces other than the 3.5-inch floppy
disk drive.
During 2000, we expect that our development efforts will be primarily
focused on the following initiatives:
/bullet/ expanding our FlashPath product line to support the additional
flash memory card formats;
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/bullet/ further reducing our production costs; and
/bullet/ developing new, application-specific products that will allow
flash memory cards to be used with existing non-PC
technologies.
An element of our business strategy is to enter into strategic
alliances without licensing our technology to OEMs. Our strategic alliances with
Hitachi, NEC, SanDisk, Sony and Toshiba began with their initial inquiries to
license our FlashPath technology. Those preliminary overtures developed into
more extensive dialogues and the exchange of information that permitted us to
better demonstrate our technology platform, proprietary rights and research,
design and development expertise. We believe that the broad scope of our
strategic alliances with these leading industry participants demonstrates the
appeal and strength of our proprietary technology. Many of these alliances have
led to equity investments and cooperative development arrangements.
The technology comprised in our product offerings consists of five key
components:
/bullet/ FLASH MEMORY OR SMART CARD READ/WRITE SYSTEM. This proprietary
system uses the central processing logic to store data on and
retrieve data from the flash memory card in the product.
/bullet/ DIGITAL ASIC. Our proprietary digital ASIC prepares the
digital data to be retrieved from the flash memory, encodes it
and sends it to the analog ASIC. The digital ASIC also decodes
data from the analog ASIC for use with the flash memory or
smart card read/write system.
/bullet/ ANALOG ASIC. Our proprietary analog ASIC converts between
digital data and analog signals for interfacing the floppy
disk drive read/write head and the flash memory card.
/bullet/ CENTRAL PROCESSING UNIT. This unit consists of an industry
standard microprocessor, memory and other processing logic to
control the functions of the digital and analog ASICs and the
flash memory or smart card read/write system.
/bullet/ DRIVER SOFTWARE. Our proprietary driver software enables our
products to operate with a variety of commonly installed
personal computer operating systems such as Microsoft Windows.
MARKETING, CUSTOMERS AND STRATEGIC RELATIONSHIPS
SALES AND MARKETING. We market and sell our current FlashPath product
primarily to OEMs, including Agfa, FujiFilm, Olympus, Ricoh, SanDisk, Sanyo,
Sharp, Sony and Toshiba. These OEMs compete in some of the fastest growing
segments of the electronics industry, including digital cameras, digital audio
players, digital camcorders and personal digital assistants.
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We believe that of the total amount of our products, marketed and
distributed by OEMs, approximately 75% are sold on a stand-alone basis, and
approximately 25% are either packaged with the OEMs' products or are shipped by
them upon presentation of a coupon that is provided, and paid for, by the OEMs.
Often, both the OEM's brand name and our FlashPath tradename appear on the
product packaging. As a result, we benefit from the powerful advertising and
promotion of our products by the OEMs without having to incur significant
additional marketing expenses. For example, our products have been featured in
OEM advertisements in major publications, including THE WALL STREET JOURNAL,
TIME MAGAZINE and USA TODAY.
The packaging of our FlashPath product with FujiFilm's and Olympus'
digital cameras illustrates the synergistic relationships we have with some of
our customers. Their marketing campaigns emphasized the convenience of using the
FlashPath product to transfer digital photographs to the PC. We believe that our
FlashPath adapter is one of the key reasons that many of the top selling digital
cameras in the world use Toshiba's SmartMedia card.
We support the marketing activities of our customers with a product
manager for each of our product lines. In addition, we support their sales
efforts through sales training courses, public relations activities, trade shows
and industry education programs. We also employ marketing communications
personnel to develop packaging, brochures and other collateral materials.
We market and sell our Smarty product to financial institutions and
other service providers who promote Smarty to their customers as part of their
smart card-based programs. Our Smarty customers include ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain) and
Visa-related banks in Latin America.
As of December 31, 1999, we had 10 full-time employees engaged in sales
and marketing activities. We also use the services of Japan-based dealers to
serve as our agents in connection with sales to OEMs based in that country.
Those intermediaries generally mark up the selling price to the OEM purchaser by
approximately 3-4%. Our customers generally place orders for our products on an
as-needed basis, with no long-term commitments.
STRATEGIC RELATIONSHIPS. An important element of our business strategy
is to develop strategic relationships with industry players that can assist us
in the development of new products, provide us with access to leading-edge
manufacturing capabilities and market and distribute our products globally. This
approach allows us to concentrate our resources on our core expertise of product
design and development, reduces our capital requirements and generally provides
a high degree of operating leverage. In addition, our close relationships with
flash memory card manufacturers and consumer product OEMs frequently provide
insight into the current and future needs of these companies, enabling us to
design specific products to meet these needs. OEMs frequently distribute our
FlashPath product in connection with the distribution of their consumer
electronic products. As a result, we believe that these strategic relationships
allow us to take advantage of OEMs' direct sales organization, distributors and
manufacturers' representatives. We evaluate potential collaborative arrangements
on an ongoing basis and intend to continue to pursue additional strategic
relationships.
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Set forth below are brief descriptions of some of our strategic
relationships:
TOSHIBA. Toshiba Corporation, a leading electronics company, played a
critical role in our early development stage. Toshiba made an equity investment
of approximately $10.0 million in SmartDisk and introduced us to most of the key
technical personnel that now constitute our Tokyo-based applied engineering and
production engineering team. Toshiba also assisted us in the development and
engineering of FlashPath, helped guide our selection of manufacturing
techniques, aided our introduction into mass production and introduced our
management to potential strategic partners. Toshiba continues to provide
cooperative support in several areas.
SONY. Under our first co-development agreement with Sony, we developed
a FlashPath product for use with the Sony Memory Stick. Sony reimbursed us for a
portion of our development expenses and paid us additional fees during the
course of development. During the fourth quarter of 1999 we completed
development of this product and began full-scale production. We began shipping
the product to Sony during the fourth quarter and Sony will distribute this
co-developed product. We have entered into a new co-development agreement with
Sony to develop a follow-on FlashPath product for their Memory Stick. The terms
of this agreement with Sony are similar to those in the previous agreement.
SANDISK. During 1999 we entered into a co-development agreement with
SanDisk, a leading developer and marketer of flash memory storage products,
including CompactFlash and the MultiMediaCard. We issued 37,500 shares of our
common stock to SanDisk in exchange for a license to utilize certain patented
technology developed by Sandisk. Under the agreement, we jointly developed a
FlashPath product to support the SanDisk MultiMediaCard. We funded the
development costs and we will be entitled to revenues derived from the sale of
our FlashPath for the MultiMediaCard. We will pay SanDisk a royalty based on the
portion of those revenues derived from sales other than to SanDisk.
VISA. We have a non-contractual arrangement with VISA International, a
leading issuer of credit cards, to test our Smarty product. Under the pilot
program, Smarty is used in conjunction with the Visa Platinum card to permit
controlled access to the Visa website, allowing cardholders to access account
information and other ancillary services.
The following table illustrates the nature of some of our strategic
relationships:
TYPE OF STRATEGIC RELATIONSHIP
-----------------------------------------------------------------------------------------------
ASSISTED IN MANUFACTURER
INVESTED IN PRODUCT PROVIDED SUPPLIER OF OF SMARTDISK CUSTOMER OF
NAME SMARTDISK DEVELOPMENT LICENSE COMPONENTS PRODUCTS SMARTDISK
- ----------------------- ----------- -------------- ----------- -------------- -------------- ------------
Atmel v v v
Hitachi v v v v
Mitsumi v
NEC v v v
Rohm v v v
SanDisk v v v v
Sony v v v
Toshiba v v v v
Yamaichi v v v v
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PRODUCTS
Each of our products is based upon our core, patented technology and is
designed to easily transfer digital data between PCs, the Internet and various
types of digital appliances.
FLASHPATH. FlashPath is a solid-state electronic device in the shape of
a 3.5-inch floppy diskette. It works in any standard 3.5-inch floppy drive found
in most PCs today. The current principal use of our FlashPath product is to
transfer images from digital cameras to PCs. Digital cameras use flash memory
cards as film. After the flash memory card captures and stores images, the flash
memory card is removed from the camera and is placed into FlashPath. FlashPath
is then inserted into the PC's floppy disk drive and the images are transferred
to the PC. With the aid of readily available software, the consumer may then
edit the images, add text, graphics or sound, or mail the images over the
Internet. Because FlashPath transfers images from the camera to the PC without
using cables or PC peripheral ports and without any hardware installation, the
consumer has a device that is familiar, easy to use, not intimidating and
transportable among multiple PCs. FlashPath uses our proprietary driver software
provided with our products and available free of charge from the Internet. Our
driver software enables our products to operate with Windows 95, Windows 98,
Windows NT, NEC, Windows and Macintosh operating systems.
Our first FlashPath product, introduced in 1998, transfers images from
digital cameras using the SmartMedia flash memory card manufactured by Toshiba
and Samsung. A number of manufacturers use the SmartMedia card in their digital
cameras, including Agfa, FujiFilm, Olympus, Ricoh, Sanyo, Sharp and Toshiba.
During the fourth quarter of 1999 we introduced two new FlashPath
products, which support the latest flash memory cards to be introduced to the
market, Sony's Memory Stick and SanDisk's MultiMediaCard. These flash memory
cards are expected to have applications in "smart" cellular phones, digital
cameras and camcorders, digital audio players and video game devices. We began
shipping the Memory Stick FlashPath in the fourth quarter of 1999 and have
orders from SanDisk for the MultiMediaCard FlashPath for delivery during the
first half of 2000. We expect that these new products will enable us to reach
new markets and new customers. In addition, we are developing a new
consumer-oriented product that is designed to allow flash memory cards to be
used with an existing, non-PC technology.
SMARTY. Our Smarty products enable smart cards to store and retrieve
information through a PC's floppy disk drive, thereby eliminating the need for
dedicated smart card reader peripherals. Like our FlashPath products, the Smarty
product is a solid-state electronic device the size of a 3.5-inch floppy disk,
is powered by two replaceable batteries and requires no external power source or
wire connections. Smart cards are inserted into our Smarty product, which
accesses information on the smart card from the card's embedded microprocessing
chip. A user simply places the smart card into Smarty, inserts Smarty into the
3.5-inch floppy disk drive and connects with the smart card application. Smarty
retrieves data from and stores data on any
13
standard smart card without cable connections, without any hardware installation
and without consuming PC peripheral ports.
Smart cards are typically used to store information such as medical
information, digital money and security codes. Accordingly, smart cards can
serve as personal identification, a credit card, a mass transit pass and as a
cash substitute for purchases at stores or over the Internet. Smart cards are
used in a number of applications in Europe but, as yet, have not gained
widespread consumer acceptance in the United States. However, we believe that
U.S. acceptance is increasing, as evidenced by the American Express "Blue Card".
Today, Smarty is primarily being used in pilot programs, the earliest
of which began in October 1997. The major users of Smarty are ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain) and
Visa-related banks in Latin America. The product is sold to these customers, who
in turn distribute it to their customers for use with their accounts. Bank of
America, for example, distributes Smarty to some of its corporate customers for
use in making secure electronic funds transfers. Visa distributes Smarty with
its Platinum card in some Latin American regions for use in authenticating
permitted access to restricted areas on the Visa Platinum world wide web site.
The pilot programs have provided us with useful feedback that has resulted in
improvements to the product, but we do not expect a significant increase in our
Smarty sales in the near future.
RESEARCH AND DEVELOPMENT
Our product design and development activities are conducted in our
Naples, Florida, Alpharetta, Georgia and Tokyo, Japan offices.
NAPLES. Our Naples team is primarily responsible for our core research
and development activities, including product conceptualization, software and
firmware development, technical writing, printed circuit board layouts and
mechanical engineering. Our Naples team has significant expertise with floppy
disk drive interfaces, flash memory media and smart card interfaces, driver,
user and utility software interfaces, and firmware and ASIC design. Our
engineers and other research and development employees also develop design
specifications based on customer requirements and supervise our quality
assurance activities. This team consists of executive management, line
management, engineers, developers and quality assurance personnel.
ATLANTA. Our Atlanta team is primarily responsible for research and
development activities on new products, including product conceptualization and
development. This team has significant expertise with audio applications and
small, portable electronic products.
TOKYO. Our Tokyo research and development team actively assists in the
implementation of our product designs, with primary responsibility for applied
engineering, production engineering and the supervision of our contract
manufacturers. Our Tokyo team also plays a principal role in coordinating our
development activities with the leading flash memory card manufacturers and
refining the product requirements of our OEM customers. Other activities
14
include the localization/translation of our products for the Japanese market,
debugging and quality assurance. Our Tokyo research and development team
consists of our Japanese subsidiary's Vice President of Engineering and the
Senior Manager of Audio/Video Products as well as four Toshiba engineers who
provide services on a contract basis.
For 1999, 1998 and 1997, our research and development expenditures were
approximately $5.9 million, $2.1 million and $1.4 million, respectively.
In addition, since our inception we have endeavored to develop and
maintain close relationships with key suppliers of components and technologies
in order to enable us to quickly introduce new products that incorporate the
latest technological advances. As a result, companies with substantial
resources, such as Hitachi, Mitsumi, NEC, Rohm, SanDisk, Sony, Toshiba and
Yamaichi augment our internal research and development efforts. These
cooperative arrangements take many forms and provide a number of benefits. For
example, SanDisk, Sony and Toshiba have licensed technology to us that allows
our products to interface with their flash memory cards and provide extensive
engineering support. We believe that our close relationships with flash card
manufacturers and consumer product OEMs also provide insight into their current
and future needs, enabling us to design specific products that meet those
requirements.
MANUFACTURING AND SOURCES OF SUPPLY
We currently outsource our manufacturing and plan to continue to
outsource manufacturing for the foreseeable future. This strategy allows us to
focus on our core research, product design and development capabilities, and to
reduce the substantial capital investment required to manufacture our products.
We also believe that our use of experienced, high-volume manufacturers provides
greater manufacturing specialization and expertise, higher levels of flexibility
and responsiveness, and faster delivery of product than in-house manufacturing.
In addition, we frequently seek the advice of our experienced manufacturers with
respect to design changes that reduce manufacturing costs or lead times or
increase the manufacturing yields and the quality of our finished products.
Our products are currently manufactured in the Philippines at
facilities operated by Yamaichi and Mitsumi. Under our manufacturing
arrangements, we receive fully assembled and tested products based upon our
proprietary designs and specifications. We selected our manufacturers based upon
their reputations for quality, their cost structures, their production
capacities and their support of state-of-the-art manufacturing processes and
systems. However, our current dependence on a limited number of manufacturers
exposes us to a variety of risks, including shortages of manufacturing capacity,
and reduced control over delivery schedules, quality assurance, production
yields and costs. Accordingly, we intend to seek additional manufacturing
capacity and, in particular, at least two manufacturers for each of our
products. To that end, in January 1999, we signed an agreement with Hitachi to
manufacture our Smarty product.
To ensure that products manufactured by others meet our standards, our
Tokyo production and engineering team works closely with our contract
manufacturers in all
15
key aspects of the production process. We establish product specifications,
select the components to be used to produce our products, select the suppliers,
and negotiate the prices for most of these components. We also work with our
contract manufacturers to improve process control and product design, and
conduct periodic, on-site inspections of our manufacturers. In addition, our
Tokyo team conducts monthly review meetings with our manufacturers to discuss
sales forecasts and the procurement of long lead-time parts, production
capacities and facilities.
We rely upon a limited number of suppliers of several key components
used in our products. In particular, Rohm manufactures our proprietary ASICs
used in our FlashPath products and our proprietary analog ASICs used in our
Smarty products, and Atmel manufactures our proprietary digital ASICs used in
our Smarty products. Moreover, we purchase ASICs and other components pursuant
to purchase orders placed from time to time and have no guaranteed supply
arrangements. Our reliance on limited source suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, unexpected price increases, lack of timely delivery and variable
component quality.
COMPETITION
There are no competitors known to us that offer a digital data transfer
solution for flash memory or smart cards using a 3.5-inch floppy drive. However,
we face competition from numerous providers of cable and other non-cable
interfaces, including ports, USBs and infrared interfaces. These competing
products are offered by a number of companies, including:
/bullet/ in the case of flash memory card interfaces, Hagiwara, SanDisk
and SCM Microsystems; and
/bullet/ in the case of smart card interfaces, Gemplus, Hitachi, SCM
Microsystems and Toshiba.
The market for data transfer products is intensely competitive and
characterized by rapidly changing technology and rapid changes in consumer
preference. We believe that competition is likely to intensify as a result of
increasing demand for digital appliances using flash memory cards. Future
competition may also include flash memory card manufacturers and the consumer
product OEMs that are our current customers. In addition, it is possible that
third parties may design around our patents or license technology to develop
competing products that use a 3.5-inch floppy drive interface.
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 or to changes in customer requirements. Our
competitors may also be able to devote greater resources to the development,
promotion and sale of products, and may be able to deliver competitive products
at a lower end-user price. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of our
prospective customers. Therefore, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
operating margins and
16
loss of market share. Any of these factors could have a material adverse effect
on our business and operating results.
We believe that the principal competitive factors affecting the market
for flash memory connectivity and smart card products include:
/bullet/ the extent to which products work with existing and will work
with future digital appliances;
/bullet/ ease of use;
/bullet/ quality and reliability;
/bullet/ rate of throughput, or data transfer speed;
/bullet/ strength of distribution channels; and
/bullet/ price.
We believe that our products compete successfully on most of these
bases.
INTELLECTUAL PROPERTY
We do not intend to license our proprietary technology to flash memory
card manufacturers, consumer product OEMs or other third parties in the future.
We have granted Fischer International a non-exclusive license to produce our
SafeBoot product until 2001. The protection of our intellectual property rights
is critical to our future success, and we rely in part on patent, trade secret,
trademark, maskwork and copyright law. We own five United States patents and 56
foreign patents. We also have a number of pending patent applications in various
countries. Our patents and patent applications cover various aspects of our
technology.
Although we believe that our patent rights, when considered in
conjunction with our allowed patent applications and trade secret protection,
should prevent another party from manufacturing and selling competing data
transfer products that use a floppy disk drive interface, we cannot guarantee
that the steps we have taken to protect our technology will be successful. The
patents issued to us may not be adequate to protect our proprietary rights, to
deter misappropriation or to prevent an unauthorized third party from copying
our technology, designing around the patents we own or otherwise obtaining and
using our products, designs or other information. In addition, patents may not
be issued under our current or future patent applications, and the patents
issued under those patent applications could be invalidated, circumvented or
challenged. It may also be particularly difficult to protect our products and
intellectual property under the laws of some countries in which our products are
or may be manufactured or sold.
17
Moreover, third parties could develop technologies that are similar or
superior to our technology or could make infringement claims against us.
Regardless of the outcome, an infringement claim would likely result in
substantial cost and diversion of our resources. In addition, we may not prevail
in litigation or be able to license any valid and infringed patents from third
parties on commercially reasonable terms, if at all. Any infringement claim or
other litigation against us or by us could therefore harm our business,
financial condition and results of operations.
Our FlashPath and Smarty trademarks are registered in the United States
and a variety of other countries in which we do business, and we will continue
to evaluate the registration of additional trademarks as appropriate. However,
we do not have the rights to the Smarty trade name in either Germany, Japan or
The Netherlands, and our trademark application for the SmartDisk name is still
pending in the United States. We also claim copyright protection for some of our
proprietary software and documentation. In addition, we generally enter into
confidentiality and non-disclosure agreements with our employees and with key
consultants, vendors and suppliers.
EMPLOYEES
As of December 31, 1999, we had 59 full-time employees working in the
United States and Japan, including 33 employees engaged in research and
development, 10 engaged in sales and marketing and 16 engaged in general and
administrative activities. Our employees are not represented by any collective
bargaining agreements, and we have never experienced a work stoppage. We believe
our employee relations are good.
18
ITEM 2. PROPERTIES
Our corporate and technical headquarters are located in Naples, Florida
where we lease approximately 15,000 square feet of space. The lease on our
Naples facility expires in December 2001. We also lease approximately 1,400
square feet of space in Alpharetta (a suburb of Atlanta), Georgia for a portion
of our research and development efforts. The lease on our Alpharetta facility
expires in September 2000. Our Japanese branch leases approximately 3,500 square
feet of office space in Tokyo. The lease on this facility expires in April 2000
and we are able to renew the lease for an additional two years. We believe that
our existing facilities are adequate to support our existing operations and
that, if needed, we will be able to obtain suitable additional facilities on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
SmartDisk is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 13, 1999, we sold 250,000 shares of common stock to Hitachi
Software Engineering Co., Ltd. for $1,100,000.
On May 26, 1999, we sold 515,500 shares of common stock to the
stockholders of SmartDiskette Limited, an English corporation, in exchange for
all of the outstanding shares of capital stock of SmartDiskette Limited.
On June 30, 1999, we issued 37,500 shares of common stock to SanDisk
Corporation as partial consideration for the grant of a license to certain
intellectual property.
On July 1, 1999, we sold 312,500 shares of common stock to SCM
Microsystems, Inc. for $2,500,000. On that date, we also sold an aggregate of
87,500 shares of common stock to five investors, including two of our directors,
Messrs. Tomlinson and Bidzos, for $700,000, or $8.00 per share.
Between January 1, 1998 and December 31, 1999, we issued an aggregate
of 747,738 shares of common stock to 20 persons, all of whom were our employees,
directors or consultants. Such shares were issued upon exercise of stock options
with exercise prices ranging from $0.72 to $8.00 per share.
19
The sale of the above securities was deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer not involving any public offering or transactions
pursuant to compensation benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
On October 6, 1999, we completed an initial public offering (IPO) of
our common stock (the "Offering"). The shares of common stock sold in the
Offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (No. 333-82793) (the "Registration
Statement"). The Registration Statement was declared effective by the Securities
and Exchange Commission on October 5, 1999. We realized net proceeds of
approximately $39.14 million from the sale of 3,450,000 shares of common stock
(including 450,000 shares issued upon the exercise of the underwriters' over
allotment option) at $13.00 per share after deducting underwriting discounts and
commissions of approximately $3.14 million and offering expenses of
approximately $2.57 million.
Upon the completion of our initial public offering, the 2,487,500
outstanding shares of redeemable common stock converted into nonredeemable
common stock.
The net proceeds from our IPO have been invested in cash, cash
equivalents and short-term investments. In March 2000, in connection with the
acquisition of VST Technologies, Inc. (VST), we paid, or have set aside to be
paid, a total of approximately $19 million dollars in purchase consideration and
other acquisition related costs. We also funded their current operations with
approximately $1.5 million. VST has a line of credit with an outstanding balance
of approximately $4.2 million, which we plan to pay down in the near future. We
plan to use the remaining net IPO proceeds for general corporate purposes,
including working capital. The use of the proceeds from the IPO does not
represent a material change in the use of proceeds described in our prospectus
dated October 5, 1999.
20
Our common stock is listed on the Nasdaq National Market under the
symbol "SMDK". The following table sets forth the high and low closing sale
prices per share of our common stock for the periods indicated.
HIGH LOW
---- ---
Fiscal 1999:
Fourth Quarter (beginning October 6, 1999)....... $ 55.19 $ 23.56
As of February 29, 2000, there were 76 holders of record of the
Company's common stock. We believe that the number of beneficial owners of our
common stock is in excess of 1,000. The Company has never declared or paid any
cash dividend on its common stock. Since the Company currently intends to retain
all future earnings to finance future growth, it does not anticipate paying any
cash dividends in the foreseeable future.
21
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto and other
financial information included elsewhere in this Annual Report on Form 10-K. The
consolidated statements of operations data set forth below of SmartDisk for the
years ended December 31, 1999, 1998 and 1997 and the consolidated balance sheet
data as of December 31, 1999 and 1998 have been derived from SmartDisk's audited
consolidated financial statements which are included elsewhere in this Annual
Report on Form 10-K. The consolidated statement of operations data set forth
below for the year ended December 31, 1996 and the consolidated balance sheet
data as of December 31, 1997 and 1996 have been derived from SmartDisk's audited
consolidated financial statements which are not included in this Annual Report
on Form 10-K. The selected financial data of SmartDisk as of and for the year
ended December 31, 1995, have been derived from unaudited consolidated financial
statements, which are not included in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
Revenues $ 40,319 $ 15,323 $ 893 $ 500 $ 316
Cost of revenues 24,820 12,600 301 367 486
Gross profit (loss) 15,499 2,723 592 133 (170)
Operating income (loss) 1,763 (5,581) (4,016) (11,818) (2,277)
Net income (loss) 958 (5,503) (3,964) (9,470) (2,239)
Earnings (loss) per share - basic (1) 0.09 (0.68) (0.51) (1.25) (0.30)
Earnings (loss) per share - diluted (1) 0.07 (0.68) (0.51) (1.25) (0.30)
Total assets 63,444 11,136 1,607 250 437
Long-term debt -- 648 645 93 --
Redeemable common stock -- 9,992 -- -- --
Stockholders' equity (deficit) 49,787 (6,336) (4,626) (2,017) (3,580)
- -------
(1) Shares used in computing net earnings (loss) per share reflect the
retroactive adjustment of outstanding shares related to the mergers of
SmartDiskette Limited and SmartDisk Security Corporation into SmartDisk, as well
as the one for four reverse stock split completed in August 1999.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
In 1997, we were primarily a development stage company with limited
revenues. We did not begin to recognize significant revenues from our FlashPath
and Smarty products until mid-1998. Because of these significant fluctuations in
our product mix and the development stage nature of our operations prior to
mid-1998, we do not believe that period-to-period comparisons of our historical
results are meaningful or predictive of future performance.
During 1999 and 1998, substantially all of our product revenues were
derived from the sale of our FlashPath product that works with SmartMedia flash
memory cards. Moreover, most of our product revenues are derived from sales to
relatively few OEM customers. FujiFilm and Olympus collectively accounted for
approximately 55% of our 1999 revenues, down from 70% in 1998, and our top five
customers accounted for approximately 81% of our revenues, down from 93% in
1998. Although we work closely with the OEMs to forecast sales, we do not have
purchase contracts with any of our customers that obligate them to continue to
purchase our products, and they could cease purchasing products from us at any
time.
Our operating results fluctuate based on the timing and amount of
orders we receive from our customers and depend on the ability of OEMs to
achieve consumer acceptance of our products. This acceptance rate may in turn be
tied to seasonal demand for the consumer electronic products manufactured and
sold by these OEMs. Because fluctuations in orders from our major customers
could cause our net revenues to fluctuate significantly in any given quarter or
annual period, we do not believe that period-to-period comparisons of our
financial results are necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, historically the average selling
prices of our products have declined and we expect that our OEM customers may
seek price concessions, which would reduce our average selling prices and our
gross margins in the future.
Our fiscal year ended December 31, 1999 was our first full year of
profitability and we have been profitable since the third quarter of 1999. Our
net losses in 1998 and 1997 resulted from our significant investment in our
research and development and in building sales and marketing and general and
administrative infrastructure. We expect to continue to invest significantly in
research and development related to new and refined FlashPath products, as well
as marketing and sales activities to support those products. No assurance can be
given that the introduction or market acceptance of new products will be
successful.
We purchase our products from contract manufacturers located in Asia.
As a result, a substantial portion of our costs and expenses are denominated in
currencies other than the U.S. dollar, primarily the Japanese yen. In addition,
approximately 85% of our 1999 revenues were derived from customers located
outside the United States, most of which were denominated in yen.
23
While most of the transactions and accounts of our United States and
Japanese operations are dollar or yen denominated, respectively, some accounts
are denominated in other currencies. Since the accounting records of our
Japanese operations are kept in yen, any non-yen denominated transactions are
accounted for in yen at the time of the transaction. Upon settlement of such
transactions, any foreign currency gain or loss results in an adjustment to
income. We could be required to denominate our product sales in currencies other
than the yen in the future, which would make the management of currency
fluctuations more difficult and expose us to greater currency risk. Some
accounts of our US and Japanese operation are denominated in currencies other
than the dollar or yen, respectively, and are remeasured to the dollar or yen at
the end of the accounting period. This remeasurement also results in an
adjustment to income. Additionally, the balance sheet accounts of our Japanese
operations are translated to dollars for financial reporting purposes and
resulting adjustments are made to stockholders' equity. The value of the yen may
strengthen or weaken against the dollar, which would impact the value of
stockholders' investment in our common stock. The strengthening of the yen
against the US dollar in 1999 contributed the most significant portion of the
foreign currency translation gain adjustment. This amount is included in
accumulated other comprehensive income and shown in the equity section of our
balance sheet. We do not currently hedge against foreign currency exposure. The
lack of a hedging program exposes us to foreign currency gains and losses.
Our backlog at December 31, 1999 was approximately $5.4 million,
compared to approximately $2.7 million at December 31, 1998. The increase in
backlog of approximately $2.7 million resulted primarily from the year-end
introduction of the Memory Stick FlashPath for use with Sony digital appliances
and the MultiMediaCard FlashPath which utilizes SanDisk's latest flash memory
card. However, a substantial portion of our backlog is typically scheduled for
delivery within 60 days. Variations in the size and delivery schedules of
purchase orders received by us, as well as changes in customers' delivery
requirements, may result in substantial fluctuations in backlog from period to
period. Accordingly, we believe that backlog cannot be considered a meaningful
indicator of future financial results.
YEAR ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Our product revenues from the sale of our FlashPath and Smarty products
are recognized at the time of shipment to customers. Our research and
development revenue is recognized upon final customer acceptance of our work
performed under the terms of the agreement. Our royalty revenues consist of
royalties earned on the sales of our first product, SafeBoot, which is licensed
to and sold by Fischer International, an affiliate.
24
Total product revenues were approximately $37.3 million for the year
ended December 31, 1999 compared to approximately $15.0 million for the year
ended December 31, 1998. This increase was primarily attributable to higher
sales of our FlashPath for SmartMedia product, which we commercially introduced
in mid-1998, and, to a lesser extent, sales of our newest product, FlashPath for
the Sony Memory Stick, which we commercially introduced in the fourth quarter of
1999. Our product revenues from the sale of FlashPath increased to $36.4 million
for the year ended December 31, 1999 from $13.8 million for the year ended
December 31, 1999 from $13.8 million for the year ended December 31, 1998. This
increase was partially offset by a decrease in our Smarty sales to approximately
$836,000 for the year ended December 31, 1999 from $1.3 million for the year
ended December 31, 1998. As a result of the growth of our FlashPath revenues and
the decrease in Smarty sales, Smarty revenues represented less than 3% of
product revenues for the year ended December 31, 1999 compared to approximately
9% in the year ended December 31, 1998. With the acquisition of VST in March
2000, we expect our revenues to significantly increase next year.
Fiscal year 1999 was the first year that we have had revenues from our
research and development efforts. During 1999, we entered into agreements with a
customer for the development of new products. Upon acceptance of the products by
the customer in the fourth quarter of 1999, we recognized approximately $2.6
million in revenue. During the fourth quarter we entered into an additional
research and development agreement, which is expected to be completed during the
first half of 2000.
Our royalty revenues from the sale of our Safeboot product increased to
$470,000 in the year ended December 31, 1999 as compared to $284,000 in December
31, 1998. As our FlashPath revenues continue to increase, these royalties
represent a smaller portion of our total revenues and have decreased to
approximately 1% of our total revenues for the year ended December 31, 1999.
COST OF REVENUES
Cost of revenues includes the purchased cost of product, packaging,
freight and royalties for our FlashPath and Smarty products, the creation of
disks for our SafeBoot product and scrap and inventory provisions. Cost of
revenues increased to approximately $24.8 million for the year ended December
31, 1999 compared to approximately $12.6 million for the year ended December 31,
1998. These increases in cost were due primarily to the increase in sales of our
FlashPath product. With the acquisition of VST in March 2000, we expect our cost
of revenues to significantly increase next year.
25
GROSS PROFIT
Our gross profit for the year ended December 31, 1999 increased to
approximately $15.5 million or 38% of total revenue, compared to approximately
$2.7 million or 18% of revenue for the year ended December 31, 1998. The
increase in our gross profit and gross profit as a percentage of revenues is
primarily the result of revenue growth and improved margins on our FlashPath
product. The improved FlashPath product margins achieved in 1999 are related to
our efforts to reduce our cost per unit and a favorable mix associated with
higher shipments to customers other than our largest OEMs. We expect gross
margins on our FlashPath products to remain relatively consistent with the
current level; however, our largest OEM customers may seek price concessions,
which could cause a reduction in our gross margins. Another contributor to our
improved gross profit in 1999 was the research and development revenue earned
under the Sony agreement. Without the research and development revenue, our
gross profit would still be approximately 35% of total revenue. With the
acquisition of VST in March 2000, we expect our gross profit to increase next
year, however, we anticipate our overall gross margins will decrease.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses consist primarily of salaries and
payroll-related expenses for our design and development engineers, as well as
prototype supplies and contract or professional services. These expenses
increased to approximately $5.9 million for the year ended December 31, 1999
compared to approximately $2.1 million for the year ended December 31, 1998. The
increase was attributable to the hiring of additional technical personnel,
including salaries and related payroll expenses, costs incurred in conjunction
with the Sony research and development contract and the outsourcing of product
development.
All of these expenses were to support our development of enhanced
versions of our existing FlashPath and Smarty products, as well as our
development of our new FlashPath products designed to work with the Sony Memory
Stick and the SanDisk MultiMediaCard. We expect that our research and
development expenses will continue to increase in connection with the
enhancement of our existing FlashPath products and the expansion of the
FlashPath line to support additional flash memory card formats. In addition, we
expect to incur additional costs as we continue our efforts to develop other
products to conveniently transfer digital data from competing flash memory cards
to existing, non-PC technologies and, in the future, products that support
computer interfaces other than the 3.5-inch floppy disk drive.
With the acquisition of VST in March 2000, we expect our research and
development expenses to significantly increase next year.
26
SALES AND MARKETING EXPENSES
Sales and marketing expenses include salaries, benefits and travel
expenses for our sales, marketing and product management personnel in the United
States and Japan. These expenses also include other selling and marketing
expenditures for items such as trade shows, marketing and promotional programs.
Sales and marketing expenses increased by less than $0.1 million to
approximately $1.6 million for the year ended December 31, 1999 compared to the
year ended December 31, 1998. The change from year to year reflects various
additional costs incurred in 1998 in connection with the introduction of the
FlashPath for SmartMedia product including salaries and payroll related expenses
associated with the opening of our Tokyo, Japan office in March 1998. With the
acquisition of VST in March 2000, we expect our sales and marketing expenses to
significantly increase next year.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include the salaries and related
expenses of our executive management, finance, information systems, human
resources, legal and administrative functions, as well as lease rental expense,
utilities, maintenance expenses, taxes, insurance, legal and accounting
professional fees, depreciation and amortization. General and administrative
expenses increased to approximately $6.3 million in the year ended December 31,
1999 compared to approximately $4.6 million in 1998. The increase in expenses is
primarily due to increases in professional services, legal fees and personnel
related costs including salaries, bonuses and relocation expenses. As a result
of the acquisition of VST in March 2000, we expect our general and
administrative expenses to significantly increase next year due to the addition
of VST's general and administrative expenses as well as the amortization of
goodwill recognized in connection with the acquisition.
INTEREST AND OTHER INCOME/INTEREST EXPENSE
Interest and other income includes interest earned on cash balances and
gains or losses on foreign exchange. Interest expense is incurred on the bank
line of credit in Japan. The significant component of interest and other income
is interest earned on the proceeds from our initial public offering in October
1999. The average outstanding balance on the line of credit in Japan remained
consistent between 1999 and 1998, therefore, interest expense remained
consistent between years.
PROVISION FOR INCOME TAXES
We are subject to tax in Japan and a number of other jurisdictions
where we do business, including the United States and United Kingdom. These
jurisdictions have different marginal tax rates. For the year ended December 31,
1999, we provided for Japanese withholding tax of approximately $585,000 on
royalty income from Japan. We also provided for Japanese income tax of
approximately $780,000 due to income earned in Japan. As of December 31, 1999 we
had a net operating loss carry forward of approximately $1.5 million for United
States federal income
27
tax purposes. However, we have provided a valuation allowance to reduce the
related deferred tax asset to zero.
YEAR ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Our revenues increased to approximately $15.3 million in 1998 from
$893,000 in 1997. The increase from 1997 to 1998 was due to an approximately
$13.4 million increase in sales of our FlashPath for SmartMedia product, which
was commercially introduced by SmartDisk in mid-1998, and a $1.0 million
increase in sales of Smarty. Substantial shipments of these products did not
occur until the first quarter of 1998 for Smarty and the second quarter of 1998
for FlashPath.
COST OF REVENUES
Cost of revenues increased to approximately $12.6 million in 1998 from
approximately $301,000 in 1997. The increase in cost was due primarily to the
increase in sales of our FlashPath product since substantial shipments of our
FlashPath and Smarty products did not occur until 1998. The cost of revenues
incurred in 1997 primarily related to our SafeBoot product.
GROSS PROFIT
Gross profit increased to approximately $2.7 million in 1998 from
approximately $592,000 in 1997. The increase in gross profit was due to
increasing revenues caused especially by the market introduction of our
FlashPath product in mid-1998. Gross profit as a percentage of revenues
decreased to 18% in 1998 compared to 66% in 1997 as a result of lower overall
margins due to sales of FlashPath at quantity pricing levels to major customers.
The margins generated in 1997 were unrealistically high and could not be
maintained with increases in volume sales to large customers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to approximately $2.1
million in 1998 from approximately $1.4 million in 1997. The increase was
attributable to the hiring of additional technical personnel to support the
development of our FlashPath and Smarty products.
28
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to approximately $1.5 million in
1998 from approximately $12,000 in 1997. The increase was attributable to the
hiring of sales, marketing and product management personnel to support our
FlashPath and Smarty products, and in particular, the opening of our Tokyo,
Japan office in March 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to approximately $4.6
million in 1998 from approximately $3.2 million in 1997. The increase was
attributable to our hiring of additional executives to support our growth,
including executives to staff our Tokyo office, which opened in March 1998.
RECENT DEVELOPMENTS
On February 23, 2000, the Company signed a letter of intent to acquire
substantially all of the intellectual property of a privately held company for
$800,000 and the issuance of approximately 37,000 shares of SmartDisk common
stock. This company, which is based in California, is a supplier of
high-performance storage solutions. The transaction will be accounted for under
the purchase method of accounting and is expected to close in the first half of
2000.
On March 6, 2000, the Company completed its acquisition of VST
Technologies, Inc. (VST), which designs, develops, manufactures and markets
FireWire and USB-based flash memory readers and high performance personal
storage solutions for PC and Macintosh(R) platforms. VST's product line includes
expansion bay storage devices, such as the Zip 100 drive for Apple, IBM and
Fujitsu notebooks, SuperDisk drives for select Apple and IBM notebooks, USB
floppy drives, portable FireWire hard drives and a dual flash memory card and
rotational media reader.
The acquisition of VST, which is based in the Boston area, will provide
the Company with an expanded product line that will address the rapidly growing
digital video and digital music markets; will afford the Company a significant
presence in the resurgent market for Apple products; and will contribute
advanced FireWire and USB technologies to the Company's product portfolio.
29
Pursuant to the merger agreement, all of the outstanding shares of VST
were exchanged for approximately $10.3 million in cash and approximately 1.1
million shares of SmartDisk common stock. In addition, the Company paid
approximately $4.3 million in cash and issued approximately 443,000 options to
acquire shares of SmartDisk Corporation common stock with exercise prices
ranging from $0.90 to $4.45, in exchange for outstanding vested options to
acquire shares of VST common stock. The transaction will be accounted for under
the purchase method of accounting. For the year ended December 31, 1999, VST had
gross revenues of approximately $61.5 million, operating income of approximately
$6.5 million and net income of approximately $6.2 million.
30
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 % CHANGE
-------- -------- ---------
Cash, cash equivalents and short-term investments $ 45,720 $ 2,920 1,466%
Working capital $ 46,108 $ 2,869 1,507%
Stockholders' equity (deficit) $ 49,787 $ (6,336) ***
***not meaningful
During 1997, we financed our operations principally through loans
payable to related parties. During 1998 and 1999, we financed our operations and
repaid loans outstanding through short-term borrowings and the sale of equity
securities in private placements with several strategic investors. At December
31, 1999, we had total cash and cash equivalents of approximately $45.7 million
and working capital of approximately $46.1 million.
We maintain a line of credit under which we may borrow up to $5
million. Any amounts borrowed under this line of credit bear interest at 2% over
the 30-day LIBOR rate and would be collateralized by all assets of the Company.
This line of credit expires on December 15, 2000. We have not borrowed against
this line of credit and we have no current plans to borrow any amounts under
this line of credit.
Our Japanese branch has a line of credit with maximum borrowing
capacity of approximately $2.9 million (295 million Yen). The facility, which
has no fixed term, is collateralized by a time deposit and accounts receivable.
The branch maintains a time deposit with the bank that has a balance at December
31, 1999 of approximately $1.0 million. We may borrow up to 90% of this amount.
The credit agreement corresponding to the time deposit collateral is renewable
automatically on May 31, 2000. In addition, accounts receivable of up to $2
million (200 million Yen) of specified trade customers may be used as additional
collateral. The credit agreement corresponding the accounts receivable
collateral is renewable automatically on January 31, 2001. The interest rate on
borrowings under the credit facility is 1.38% per year. The outstanding balance
under the line of credit was approximately $2 million (200 million Yen) as of
December 31, 1999 compared to approximately $0.9 million at December 31, 1998.
The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $2.9 million (302 million Yen) at
December 31, 1999 and approximately $1.4 million (160 million Yen) at December
31, 1998.
Net cash used in operating activities was approximately $0.2 million
for the year ended December 31, 1999 as compared to approximately $6.0 million
and $4.1 million for the years ended December 31, 1998 and 1997. Net cash used
in operating activities in 1999 was due to increases in accounts and notes
receivable of approximately $6.7 million, prepaid expenses and other current
assets of approximately $0.9 million. These amounts were partially offset by
approximately $1.0 million of net income and increases in accounts payable of
approximately $1.6 million, accrued expenses of approximately $2.4 million and
deferred research and development revenues of approximately $0.3 million. At
December 31, 1999, approximately $6.3 million, or 62%, of our trade receivables,
substantially all of which related to sales to Asian OEMs, were subject to
extended payment term arrangements secured by promissory notes. This is a normal
business practice in Asia, particularly in Japan, and, in these cases, credit
terms generally ranged from 90 to 150 days. The OEMs are required to pay for the
products that they order from us and which we deliver to them whether or not
they ultimately resell the products. Product returns are contractually required
only for defective products and, to date, returns have been negligible. In
addition, our allowance for doubtful accounts at December 31, 1999 was minimal
in relation to the value of the accounts receivable, but we believe it to be
adequate because the majority of our revenues are derived from sales in Japan to
"blue chip" customers, who either secure the accounts receivable with a
promissory note or have historically consistently paid without default.
31
Net cash used in investing activities was approximately $30.2 million
for 1999 compared to $2.1 million in 1998 and $0.3 million in 1997. The most
significant use of cash in 1999 was for the purchase of short-term investments
with a portion of the proceeds from our initial public offering in October 1999.
Cash was also used for capital expenditures, primarily the acquisition of
production equipment for the manufacture of our products in Japan.
Net cash provided by financing activities was approximately $46.6
million in 1999 compared to $10.4 million in 1998 and $4.8 million in 1997. This
was primarily attributable to approximately $43.8 million in proceeds from
private sales and the initial public offering of the Company's common stock, as
well as, approximately $2.6 million in net borrowings under the Company's line
of credit.
On October 6, 1999, the Company completed its initial public offering
(IPO). The Company realized net proceeds of approximately $39.14 million from
the sale of 3,450,000 shares of common stock (including 450,000 shares issued
upon the exercise of the underwriters' over allotment option) at an initial
public offering price of $13.00 per share after deducting underwriting discounts
and commissions of approximately $3.14 million and offering expenses of
approximately $2.57 million.
The net proceeds from our IPO have been invested in cash, cash
equivalents and short-term investments. In March 2000, in connection with the
acquisition of VST Technologies, we paid, or have set aside to be paid, a total
of approximately $19 million dollars in purchase consideration and other
acquisition related costs. We also funded their current operations with
approximately $1.5 million. VST has a line of credit with an outstanding balance
of approximately $4.2 million, which we plan to pay down in the near future. We
plan to use the remaining net IPO proceeds for general corporate purposes,
including working capital. The use of the proceeds from the IPO does not
represent a material change in the use of proceeds described in our prospectus
dated October 5, 1999.
We believe that our cash and cash equivalents, short-term investments,
credit facility and the net proceeds of the initial public offering, will be
sufficient to meet our working capital and anticipated capital expenditure needs
for at least the next 12 months. We may need to raise additional capital if we
expand more rapidly than initially planned, to develop new or enhanced products
and/or services, to respond to competitive pressures or to acquire complementary
products, businesses or technologies. The capital, if needed, may not be
available or may not be available on terms acceptable to us.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers generally to the problems that some
software may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems could
fail or create erroneous results when addressing dates after January 1, 2000.
32
In assessing the effect of the Year 2000 Issue on SmartDisk, we
determined that we need to evaluate four general areas:
/bullet/ Manufacturer and supplier relationships;
/bullet/ Internal infrastructure;
/bullet/ Products sold to customers; and
/bullet/ Other third-party relationships.
MANUFACTURER AND SUPPLIER RELATIONSHIPS. We outsource the manufacturing
of our products to a number of subcontractors. If our subcontractors are
affected by the Year 2000 Issue, our supply of products could be delayed or
eliminated. Any disruption in our supply of products from our subcontractors
would seriously harm our business, financial condition and results of
operations. To date, none of our subcontractors have reported any Year 2000
problems.
INTERNAL INFRASTRUCTURE. The Year 2000 Issue could also affect our
internal systems, including both our information technology and non-information
technology systems. We have completed an assessment of our material internal
information technology systems, including third-party software and hardware
technology. In addition, we have implemented changes to our network and
workstation software and hardware for our internal information technology
systems to make them Year 2000 ready. We have also completed an assessment of
our internal non-information technology systems, such as our test facility, and
we have implemented changes to those critical internal non-information
technology systems to make them Year 2000 ready. To date, we have not
experienced any Year 2000 problems. We will continue to monitor and maintain all
internal systems into the year 2000.
PRODUCTS SOLD TO CUSTOMERS. Our FlashPath and Smarty products do not
contain two digit date codes and therefore are generally unaffected by the Year
2000 Issue. However, once shipped, our products are used in conjunction with
products, which we do not develop. The performance of our products could be
affected if a Year 2000 Issue exists in a different component of a customer's
product. We have not, and will not, assess the existence of these potential
problems in our customers' products.
To date, none of our major customers have reported any Year 2000
problems. If our current or future customers are not Year 2000 compliant, they
may experience significant costs to remedy problems, or they may face litigation
costs. In either case, Year 2000 issues could reduce or eliminate the budgets
that current or potential customers could have for purchases of our products and
services. As a result, our business, results of operations or financial
condition could be materially adversely affected.
OTHER THIRD-PARTY RELATIONSHIPS. We rely on outside vendors for
utilities and telecommunication services as well as other infrastructure
services. We are not capable of independently evaluating the Year 2000
compliance of the systems utilized to supply these services. To date, none of
our outside vendors have reported any Year 2000 problems. Any failure of these
third parties to resolve Year 2000 Issues with their systems in a timely manner
could have a material adverse effect on our business, financial condition or
results of operations.
33
Any investigations we have undertaken with respect to Year 2000 Issues
have been funded from available cash, and these costs have not been separately
accounted for. To date, these costs have not been significant.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company's business, results of operation and financial condition
could be adversely affected by a number of factors, including the following:
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PRODUCTS
Our current and planned FlashPath products are designed to provide
connectivity between personal computers and digital appliances that use flash
memory cards. The flash memory market is in the early stage of development and
is still evolving. Our current dependence on sales of FlashPath and lack of
product diversification exposes us to a substantial risk of loss in the event
that the flash memory market does not develop or if a competing technology
replaces flash memory cards. If a competing memory storage device replaces or
takes significant market share from the flash memory cards which our products
support, we will not be able to sell our products in quantities sufficient to
grow our business.
We believe that demand for our flash memory connectivity products is
driven, to a large extent, by the absence of a single standard for flash memory
cards. There are currently four major flash memory cards, none of which has
emerged as the industry standard. Should one of these cards or a new technology
emerge as an industry standard, flash memory card readers could be built in to
PCs, eliminating the need for our current flash memory connectivity products.
A REDUCTION IN THE USE OF THE 3.5 INCH FLOPPY DISK DRIVE BY CONSUMERS
Our current products only work in conjunction with the standard 3.5
inch floppy disk drive. While the 3.5 inch floppy disk drive is today found in
most PCs, a number of newer PC models, such as the Apple iMac and the Apple G3
desktop, do not have this device and new industry standards may emerge that
render the 3.5 inch floppy disk drive obsolete. Advances in input devices such
as CD-ROM and removable data storage disk drives, such as Zip drives, may reduce
or eliminate the need for the 3.5 floppy diskette, which will lead to a
corresponding reduction in demand for our products. We would then have to
develop new products that use a different interface between personal computers
and digital appliances. We may not be able to redesign our products to fit the
new interface and demonstrate technological feasibility of those products on a
timely basis, if at all, or in a cost effective manner.
34
DEPENDENCE ON ONE PRODUCT
To date, substantially all of our revenue has been derived from the
sale of our FlashPath product that stores data on and retrieves data from only
the SmartMedia flash memory card. While our long-term strategy is to derive
revenue from multiple products, we anticipate that the sale of FlashPath for
SmartMedia products will continue to represent the most substantial portion of
our revenues through at least 2000. A decline in the price of or demand for
FlashPath products as a result of competition, technological change, the
introduction of new products by us or others, a failure to adequately manage
product transitions, or for other reasons, would seriously harm our business.
PROTECTION OF OUR INTELLECTUAL PROPERTY
Our proprietary technology with respect to 3.5 inch floppy disk drive
interfaces is critical to our future growth. We rely in part on patent, trade
secret, trademark and copyright law to protect our intellectual property.
However, the patents issued to us may not be adequate to protect our proprietary
rights, to deter misappropriation or to prevent an unauthorized third party from
copying our technology, designing around the patents we own or otherwise
obtaining and using our products, designs or other information.
WE MAY FACE COMPETITION FROM INTEL IF IT DECIDES TO UTILIZE ITS COMPETING
PATENT
Intel Corporation was issued a patent in 1997 disclosing and claiming
technology substantially similar to that disclosed in one of our key patents.
The Intel patent was filed four years after our effective filing date, and we do
not believe that the Intel patent can be validly applied to any of the
technology disclosed in our patent. However, given the substantial resources
available to Intel, our financial condition could suffer if we engage in a
dispute with Intel. Our business could also be harmed if Intel's patent is
determined to be valid and Intel or any licensee of Intel decides to sue our
customers or develop and commercialize products based on its patent.
INFRINGEMENT CLAIMS BY THIRD PARTIES COULD RESULT IN COSTLY LITIGATION AND
OTHERWISE ADVERSELY IMPACT OUR BUSINESS
From time to time we may receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights of
these third parties. These claims of infringement may result in protracted and
costly litigation, which could require us to pay substantial damages or have
sales of our products stopped by an injunction. Infringement claims could also
cause product shipment delays, require us to redesign our products or require us
to enter into royalty or licensing agreements, any of which could harm our
business. For example, we received a letter from SanDisk stating that SanDisk
held two patents which it believes might apply to our products. Although we
subsequently obtained a non-exclusive worldwide license for a 10-year period for
all of SanDisk's intellectual property rights in connection with multimedia
floppy disk interfaces, if the license terminates or expires, we could face a
potential conflict with SanDisk regarding the scope of those patents. In another
instance, we received communications alleging that our FlashPath products
infringed a third party's patent rights. We have met with such third party to
obtain a better understanding of its claim and have agreed to retain a mediator
to review the facts and to help us resolve this dispute through mediation.
Although we believe that we do not infringe such third party's patent, we can
not guarantee that the mediation will avoid litigation, or that the outcome of
any such litigation will be favorable to SmartDisk Corporation. We also received
35
correspondence alleging that our SafeBoot product violated another third party's
intellectual property rights. We reviewed the patents and concluded that our
products do not infringe upon either of the third parties' patent rights. While
none of these claims has resulted in litigation, future claims may. In addition,
we license a portion of the intellectual property included in our products from
third parties, which may increase our exposure to infringement actions because
we rely upon those third parties for information about the origin and ownership
of the licensed intellectual property. We may also lose our license rights with
respect to the intellectual property for which infringement is claimed. Further,
if our customers are required to obtain a license on other than commercially
reasonable terms, our business could be jeopardized.
WE HAVE INDEMNIFICATION OBLIGATIONS RELATED TO OUR INTELLECTUAL PROPERTY,
WHICH MAY REQUIRE US TO PAY DAMAGES
Our arrangements with SanDisk, Sony and Toshiba require us to indemnify
them for any damages they may suffer if a third party claims that we are
violating their intellectual property rights. While, to date, we have not
received indemnification claims, there may be future claims. Any indemnification
claim may require us to pay substantial damages, which could negatively impact
our financial condition.
A NEW OR COMPETING DATA TRANSFER SOLUTION THAT ACHIEVES SIGNIFICANT MARKET
SHARE OR RECEIVES SIGNIFICANT SUPPORT FROM FLASH CARD MANUFACTURERS WOULD
JEOPARDIZE OUR BUSINESS
Our products currently compete with a number of cable and non-cable
interfaces between personal computers and digital appliances, including ports,
PCMCIA slots and infrared interfaces, all of which are PC peripheral interfaces.
It is possible that one of these competing data transfer solutions, or another
existing or new technology, could achieve a significant market presence or
become supported by a number of significant flash memory card or digital
appliance manufacturers. Regardless of the relative benefits of our products, if
a competing product gains significant market share or significant support of
flash card manufacturers, this product would likely emerge as the industry
standard and thereby achieve a dominant market position that would jeopardize
our survival.
DEPENDENCE ON KEY CUSTOMERS AND OEMS
Our business will be seriously harmed if we lose any of our significant
customers, particularly Olympus or FujiFilm, or suffer a substantial reduction
in or cancellation of orders from these customers. Our current strategy is
principally based on sales to OEMs, which results and will continue to result in
sales to only a limited number of customers. Our products are sold as
stand-alone products by OEMs and, to a lesser extent, are bundled together and
sold with systems manufactured by third party OEMs.
No OEM or other customer is contractually obligated to purchase
products from us. As a result, our customers are free to cancel their orders or
stop ordering our products at any time. In addition, even if we are able to
demonstrate that our products are superior, OEMs may still choose not to bundle
our products with theirs or market and distribute our products on a stand-alone
basis. OEMs may also change their business strategies and manufacturing
practices, which
36
could cause them to purchase fewer of our products, find other sources for
products we currently manufacture or manufacture these products internally.
We depend upon our OEM customers to market our products and we do not
have significant experience and resources devoted to independent marketing
efforts. Failure of the OEMs' products to achieve market acceptance, the failure
of the OEMs to bundle our products with theirs, or any other event causing a
decline in our sales to the OEMs could seriously harm our business. Even if
consumers buy OEMs' products, their ultimate decision to buy our products
depends on OEM packaging, distribution and sales efforts, which may not be
sufficient to maintain or increase sales of our products. If we cannot achieve
or maintain a sufficient consumer acceptance rate of our products concurrent
with their purchases of OEM products, our future sales to OEM customers will be
adversely affected.
OUR INTERNATIONAL OPERATIONS CONCENTRATED IN JAPAN ARE SUBJECT TO CERTAIN
RISKS
Approximately 81% of our revenues for 1999 and 84% of our revenues for
1998 were attributable to sales to Japanese customers, and we expect that sales
to Japanese customers will continue to account for a significant portion of our
total revenues for the foreseeable future. All of our Japanese sales, as well as
the related expenses, are denominated in yen. Fluctuations in exchange rates
between the yen and the U.S. dollar, particularly with respect to Japanese
transactions denominated in a currency other than the yen, could adversely
impact our financial results.
Some transactions and accounts of our Japanese subsidiary are U.S.
dollar denominated. Since the Japanese subsidiary's accounting records are kept
in yen, those U.S. dollar denominated transactions are accounted for in yen at
the time of the transaction. U.S. dollar denominated accounts are remeasured at
the end of the accounting period. This remeasurement results in adjustments to
income. In addition, the balance sheet accounts of our Japanese subsidiary are
translated to the U.S. dollar for financial reporting purposes and resulting
adjustments are made to stockholders equity. The value of the yen may
deteriorate against the dollar, which would impair the value of stockholders'
investment in us. Further, we do not currently hedge against foreign currency
exposure. In the future, we could be required to denominate our product sales in
other currencies, which would make the management of currency fluctuations more
difficult and expose us to greater currency risks.
We are also subject to risks associated with a significant amount of
sales being made to one geographical area. An economic downturn in Asia
generally, and Japan in particular, could lead to a reduced demand for our
products. In recent years, Japan has been subject to political and economic
instability and, while that instability has not yet adversely impacted us, if it
continues, sales of our products in Japan may be adversely affected.
Given our dependence on sales to Japanese customers, we must develop
and maintain alliances in Japan to help with the promotion and distribution of
our products. We may not be able to develop or maintain these alliances.
37
In addition, there are certain risks inherent in doing business on an
international basis, including, among others:
/bullet/ Regulatory requirements
/bullet/ Difficulties in staffing and managing foreign operations:
/bullet/ Longer sales and payment cycles
/bullet/ Potentially adverse tax consequences
/bullet/ Tariffs and other trade barriers
DEPENDENCE ON A LIMITED NUMBER OF CONTRACT AND OFFSHORE MANUFACTURERS
We contract with two offshore manufacturers to produce our products and
our dependence on a limited number of contract manufacturers exposes us to a
variety of risks, including shortages of manufacturing capacity, reduced control
over delivery schedules, quality assurance, production yield and costs. We do
not have contracts with the sole manufacturers of our FlashPath products. If
either of the manufacturers terminates production or cannot meet our production
requirements, we may have to rely on other contract manufacturing sources or
identify and qualify new contract manufacturers. We may not be able to identify
or qualify new contract manufacturers in a timely manner and these new
manufacturers may not allocate sufficient capacity to us in order to meet our
requirements. Any significant delay in our ability to obtain adequate quantities
of our products from our current or alternative contract manufacturers would
cause our sales to decline.
LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS
We rely on one company as our sole provider of application specific
integrated circuits, or ASICs, for our FlashPath products and we purchase ASICs
for Smarty from two suppliers. In our products, the specific function of these
integrated circuits is the conversion of digital and analog data. Our dependence
on a limited number of suppliers and our lack of long-term supply contracts
exposes us to several risks, including a potential inability to obtain an
adequate supply of components, price increases, late deliveries and poor
component quality. Disruption or termination of the supply of components could
delay shipments of our products. If we are unable to accurately predict our
component needs, or if our component supply is disrupted, we may miss market
opportunities by not being able to meet the demand for our products. This may
damage our relationships with current and prospective customers.
38
WE MAY NOT BE ABLE TO INTEGRATE THE BUSINESS OF COMPANIES WE ACQUIRE AND
THEREFORE THESE ACQUISITIONS MAY NOT PROVIDE ADDITIONAL VALUE TO OUR
SHAREHOLDERS
We continually evaluate potential acquisitions of complimentary
businesses, products and technologies. We acquired VST Technologies, Inc., based
in Acton, Massachusetts, in March 2000. We may not realize the desired benefits
of this transaction or of future transactions. In order to successfully
integrate acquired companies we must, among other things:
/bullet/ Continue to attract and retain key management and other
personnel;
/bullet/ Integrate the acquired products from both an engineering and
sales and marketing prospective;
/bullet/ Establish a common corporate culture; and
/bullet/ Integrate geographically distant facilities and employees.
If our management's attention to day-to-day operations is diverted to
integrating acquired companies or if problems in the integration process arise,
our business could be adversely affected and we could be required to use a
significant portion of our available cash. If an acquisition is made utilizing
our securities, a significant dilution to our stockholders and significant
acquisition related charges to earnings could occur. We may incur additional
charges in the future resulting from redundancies in product lines, customer
lists and sales channels associated with these acquisitions. Acquisitions may
also cause us to incur or assume additional liabilities or indebtedness,
including liabilities that are unknown or not fully known to us at the time of
the acquisition, which could have an adverse effect on us. Furthermore, we
cannot assure that any products we acquire in connection with any acquisition
will gain acceptance in our markets.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company's exposure to market risk for changes
in interest rate relates primarily to the Company's investment portfolio. The
Company places its investments with high credit quality issuers and, by policy,
limits the amount of credit exposure to any one issuer. As stated in its policy,
the Company is averse to principal loss and seeks to preserve its invested funds
by limiting default risk, market risk, and reinvestment risk. The portfolio
includes only marketable securities with active secondary or resale markets to
ensure portfolio liquidity.
The table below presents the principal amount, related weighted average
interest rates and maturities for the Company's investment portfolio. Short-term
investments are all in fixed rate instruments.
AGGREGATE AVERAGE
FAIR VALUE INTEREST RATE
----------- -------------
Cash and cash equivalents (0-3 months) $19,079,542 4.55%
Short-term investments (3-24 months) 26,640,401 6.46%
-----------
Total cash, cash equivalents and
short-term investments $45,719,943
===========
We do not hold or issue derivative securities, derivative commodity
instruments or other financial instruments for trading purposes.
FOREIGN EXCHANGE RISK. We are exposed to currency exchange fluctuations
since we sell our products internationally. We are also exposed to currency
fluctuations associated with our Japanese branch, however, revenue and expense
items of the Japanese branch are denominated in yen. Changes in foreign exchange
rates impact the results of operations of the Japanese branch when translated
into U.S. dollars. The Company has not incurred any significant realized losses
on exchange transactions and does not utilize foreign exchange contracts to
hedge foreign currency fluctuations. If realized losses on foreign transactions
were to become significant, the Company would evaluate appropriate strategies,
including the possible use of foreign exchange contracts, to reduce such losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers required by
Item 10 is incorporated by reference from the information set forth in the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 23, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation required by Item 11 is
incorporated by reference from the information set forth in the Company's
definitive proxy statement for its annual stockholders' meeting to be held on
May 23, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding security ownership of certain beneficial
owners and management required by Item 12 is incorporated by reference from the
information set forth in the Company's definitive proxy statement for its annual
stockholders' meeting to be held on May 23, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related
transactions required by Item 13 is incorporated by reference from the
information set forth in the Company's definitive proxy statement for its annual
stockholders' meeting to be held on May 23, 2000.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of SmartDisk
Corporation are filed as a part of this report:
PAGE
----
Report of Independent Certified Public Accountants ................................................................... 45
Consolidated Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 .................................................................. 46
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 .................................... 47
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997 ................ 48
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 .................................... 49
Notes to Consolidated Financial Statements ....................................................................... 50
(a) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of the Company for each of
the years ended December 31, 1999, 1998 and 1997 is filed as part of this Form
10-K and should be read in conjunction with the Consolidated Financial
Statements, and the related notes thereto, of the Company.
PAGE
----
Schedule II--Valuation and Qualifying Accounts ............................................................................ S-1
All other schedules are omitted since they are either not required, not
applicable or the required information is shown in the consolidated financial
statement or notes thereto.
42
(a) 3. EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 1998 Employee Stock Option Plan (2)
10.2 1998 Directors and Consultants Stock Option Plan (2)
10.3 1999 Incentive Compensation Plan (2)
10.4 1999 Employee Stock Purchase Plan (2)
10.5 Employment Agreement with Michael S. Battaglia (1)
10.6 Employment Agreement with Robert Protheroe (1)
10.7 Employment Agreement with Quresh Sachee (1)
10.8 License Agreement dated May 26, 1998 between Toshiba Corporation and
SmartDisk, as amended (1)
10.9 Operating Agreement dated May 28, 1998 between Fischer International
System Corporation and SmartDisk, as amended (1)
10.10 License and Distribution Agreement dated May 28, 1998 between
SmartDisk and Fischer International Systems Corporation (1)
10.11 Distribution Agreement dated May 28, 1998 between Fischer
International Systems Corporation and SmartDisk (1)
10.12 Investors' Rights Agreement dated May 22, 1998 among SmartDisk and
each of the investors a party thereto (1)
10.13 Amendment number one to Investors' Rights Agreement dated July 1999
among SmartDisk and each of the investors a party thereto
10.14 Lease Agreement dated October 4, 1993 between Arnold Industrial Park
and SmartDisk, by assignment (1)
10.15 Development and License Agreement dated June 30, 1999 between
SmartDisk and Sony Corporation (1)(3)
10.16 Development and License Agreement dated December 1, 1999 between
SmartDisk and Sony Corporation
10.17 Cooperative Development Agreement dated June 30, 1999 between
SmartDisk and SanDisk Corporation (1)(3)
10.18 Form of Indemnification Agreement between the Registrant and each of
its directors and executive officers (1)
43
10.19 Joint Venture Agreement dated as of February 24, 1998 by and among
Phoenix House Investments, L.L.C., Toshiba Corporation and SmartDisk
Corporation (1)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (available in EDGAR format only)
(1) Previously filed.
(2) Management Compensation Plan or Arrangement.
(3) Confidential treatment granted for portions of this exhibit.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company in the fourth quarter
ended December 31, 1999.
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of SmartDisk Corporation:
We have audited the accompanying consolidated balance sheets of
SmartDisk Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a)2. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
SmartDisk Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Miami, Florida
January 21, 2000, except
for Note 15 as to which
the date is March 6, 2000
45
SMARTDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,079,542 $ 2,919,728
Restricted cash 1,050,000 1,050,000
Short-term investments 26,640,401 --
Accounts receivable, net of allowance for doubtful accounts
of $139,842 and $33,848 at December 31, 1999 and 1998,
respectively 3,865,781 2,195,356
Notes receivable 6,302,439 1,381,886
Inventories, net 1,474,613 1,689,020
Other current assets 1,353,235 280,291
------------ ------------
Total current assets 59,766,011 9,516,281
Property and equipment, net 2,623,629 682,014
Intangible assets, net 882,699 740,978
Deposits and other assets 171,855 196,682
------------ ------------
TOTAL ASSETS $ 63,444,194 $ 11,135,955
============ ============
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable $ 5,329,804 $ 3,706,297
Bank line of credit and discounted notes 4,894,672 2,247,718
Other accrued liabilities 2,014,765 693,590
Income taxes payable 1,110,537 --
Deferred research and development contract revenue 307,874 --
------------ ------------
Total current liabilities 13,657,652 6,647,605
Deferred income tax liability -- 184,658
Stockholder loan -- 648,147
Commitments and contingencies
Redeemable common stock: 2,487,500 shares issued
and outstanding at December 31, 1998 -- 9,991,918
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued -- --
Common stock, $.001 par value; 60,000,000 shares authorized;
16,072,399 issued and 15,991,422 outstanding at December
31, 1999; 9,296,723 issued and 9,216,496 outstanding at
December 31, 1998 16,072 9,297
Capital in excess of par value 71,246,592 16,351,092
Treasury stock, 80,977 shares at December 31, 1999 and
80,227 shares at December 31, 1998, at cost (58,304) (57,764)
Accumulated other comprehensive income 711,954 478,948
Notes receivable from officers/employees (387,454) (417,334)
Accumulated deficit (21,742,318) (22,700,612)
------------ ------------
Total stockholders' equity (deficit) 49,786,542 (6,336,373)
------------ ------------
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 63,444,194 $ 11,135,955
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
46
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES
Product sales $ 37,262,464 $ 15,038,281 $ 892,530
Research and development revenue 2,586,506 -- --
Royalties 470,479 284,298 --
------------ ------------ ------------
Total revenues 40,319,449 15,322,579 892,530
COST OF REVENUES 24,820,064 12,600,330 300,678
------------ ------------ ------------
GROSS PROFIT 15,499,385 2,722,249 591,852
OPERATING EXPENSES
Research and development 5,868,983 2,107,142 1,411,986
Sales and marketing 1,608,214 1,565,865 11,582
General and administrative 6,259,161 4,630,736 3,184,552
------------ ------------ ------------
Total operating expenses 13,736,358 8,303,743 4,608,120
------------ ------------ ------------
OPERATING INCOME (LOSS) 1,763,027 (5,581,494) (4,016,268)
Gain (loss) on foreign exchange 29,919 (47,678) --
Interest and other income 586,663 75,770 8,210
Interest expense (54,471) (51,858) (514)
------------ ------------ ------------
Net income (loss) before income taxes 2,325,138 (5,605,260) (4,008,572)
Income tax expense (benefit) 1,366,844 (102,316) (44,598)
------------ ------------ ------------
NET INCOME (LOSS) $ 958,294 $ (5,502,944) $ (3,963,974)
============ ============ ============
Earnings (loss) per share - basic $ 0.09 $ (0.68) $ (0.51)
Earnings (loss) per share - diluted $ 0.07 $ (0.68) $ (0.51)
Weighted average shares used to calculate
earnings (loss) per share amounts
Basic 10,724,608 8,040,169 7,738,909
Diluted 13,349,376 8,040,169 7,738,909
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
47
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 958,294 $ (5,502,944) $ (3,963,974)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 1,478,184 613,777 227,089
Amortization 551,751 410,917 179,346
Bad debt expense 93,035 26,565 --
Provision for inventory obsolescence 86,600 -- --
Employee stock option expense 76,500 -- --
Foreign currency (gain) loss (29,919) (31,235)
Deferred income tax benefit (388,874) (102,316) (44,598)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,763,460) (2,221,921) --
Notes receivable (4,920,553) (1,381,886) --
Inventories 127,807 (1,394,524) 23,529
Other current assets (918,472) (240,169) (274,894)
Deposits and other assets 93,517 (176,942) 20,525
Increase (decrease) in liabilities:
Accounts payable 1,623,507 3,452,485 (397,416)
Deferred research and development contract revenue 307,874 -- --
Other accrued liabilities and income taxes payable 2,431,712 587,575 80,588
------------ ------------ ------------
Net cash used in operating activities (192,497) (5,960,618) (4,149,805)
Cash flows from investing activities:
Purchases of property and equipment (3,057,057) (1,019,878) (284,943)
Purchases of short-term investments (36,707,793) -- --
Sales and maturities of short-term investments 9,995,030 -- --
Purchase of intangible assets (404,959) -- --
Increase in restricted cash -- (1,050,000) --
------------ ------------ ------------
Net cash used in investing activities (30,174,779) (2,069,878) (284,943)
Cash flows from financing activities:
Proceeds from issuance of exchangeable note -- 5,000,000 --
Net proceeds from line of credit 2,646,954 2,247,718 --
Net proceeds (repayment) of stockholder loan -- (3,955,000) 3,709,527
Net proceeds (repayment) of loan from related parties -- (1,045,000) 1,045,000
Proceeds from sale of redeemable common stock -- 4,950,000 --
Net proceeds from issuance of common stock 43,820,485 3,259,967
Proceeds from sale of stock by SDL 65,225 -- --
Collections on notes receivable from officers 29,880 -- --
Purchase of treasury stock (540) (57,764) --
------------ ------------ ------------
Net cash provided by financing activities 46,562,004 10,399,921 4,754,527
Effect of exchange rate fluctuations on cash (34,914) 220,525 1,973
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 16,159,814 2,589,950 321,752
Cash and cash equivalents at beginning of period 2,919,728 329,778 8,026
------------ ------------ ------------
Cash and cash equivalents at end of period $ 19,079,542 $ 2,919,728 $ 329,778
============ ============ ============
Significant non-cash activities:
Acquisition of SDL patents $ 300,000 $ 693,424
Conversion of stockholder loan to capital $ 648,147 654,661
Exchange of note payable plus accrued interest
for redeemable common stock 5,041,918
Notes receivable obtained for stock option exercise 417,334
Issuance of common stock for licenses and trademarks 300,000 600,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
48
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK CAPITAL IN
------------------------- EXCESS OF COMPREHENSIVE
SHARES AMOUNT PAR VALUE INCOME (LOSS)
-------------------------------------------------------
Balance at December 31, 1996 7,724,639 $ 7,725 $ 11,027,278
Comprehensive loss:
Net loss $(3,963,974)
Foreign currency translation 7,533
-----------
Comprehensive loss $(3,956,441)
===========
Acquisition of SDL 23,253 23 693,401
Contribution of stockholder loan to capital 654,661
---------------------------------------
Balance at December 31, 1997 7,747,892 7,748 12,375,340
Comprehensive loss:
Net loss $(5,502,944)
Foreign currency translation 290,208
-----------
Comprehensive loss $(5,212,736)
===========
Issuance of common stock in private placement 666,250 666 3,164,334
Common stock issued for trademarks 150,000 150 (150)
Common stock issued under stock option plans 699,863 700 511,601
Acquisition of SDL minority interest 32,718 33 299,967
Repurchase of common stock
---------------------------------------
Balance at December 31, 1998 9,296,723 9,297 16,351,092
Comprehensive income:
Net income $ 958,294
Foreign currency translation adjustments 277,147
Unrealized loss on short-term investments (44,141)
-----------
Comprehensive income $ 1,191,300
===========
Issuance of common stock in public offering, net 3,452,500 3,453 39,170,411
Conversion of redeemable common stock 2,487,500 2,487 9,989,431
Issuance of common stock in private placements 650,000 650 4,299,350
Issuance of common stock under stock
option plans 47,875 48 251,948
Issuance of common stock under employee stock
purchase plan 15,411 15 171,110
Issuance of common stock for license 37,500 37 299,963
Conversion of stockholder loan into SDL shares 76,018 76 648,071
Issuance of shares by SDL 8,872 9 65,216
Collection on note receivable from officer
Repurchase of common stock
---------------------------------------
Balance at December 31, 1999 16,072,399 $16,072 $ 71,246,592
=======================================
NOTES
ACCUMULATED RECEIVABLE
OTHER FROM
ACCUMULATED COMPREHENSIVE OFFICERS/ TREASURY
DEFICIT INCOME (LOSS) EMPLOYEES STOCK TOTAL
------------------------------------------------------------------------
Balance at December 31, 1996 $(13,233,694) $ 181,207 $ -- $ -- $(2,017,484)
Comprehensive loss:
Net loss (3,963,974)
Foreign currency translation 7,533
Comprehensive loss (3,956,441)
Acquisition of SDL 693,424
Contribution of stockholder loan to capital 654,661
------------------------------------------------------------------------
Balance at December 31, 1997 (17,197,668) 188,740 -- -- (4,625,840)
Comprehensive loss:
Net loss (5,502,944)
Foreign currency translation 290,208
Comprehensive loss (5,212,736)
Issuance of common stock in private placement 3,165,000
Common stock issued for trademarks --
Common stock issued under stock option plans (417,334) 94,967
Acquisition of SDL minority interest 300,000
Repurchase of common stock (57,764) (57,764)
------------------------------------------------------------------------
Balance at December 31, 1998 (22,700,612) 478,948 (417,334) (57,764) (6,336,373)
Comprehensive income:
Net income 958,294
Foreign currency translation adjustments 277,147
Unrealized loss on short-term investments (44,141)
Comprehensive income 1,191,300
Issuance of common stock in public offering, net 39,173,864
Conversion of redeemable common stock 9,991,918
Issuance of common stock in private placements 4,300,000
Issuance of common stock under stock 251,996
option plans
Issuance of common stock under employee stock 171,125
purchase plan
Issuance of common stock for license 300,000
Conversion of stockholder loan into SDL shares 648,147
Issuance of shares by SDL 65,225
Collection on note receivable from officer 29,880 29,880
Repurchase of common stock (540) (540)
------------------------------------------------------------------------
Balance at December 31, 1999 $(21,742,318) $ 711,954 $ (387,454) $ (58,304) $49,786,542
========================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SmartDisk Corporation ("SmartDisk" or the "Company") was incorporated
in March 1997, and its predecessor, SmartDisk Security Corporation ("SDSC") was
incorporated on May 18, 1993. SmartDisk designs and develops products that
enable consumers to easily share digital data among advanced consumer electronic
products, PCs and the Internet. The Company serves customers in the electronics,
banking and other consumer markets. Principal geographic markets for the
Company's products include the United States, Japan, Europe and other world
markets.
SDSC was substantially wholly-owned by Addison Fischer ("Fischer").
From 1993 to 1995, SDSC exploited technology that it licensed under a
manufacturing license agreement with Fischer International Systems Corporation
("FISC"), another company substantially wholly-owned by Fischer. The patents
underlying the licensed technology were held by SmartDiskette GmbH ("SDG"), a
German company that is wholly-owned by SmartDiskette Limited ("SDL"), an English
company that was approximately 37% owned by Fischer through May 1996. SDG
licensed these patents to SDL. SDL in turn entered into a manufacturing license
agreement with FISC that FISC subsequently assigned to SDSC. The license
agreement covered the manufacture and sale of solid state diskettes relating to
the fields of data security and validation and computer security and access
control. For the period January 1, 1996 through December 31, 1997, FISC,
pursuant to an operating agreement with SDSC, conducted all operations and
development activities on behalf of SDSC. During this period, SDSC (through
FISC) developed several products using proprietary, high-density flash memory
technology. These products are hereafter referred to as the "SmartDisk
Products." The SmartDisk Products consist primarily of FlashPath (used to
read/write flash memory cards) and Smarty (used to read/write smart cards). SDSC
reimbursed FISC for the cost of services provided by FISC under the operating
agreement. In addition, FISC retained 25% of the gross sales price of SmartDisk
Products distributed by it on behalf of SDSC.
On March 21, 1997, FISC and Toshiba Corporation ("Toshiba") entered
into a memorandum of understanding in which the parties agreed to exploit the
SmartDisk Products. SmartDisk commenced operations January 1, 1998. Effective on
that date, SDSC's operating agreement with FISC was terminated.
50
On May 26, 1998, an agreement was finalized with Toshiba and FISC in
order to, among other things, capitalize SmartDisk. SDSC stockholders exchanged
all the issued and outstanding shares of SDSC for 7,350,000 shares of common
stock of SmartDisk, Toshiba contributed $9,991,918 for 2,487,500 shares of
redeemable common stock and FISC assigned trademarks to SmartDisk in exchange
for 150,000 shares of common stock. In conjunction with the capitalization, SDSC
was merged into SmartDisk. The merger was a combination of entities under common
control and accounted for at historical cost. The accounts of SmartDisk and SDSC
are combined in the accompanying financial statements.
In May 1996 and May 1997, Fischer increased his ownership of SDL to 87%
and 92%, respectively. In May 1998, Phoenix House Investments, LLC ("Phoenix
House"), an investment company substantially owned by Fischer, acquired the
remaining outstanding interests of SDL through the issuance of common stock
valued at approximately $300,000. In May 1999, the stockholders of SDL exchanged
all their shares of SDL for 515,500 shares of common stock of SmartDisk and SDL
became a wholly owned subsidiary of SmartDisk. The merger was a combination of
entities under common control and accounted for at historical cost. The
individual financial statements of SmartDisk and SDL are combined in the
accompanying financial statements from May 22, 1996, the date SDL came under
common control. The accounts of SDL were adjusted as of that date to reflect a
new basis under the purchase accounting method.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All intercompany transactions and balances
between the companies have been eliminated. The consolidated financial
statements are stated in U.S. dollars and have been prepared in accordance with
accounting principles generally accepted in the United States.
CERTAIN UNCERTAINTIES AND RISKS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments and trade receivables. The Company places its cash and
cash equivalents, and short-term investments with major financial institutions.
In the normal course of business, the Company extends unsecured credit to its
customers for the sale of products. Credit terms generally range from 30 to 150
days receivables with extended credit terms secured by promissory notes. The
Company evaluates and monitors the credit worthiness of each customer on a
case-by-case basis. Allowances are maintained for potential credit losses.
51
The Company sells to original equipment manufacturers, retailers, and
distributors in the United States, Japan, Europe and other world markets.
However, the majority of the Company's sales are to Japanese customers. Japanese
sales as well as related expenses are denominated in Yen and, accordingly, are
subject to the risks associated with fluctuations in exchange rates between the
Yen and the US dollar. The Company does not hedge against foreign currency
exposure.
A limited number of customers account for a substantial portion of the
Company's revenues. Further, one product accounts for a substantial portion of
the Company's revenues. Sales of the Company's products will vary as a result of
fluctuations in market demand.
Certain raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. The Company is
dependent on its manufacturers to allocate a sufficient portion of their
manufacturing capacity to meet the Company's needs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's sales are made through a Japanese
branch. This subsidiary and other foreign subsidiaries have their local currency
as their functional currency. Their assets and liabilities are translated to the
US dollar at the current exchange rates in effect at the balance sheet date.
Items of revenue and expense are translated using average exchange rates in
effect for the period in which the items occur. The resulting gains and losses
from translation are included as a component of stockholders' equity.
Certain intercompany balances with the Japanese branch are denominated
in Yen. Certain cash time deposits and inter-company accounts of the Japanese
branch are dollar-denominated balances. These balances are remeasured to the
functional currency using the current exchange rate at the balance sheet date,
and resulting adjustments are reflected in the gain (loss) on foreign exchange
account included in the statement of operations. Inter-company gains (losses)
included in this account for the years ended December 31, 1999 and 1998 totaled
$87,910 and $170,416, respectively.
52
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 1999 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and
other accrued liabilities in the accompanying balance sheet approximates fair
value because of the short-term maturity of these financial instruments. The
fair value of the restricted cash and line of credit approximates market, as the
interest rates on these financial instruments are market rates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity of three months
or less when purchased are considered to be cash equivalents. All cash
equivalents are carried at cost, which approximates fair value. Cash and cash
equivalents include money market funds, certificates of deposit and U.S.
Government Agency securities.
The Company has cash investment policies that limit investments to
investment grade securities. Investments held by the Company are classified as
"available-for-sale" as defined by SFAS No. 115 and are carried at fair value
based on quoted market prices. Such investments consist of U.S. Government
Agency securities, corporate debt securities and asset backed securities with
original maturities beyond three months and less than twenty-four months.
Realized losses represent the difference between the proceeds received upon sale
of an investment and its amortized cost. The Company's realized losses during
the year ended December 31, 1999 were $45,656. Unrealized losses, net of tax, as
of December 31, 1999 were $44,141. The Company did not have short-term
investments during the years ended December 31, 1998 and 1997.
A detail of the Company's short-term investments as of December 31,
1999 is as follows:
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
----------- ----------- ----- -----------
US government and government agency
securities $15,964,942 $15,920,180 $ -- $ (44,762)
Asset backed securities 5,990,602 5,984,190 -- (6,412)
Corporate bonds and notes 4,757,219 4,736,031 -- (21,188)
----------- ----------- ----- -----------
Total short-term investments $26,712,763 $26,640,401 $ -- $ (72,362)
=========== =========== ===== ===========
53
The following represents the maturities of the Company's short-term
investments as of December 31, 1999:
AGGREGATE
FAIR VALUE
-----------
Due in 0-12 months $ 9,996,060
Due in 12-24 months 16,644,341
-----------
Total $26,640,401
===========
RESTRICTED CASH
Restricted cash is composed of a time deposit that the Company's
Japanese branch maintains as collateral for a line of credit.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. All major expenditures for production equipment are capitalized
and depreciated over the economic life of the asset. The costs of repairs and
maintenance are charged to expense in the year when they are incurred.
Depreciation is computed using the straight-line and declining balance methods
over the estimated useful lives of 2 to 15 years. In addition, certain
production equipment is depreciated using the units of production method. The
units of production method depreciates the property over the estimated life
cycle production quantities. The monthly depreciation cost is calculated by
using the number of pieces produced times the cost per piece computed from the
estimated total production quantity.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new
software products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time
certain development costs required to attain general production release would be
capitalized. To date, the Company's software development has essentially been
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
54
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Deferred
income tax assets and liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
REVENUE RECOGNITION
Sales revenue is recognized when the risk of loss and title transfers
to the customer, which is generally at the time of shipment to customers.
Royalty revenue consists of royalties earned on sales of licensed products.
Royalty revenues are recognized when earned based upon contractual agreement. To
date, all of the Company's royalties relate to the licensing of one software
product to FISC. The Company has no continuing obligations under this licensing
agreement. Revenues from research and development contracts are recognized when
earned based upon achievement of contract milestones.
STOCK BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation" permits the use
of either a fair value based method or the intrinsic value method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements. The
Company determines the value of stock-based compensation arrangements under the
provisions of APB 25 and, accordingly, has included the pro forma disclosures
required under SFAS No. 123 in Note 9.
ADVERTISING
Advertising costs are charged to expense as incurred, advertising
expenses for 1999, 1998 and 1997 were $147,251, $214,002 and $3,785,
respectively.
55
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 established accounting and reporting standards requiring that every
derivative financial instrument be recorded on the balance sheet as either an
asset or liability measured at its current market value. Because SmartDisk
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
COMPREHENSIVE INCOME
Comprehensive income (loss) includes all changes in equity that result
from transactions and other economic events during the period other than
transactions with stockholders. The significant components of other
comprehensive income (expense) for the Company include equity adjustments
resulting from the translation of the balance sheet for the Japanese branch and
the European subsidiary and unrealized gains and losses on short-term
investments. Accumulated other comprehensive income at December 31, 1999,
includes accumulated foreign currency translation adjustments of $756,095 offset
by unrealized losses on short-term investments of $44,141, net of tax.
NOTE 2. INVENTORY
Inventories consist of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Finished goods $ 1,561,213 $ 1,687,905
Raw materials -- 1,115
----------- -----------
Total inventories 1,561,213 1,689,020
Allowance for obsolescence (86,600) --
----------- -----------
Net inventory $ 1,474,613 $ 1,689,020
=========== ===========
56
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Production Equipment $ 3,697,941 $ 702,779
Furniture and fixtures 318,973 191,576
Software 370,487 167,519
----------- -----------
Property and equipment, at cost 4,387,401 1,061,874
Accumulated depreciation and amortization (1,763,772) (379,860)
----------- -----------
Property and equipment, net $ 2,623,629 $ 682,014
=========== ===========
NOTE 4. INTANGIBLE ASSETS
The patents and goodwill recorded as of December 31, 1998 relate to
technology held by SDL. These amounts will be fully amortized in the first half
of 2000. During 1999, the Company incurred approximately $400,000 in costs for
the successful defense of the patent on its primary technology and product.
These costs have been capitalized and included in patents. These costs will be
amortized over three years, the expected future life of the patent.
On June 30, 1999 the Company issued 37,500 shares of its common stock
to SanDisk Corporation ("SanDisk") in exchange for a license to utilize certain
patented technology developed by SanDisk. The Company is amortizing the license
on a straight-line basis over the ten year term of the license. In addition, the
Company is required to pay a royalty to SanDisk on net revenues from direct
sales to customers other than SanDisk of products developed by the Company
utilizing this licensed technology.
Intangible assets consist of the following:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Patents $ 1,389,204 $ 998,334
Goodwill 326,464 332,791
License 300,000 --
----------- -----------
Total intangibles 2,015,668 1,331,125
Accumulated amortization (1,132,969) (590,147)
----------- -----------
Intangible assets, net $ 882,699 $ 740,978
=========== ===========
57
NOTE 5. BANK LINE OF CREDIT
The Company's wholly owned Japanese branch has a line of credit with
maximum borrowing capacity of approximately $2.9 million (295 million Yen). The
facility, which has no fixed term, is collateralized by a time deposit and
accounts receivable. The branch maintains a time deposit with the bank that has
a balance at December 31, 1999 of $1,050,000. The Company may borrow up to 90%
of this amount. The credit agreement corresponding to the time deposit
collateral is renewable automatically on May 31, 2000. In addition, accounts
receivable of up to $2 million (200 million Yen) of specified trade customers
may be used as additional collateral. The credit agreement corresponding to the
accounts receivable collateral is renewable automatically on January 31, 2001.
The interest rate on borrowings under the line of credit is 1.38% per year. The
outstanding balance under the line of credit was approximately $2 million (200
million Yen) as of December 31, 1999 and approximately $0.9 million (100 million
Yen) at December 31, 1998.
The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $2.9 million (302 million Yen) at
December 31, 1999 and approximately $1.4 million (160 million Yen) at December
31, 1998.
The Company maintains a line of credit under which it may borrow up to
$5 million. Any amounts borrowed under this line of credit bear interest at 2%
over the 30-day LIBOR rate and would be collateralized by all assets of the
Company. This line of credit expires on December 15, 2000. The Company has not
borrowed against this line of credit and has no current plans to borrow any
amounts under this line of credit.
Interest paid during the years ended December 31, 1999 and 1998
amounted to $53,842 and $5,017, respectively. The Company made no interest
payments in 1997.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASES
Through May 31, 1999, the Company leased space for its corporate
headquarters from a related party, FISC, on a month-to-month basis. There was no
formalized agreement and the expense was accrued and paid monthly based on a
percent of usage basis. As of June 1, 1999, the Company assumed from FISC a
facilities operating lease with an unrelated lessor that continues through
December 31, 2001. The Company also leases office space under an operating lease
that expires in September 2000. The Company's Japanese branch leases office
space under a two year operating lease that commenced in April 1998. This lease
has been renewed through 2002 on terms similar to the original lease agreement.
Total rent expense on operating leases for 1999, 1998 and 1997 was $443,645,
$261,399 and $36,995, respectively. Rent expense incurred related to FISC for
these same periods totaled $58,578, $135,290 and $36,995, respectively.
58
The table below sets forth minimum payments for the years indicated
under operating leases with remaining terms in excess of one year, at December
31, 1999:
2000 ............. $ 440,141
2001 ............. 446,343
2002 ............. 83,896
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
employees. These agreements stipulate, among other things, severance and benefit
arrangements in the event of termination. In addition, the agreements include
confidentiality provisions, invention assignment provisions, and covenants not
to compete.
CONTINGENCIES
The Company relies on a combination of patents, trademarks, copyright
and trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength or be issued in the primary countries
where the Company's products can be sold that will provide meaningful protection
or any commercial advantage to the Company. Additionally, competitors of the
Company may be able to design around the Company's patents.
NOTE 7. EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding for the period plus the
dilutive effect of the conversion of the outstanding redeemable common stock,
outstanding shares of non-vested stock and outstanding stock options using the
"treasury stock" method. For the year ended December 31, 1998, the redeemable
common stock, shares of non-vested stock and stock options were excluded from
the calculation of earnings (loss) per share because they were anti-dilutive.
They have been included in the computation of earnings per share for the year
ended December 31, 1999 due to their dilutive effect on earnings per share.
59
Earnings (loss) per share has been computed reflecting the retroactive
adjustment of outstanding shares related to the mergers of SDL and SDSC into
SmartDisk as well as the one for four reverse stock split that was effected in
August 1999.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ------------ ------------
Numerator:
Net income (loss) $ 958,294 $(5,502,944) $(3,963,974)
=========== ============ ============
Denominator:
Weighted average shares outstanding 10,724,608 8,040,169 7,738,909
Dilutive effect of conversion of redeemable
common stock 1,901,404 -- --
Dilutive effect of stock options 365,619 -- --
Dilutive effect of non-vested common stock 357,745 -- --
----------- ------------ ------------
Diluted shares outstanding 13,349,376 8,040,169 7,738,909
=========== ============ ============
Basic earnings (loss) per share $ 0.09 $ (0.68) $ (0.51)
Diluted earnings (loss) per share $ 0.07 $ (0.68) $ (0.51)
Subsequent to December 31, 1999, the Company issued 1,080,000 shares of
common stock, of which approximately 1,067,000 related to the acquisition of
VST. The Company also granted approximately 934,000 options to purchase shares
of SmartDisk common stock and issued approximately 443,000 options to acquire
shares of SmartDisk Corporation common stock in exchange for outstanding vested
options to acquire shares of VST common stock.
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT)
In connection with an agreement that was finalized in May 1998, Toshiba
Corporation received 2,487,500 shares of redeemable common stock in exchange for
$9,991,918 (consisting of $4,950,000 cash, the exchange of a $5,000,000 note and
accrued interest of $41,918).
In January and July 1999, SmartDisk sold a total of 650,000 shares of
its common stock in private transactions for gross proceeds of $4.30 million.
In August 1999, the Company completed a reverse stock split of one for
four. The consolidated financial statements and footnotes have been
retroactively restated to reflect the reverse stock split in the prior periods,
including all references in the financial statements to number of shares and per
share amounts.
60
In August 1999, the Company amended and restated its Certificate of
Incorporation such that the number of shares of authorized capital stock was
increased to 65,000,000 shares, consisting of 60,000,000 shares of common stock
with a par value of $0.001 per share and 5,000,000 shares of preferred stock
with a par value $0.001 per share.
On October 6, 1999, the Company completed its initial public offering
(IPO). The Company realized net proceeds of approximately $39.14 million from
the sale of 3,450,000 shares of common stock (including 450,000 shares issued
upon the exercise of the underwriters' over allotment option) at an initial
public offering price of $13.00 per share after deducting underwriting discounts
and commissions of approximately $3.14 million and offering expenses of
approximately $2.57 million. Upon the successful completion of the Company's
IPO, each of the 2,487,500 outstanding shares of redeemable common stock were
converted into one share of common stock.
NOTE 9. STOCK BASED COMPENSATION
STOCK OPTION PLANS
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense was recognized during 1999 and 1998.
The Company's 1998 Employee Stock Option Plan authorized the grant of
options to employees including members of the Company's Board of Directors who
are employees of the Company for up to 1,454,545 shares of the Company's common
stock. Options granted under the plan are fully vested after four years and all
options granted have a ten-year contractual life. This plan was terminated in
July 1999.
The Company's 1998 Directors and Consultants Stock Option Plan
authorized the grant of options to officers, directors, consultants and other
independent contractors (including members of the Company's Board of Directors
who are not employees of the Company) for up to 250,000 shares of the Company's
common stock. Options granted under the plan are fully vested after four years
and all options granted have a ten-year contractual life. This plan was
terminated in July 1999.
The Company has reserved 965,750 shares of common stock for outstanding
options issued under the aforementioned stock option plans.
61
During 1998 and 1999, the Company granted 880,613 stock options to
employees and directors of SmartDisk with exercise prices ranging from $0.72 to
$8.00, which options were immediately exercisable for cash or in part by cash
(minimum par value for the shares purchased) and the balance by a five-year full
recourse promissory note. Such notes would be secured by the shares purchased
(to be held in escrow with no transfer rights pending full payment) with
interest based on the coupon rate yield of a 52-week U.S. Treasury bill
immediately preceding the execution and issuance of the promissory note, with
voting rights for the underlying shares remaining with the shareholder until
default, if any, on the note. Of the 880,613 immediately exercisable options
granted, 743,363 options have been exercised and 67,250 have been cancelled as
of December 31, 1999. Of the 743,363 shares of common stock issued upon
exercise, 357,745 remain nonvested and 80,977 have been repurchased and are
shown as treasury stock, at cost, in the equity section of the balance sheet as
of December 31, 1999. The nonvested shares of common stock will vest in
accordance with the provisions of the original option award.
In July 1999, the Company established the 1999 Incentive Compensation
Plan (the 1999 Plan) and reserved 2,500,000 shares of common stock for issuance
thereunder. Pursuant to the terms of the 1999 Plan, the Company may grant
participants stock options, stock appreciation rights, restricted stock,
deferred stock, other stock-related awards and performance or annual incentive
awards that may be settled in cash, stock or other property (collectively, the
Awards). Under the 1999 Plan, the total number of shares of common stock that
may be subject to the granting of Awards at any time during the term of the 1999
Plan shall equal 2,500,000 shares, plus the number of shares with respect to
which Awards previously granted under the 1999 Incentive Plan that terminate
without being exercised, and the number of shares of common stock that are
surrendered in the payment of any Awards or any tax withholding requirements. As
of December 31, 1999, 171,000 options have been granted under the 1999 Plan. No
other form of Award has been granted under the 1999 Plan.
During the year ended December 31, 1999, compensation expense of
$76,500 was recognized relating to the accelerated vesting of 21,000 options,
exercisable at $0.72 per share.
62
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows:
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------- -------- ------ --------
Outstanding at December 31, 1997 -- $ -- -- $ --
Granted with exercise prices equal
to fair market value 1,041,613 1.29
Granted with exercise prices less
Than fair market value 25,000 4.00
Exercised (699,863) 0.73
Canceled (750) 0.72
---------
Outstanding at December 31, 1998 366,000 2.54 2,250 0.72
Options granted with exercise
prices equal to fair market value 1,024,500 7.77
Exercised (47,875) 3.67
Canceled (205,875) 2.66
---------
Outstanding at December 31, 1999 1,136,750 $ 7.19 44,794 $ 2.73
=========
The following table summarizes information about stock options
outstanding at December 31, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------------------------------------------------------- ----------------------------------
$0.72 - $1.00 58,750 8.1 years $0.76 24,689 $0.75
$4.00 - $4.80 321,125 9.0 years 4.66 16,385 4.28
$8.00 - $13.00 740,375 9.4 years 8.24 3,720 9.00
$30.50 - $36.50 16,500 9.9 years 32.00 -- --
--------- ------
$0.72 - $36.50 1,136,750 9.3 years $7.19 44,794 $2.73
========= ======
63
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Company established the 1999 Employee Stock Purchase
Plan, for which 465,000 shares of the Company's common stock have been reserved.
The plan, which is intended to qualify under Section 423 of the Internal Revenue
Code of 1986, will be implemented through successive twelve-month Offering
Periods, generally commencing the first of January each year. Employees are
eligible to participate if they are employed by the Company for at least 20
hours per week and more than five (5) months in a calendar year. Entry dates
into the plan are the first day of each calendar quarter. Each participant is
granted an option to purchase the Company's common stock on June 30 and December
31 (the "Purchase Date") of each Offering Period, up to a maximum of 1,000
shares, through payroll deductions, which may not exceed 15% of an employee's
total compensation. The initial Offering Period commenced on October 5, 1999 and
will end on the last business day of December 2000. The price of stock purchased
under the plan will be 85% of the lower of the fair market value of the common
stock at the beginning of the Offering Period or the Purchase Date. Employees
may not be granted shares under the plan if immediately following a grant they
would hold stock and/or options to acquire stock possessing more than 5% of the
total voting power of the shares of the Company. Employee contributions are
limited to $21,250 per year. Approximately 90 percent of eligible employees
participated in the Plan in 1999. Under the Plan, the Company sold 15,411 shares
of common stock to employees on December 31, 1999.
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and employee stock purchase plan under
the fair value method of that Statement. For the fair value disclosure below,
compensation value is estimated for each option grant using a Black-Scholes
option-pricing model. The following weighted average assumptions were used for
option grants in fiscal 1999 and 1998: risk-free interest rate of 5.75% in 1999
and 5.25% in 1998; expected dividend yield of 0% for 1999 and 1998; volatility
factor of the expected market price of the Company's common stock of 0.80 for
the period in 1999 following the Company's IPO and zero for the period in 1999
prior to the Company's IPO and for all of 1998; and an expected life of the
options of 3 years for 1999 and 1998. Shares issued through the 1999 Employee
Stock Purchase Plan during 1999 were valued with a minimum value pricing model
using the following assumptions: risk-free interest rate of 5.75%, expected
dividend yield of 0% and a life of three months.
The weighted average grant date fair value of options granted during
the years ended December 31, 1999 and 1998 with exercise prices equal to market
value was $5.11 and $0.84, respectively. There were no options granted during
the year ended December 31, 1999 with exercise prices less than market value.
The weighted average grant date fair value of options granted during the year
ended December 31, 1998 with exercise prices less than market value was $3.40.
The weighted average grant date fair value of the shares issued through the 1999
Employee Stock Purchase Plan for the year ended December 31, 1999 was $2.11.
64
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee's stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The Company's
pro forma information for options issued is as follows:
1999 1998
----------- -------------
Net income (loss):
As reported $ 958,294 $ (5,502,944)
Pro forma $ 754,101 $ (5,620,529)
Basic net income (loss) per share:
As reported $ 0.09 $ (0.68)
Pro forma $ 0.07 $ (0.70)
Diluted net income (loss) per share:
As reported $ 0.07 $ (0.68)
Pro forma $ 0.06 $ (0.70)
The effects of applying SFAS No. 123 on pro forma disclosures of net
income and earnings per share for fiscal 1999 and 1998 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years because the number of shares to be issued under these plans is not
known and the assumptions used to determine the fair value can vary
significantly.
NOTE 10. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, for the benefit of qualified employees, the
Company became a participant in a tax deferred savings plan offered to employees
of FISC. The plan is designed to provide employees with an accumulation of funds
at retirement. Qualified employees may elect to make pre tax contributions into
the plan for up to 15% of their annual compensation, up to a maximum of $10,000
per year. The Company's matching contributions are earned by the employee based
on a straight line, five year vesting schedule. The Company may make additional
annual contributions to the plan at the discretion of the Board of Directors.
For the years ended December 31, 1999 and 1998, the Company made matching
contributions of $30,596 and $10,747, respectively.
65
NOTE 11. INCOME TAXES
The United States and foreign components of income (loss) from
continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
----------- ----------- -----------
United States $ 552,953 $(4,584,045) $(3,462,924)
Foreign 1,772,185 (1,021,215) (545,648)
----------- ----------- -----------
Total $ 2,325,138 $(5,605,260) $(4,008,572)
=========== =========== ===========
The income tax benefit for periods prior to 1999 as presented in the
statements of operations relates to the reduction of the deferred income tax
liability associated with the identified intangible assets. The components of
the income tax provision (benefit) are as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
United States $ 60,000 $ 0 $ 0
Foreign 1,695,718 0 0
----------- ----------- -----------
Total Current Expense (Benefit) $ 1,755,718 $ 0 $ 0
Deferred:
United States $ (50,000) $ (25,000) $ 0
Foreign (338,874) (77,316) $ (44,498)
Total Deferred Expense (Benefit) $ (388,874) $ (102,316) $ (44,498)
Income Tax Provision (Benefit) $ 1,366,844 $ (102,316) $ (44,598)
=========== =========== ===========
The significant components of the Company's deferred income taxes are
as follows:
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 1,238,163 $ 2,615,236
Depreciation and amortization 104,640 18,377
Accrued expenses 134,052 9,225
Bad debt & inventory reserves 85,211 --
Foreign tax & alternative minimum tax credits 1,759,548 --
Other 347,057 --
----------- -----------
Deferred tax assets 3,668,671 2,642,838
Less: valuation allowance (3,417,277) (2,642,838)
----------- -----------
Net deferred tax assets 251,395 --
Deferred tax liabilities
Acquired intangibles (56,453) (184,658)
----------- -----------
Total net deferred taxes $ 194,942 $ (184,658)
=========== ===========
66
The reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate is:
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- -------
Federal income tax benefit 34.00% (34.00)% (34.00)%
State taxes, net of federal benefit 3.57 (3.63) (3.63)
Foreign tax rate differential (0.33) (0.13) 0.63
Non-deductible items 0.56 1.38 --
Goodwill 1.83 0.13 0.37
Recognition of net deferred tax assets
from change in SDSC status -- (0.17) --
S corporation loss reported by
stockholders -- -- 32.51
Change in valuation allowance 19.48 34.01 3.02
Other (0.32) 0.61 --
------- ------- -------
Total 58.79% (1.80)% (1.10)%
======= ======= =======
Prior to May 1998, SDSC elected to be taxed as an S corporation under
the Internal Revenue Code. As a result, the taxable income or losses for periods
prior to May 1998 were reported by the stockholders on their individual income
tax returns. Upon the conversion from an S corporation to a C corporation, SDSC
became subject to income tax. Subsequent to the conversion from an S corporation
to a C corporation, SDSC was merged into SmartDisk, a C corporation.
SFAS 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a valuation allowance of approximately $3,417,000,
$2,643,000 and $770,000 at December 31, 1999, 1998 and 1997, respectively, is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in valuation allowance amounted to
approximately $774,000, $1,873,000 and $121,000 for December 31, 1999, 1998 and
1997, respectively.
At December 31, 1999 and 1998, the Company had United States and
foreign net operating loss carryforwards for tax purposes as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------ --------------------------
JURISDICTION AMOUNT EXPIRATION AMOUNT EXPIRATION
- ------------ ---------- ---------- ---------- ----------
United States $1,532,000 2018 $4,932,000 2018
United Kingdom 2,005,000 Unlimited 2,343,000 Unlimited
Japan -- N/A 377,000 2003
67
At December 31, 1999, the Company had United States tax credit
carryforwards as follows:
DECEMBER 31, 1999
-------------------------
TAX CREDIT AMOUNT EXPIRATION
---------- ---------- ----------
Foreign tax credit $1,699,548 2004
Alternative minimum tax credit $ 60,000 Unlimited
The Company made income tax payments of $145,330 during 1999. No income
tax payments were made in 1998 and 1997.
NOTE 12. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The Company
operates in one reportable business segment.
Sales to foreign markets and to significant customers as a percentage
of the Company's total revenues were as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
Foreign markets: 1999 1998 1997
---- ---- ----
Asian and Pacific Rim 81% 84% --%
United States 15 10 82
Europe 4 6 18
YEARS ENDED DECEMBER 31,
--------------------------------
Significant Customers: 1999 1998 1997
---- ---- ----
FujiFilm 28% 38% --%
Olympus 27 32 --
FISC 10 14 100
Sony 10 -- --
The following is a summary of the carrying amounts of the Company's
foreign net assets (liabilities) by geographic area in which they are located:
DECEMBER 31,
-------------------------------
1999 1998
---------- ----------
Asian and Pacific Rim $4,359,808 $1,830,076
Europe 198,115 (46,025)
68
The following is a summary of the Company's foreign long-lived assets
by geographic area in which they are located:
DECEMBER 31,
-------------------------------
1999 1998
---------- --------
Asian and Pacific Rim $1,680,321 $281,347
Europe 191,637 750,821
NOTE 13. RELATED PARTY TRANSACTIONS
Material related party transactions that have been entered into by the
Company that are not disclosed otherwise in these notes are summarized below.
As outlined in Note 1, SmartDisk (including SDSC and SDL) and FISC were
under the common ownership of Fischer. Further, there were various transactions
between SmartDisk and FISC, such as sharing of certain general and
administrative resources, the purchases/sales of products and services and
similar transactions. In the opinion of management, the allocations were
reasonable and reflect all of the cost of the Company's doing business.
During 1997, FISC provided operating services to SmartDisk pursuant to
an operating agreement. FISC retained 25% of the gross sales price of SmartDisk
Products distributed by it on behalf of the Company. In addition, FISC allocated
direct expenses attributable to the Company such as cost of sales, product
development and depreciation, and indirect expenses such as selling, general and
administrative expenses. The direct expense allocation was based on actual
expenses incurred and the indirect expense allocation was based upon a pro rata
allocation of the total expenses incurred by FISC based upon management's
estimate of the percentage attributable to the Company. All of the Company's
revenues for 1997 and operating expenses totaling approximately $4.0 million in
1997 were recognized or incurred by FISC on behalf of SmartDisk. Management
estimates that had the Company operated on a stand-alone basis for 1997,
expenses would have approximated the amount reported.
As a direct result of this operating arrangement between FISC and
SmartDisk, the Company's stockholder loan from Fischer was increased by
$3,158,817 in 1997 representing funding of SmartDisk operations by Fischer
through FISC. Stockholder loan amounts totaling $654,661 in 1997 were
contributed to capital. In addition, stockholder loan amounts totaling $648,147
at December 31, 1998, represented advances made by Fischer and related companies
to fund the operations of SDL. Those advances, which were non-interest bearing
and due upon demand, were converted into 386,841 shares of common stock of SDL
in May 1999, which in turn were exchanged for 76,018 shares of SmartDisk.
At December 31, 1997, the Company owed $1,045,000 to FISC and
$3,955,000 to Fischer, which represented non-interest bearing amounts advanced
to fund the Company's operations. These amounts were repaid in 1998.
69
In 1998, the Company was granted a non-exclusive license to certain
patents relating to the interface with Toshiba's SmartMedia cards. In September
1998, this license was amended to expand the field of use for the license. In
return, the Company agreed to pay a 1/2% royalty on products covered by the
Toshiba patents. Royalty expenses pertaining to this license were $25,555 and
$68,752 in 1999 and 1998, respectively.
The Company has entered into various strategic agreements with related
parties to sell, manufacture and distribute products. In addition, the Company
procures certain engineering services from a strategic investor. During 1999 and
1998, approximately 18% and 34%, respectively, of the Company's sales were to
related parties. During 1999 and 1998, purchases of products and services of
approximately $37.5 million and $14.0 million, respectively, were made from
related parties.
Pursuant to license and distribution agreements entered into in 1998
between FISC and the Company, FISC was granted the right to license and
distribute the Company's products through 2001. For this right, FISC agreed to
pay to the Company royalties ranging from 5% to 33.3% of net revenue derived
from certain SmartDisk product sales. All of the Company's royalty revenues are
from FISC.
Pursuant to operating agreements entered into in 1998, FISC provides
operating assistance to the Company consisting of services, facilities and
shared equipment. The Company's share of expenses for these services is based on
an internal analysis of the relative amount of time devoted to its business by
employees of FISC as well as the overhead charges attributable to these
employees. The Company recorded operating expenses related to these agreements
for the years ended December 31, 1999 and 1998 of approximately $300,000 and
$1,500,000, respectively.
Three of the Company's principal stockholders have the right to require
the Company to file a registration statement to enable them to sell their
shares.
During February 1999, the Company loaned $60,000 to one of its officers
and the full amount was outstanding as of December 31, 1999. The loan was made
pursuant to a Promissory Note, bears interest at 4.71%, and is repayable in four
annual installments. In addition, the Company has, in conjunction with the 1998
Employee Stock Option Plan, made loans to several of its employees to allow for
the immediate exercise of stock option grants. Each loan was made pursuant to a
full recourse Promissory Note, is secured by a pledge of the shares of stock
which the employee has acquired, bears interest at approximately 5.5% which is
payable quarterly, and is required to be paid in full within five years of the
date of issuance. As of December 31, 1999, the principal amount due under these
loans was $387,454.
70
NOTE 14. RESEARCH AND DEVELOPMENT CONTRACT REVENUES
During 1999, SmartDisk entered into and completed various research and
development contracts with a customer. The contracts entitled the Company to
invoice and receive funds over the development period, some of which were
conditioned upon acceptance of certain deliverables. Through December 31, 1999,
SmartDisk invoiced approximately $2.6 million for development work. All of these
revenues were recognized as income in the fourth quarter of 1999 upon the
customer's final acceptance of the product. Approximately $1.6 million of
contract costs were charged to expense over the life of the development periods,
which ended in 1999. The Company's accounting for these research and development
revenues was based upon final customer acceptance of the product being a
condition of earning revenue under the contract.
SmartDisk also has an ongoing research and development contract, which
was entered into during the fourth quarter of 1999. This contract entitles
SmartDisk to invoice and receive funds over the development period, which is
through March 31, 2000, some of which are conditioned upon the customer's
acceptance of certain deliverables. Through December 31, 1999, SmartDisk has not
invoiced the customer for the development work under this contract and no
revenues were recognized as income. Approximately $500,000 of contract costs
related to this development contract has been charged to expense as of December
31, 1999. The Company's accounting has been based upon final customer acceptance
being a condition of earning revenue under the contract. Total estimated costs
to be incurred under this contract are approximately $1.0 million.
NOTE 15. SUBSEQUENT EVENTS
On February 23, 2000, the Company signed a letter of intent to acquire
substantially all of the intellectual property of a privately held company for
$800,000 and the issuance of approximately 37,000 shares of SmartDisk common
stock. This company, which is based in California, is a supplier of
high-performance storage solutions. The transaction will be accounted for under
the purchase method of accounting and is expected to close in the first half of
2000.
On March 6, 2000, the Company acquired VST Technologies ("VST") for
approximately $16.4 million in cash and the issuance of 1.1 million shares of
SmartDisk common stock valued at approximately $49 million. In addition, the
Company issued approximately 443,000 options, valued at approximately $19.8
million, to acquire shares of SmartDisk Corporation common stock with exercise
prices ranging from $0.90 to $4.45, in exchange for outstanding vested
71
options to acquire shares of VST common stock. VST, which is based in
Massachusetts, designs, develops, manufactures and markets high performance
portable peripherals for the computer industry. The transaction will be
accounted for under the purchase method of accounting.
72
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SMARTDISK CORPORATION
YEAR ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at End
Classification Beginning of Period Costs and Expenses Other Accounts Deductions of Period
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 34,000 $ 105,800 $ -- $ -- $ 139,800
Reserve for inventory obsolescence -- 86,600 -- -- 86,600
Valuation allowance for deferred tax asset 2,642,800 774,200 -- -- 3,417,000
---------- ---------- ---------------- ---------- ----------
$2,676,800 $ 996,600 $ -- $ -- $3,643,400
========== ========== ================ ========== ==========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ -- $ 34,000 $ -- $ -- $ 34,000
Reserve for inventory obsolescence -- -- -- -- --
Valuation allowance for deferred tax asset 770,200 1,872,600 -- -- 2,642,800
---------- ---------- ---------------- ---------- ----------
$ 770,200 $1,906,600 $ -- $ -- $2,676,800
========== ========== ================ ========== ==========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ -- $ -- $ -- $ -- $ --
Reserve for inventory obsolescence -- -- -- -- --
Valuation allowance for deferred tax asset -- 770,200 -- -- 770,200
---------- ---------- ---------------- ---------- ----------
$ -- $ 770,200 $ -- $ -- $ 770,200
========== ========== ================ ========== ==========
73
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 2000.
SmartDisk Corporation
By: /s/ MICHAEL S. BATTAGLIA
---------------------------------------
Michael S. Battaglia
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
NAME TITLE DATE
---- ----- ----
/s/ Addison M. Fischer Chairman of the Board of Directors March 27, 2000
- --------------------------------------
Addison M. Fischer
/s/ Michael S. Battaglia President, Chief Executive Officer and March 27, 2000
- -------------------------------------- Director (Principal Executive Officer)
Michael S. Battaglia
/s/ Michael R. Mattingly Chief Financial Officer (Principal Financial March 27, 2000
- -------------------------------------- and Accounting Officer)
Michael R. Mattingly
/s/ D. James Bidzos Director March 27, 2000
- --------------------------------------
D. James Bidzos
/s/ Anthony A. Ibarguen Director March 27, 2000
- --------------------------------------
Anthony A. Ibarguen
Director March 27, 2000
- --------------------------------------
Shigeki Morita
/s/ Timothy Tomlinson Director March 27, 2000
- --------------------------------------
Timothy Tomlinson
/s/ Hatim Tyabji Director March 27, 2000
- --------------------------------------
Hatim Tyabji
/s/ Joseph M. Tucci Director March 27, 2000
- --------------------------------------
Joseph M. Tucci
74
SMARTDISK CORPORATION
INDEX OF EXHIBITS
As required under Item 14. Exhibits, Financial Statement Schedules and
Report on Form 8-K, the exhibits filed as part of this report are provided in
this separate section. The exhibits included in this section are as follows:
Exhibit No. Exhibit Titles
- ----------- ---------------------------------------------------------------
10.13 Amendment number one to Investors' Rights Agreement dated
July 1999 among SmartDisk and each of the investors a party thereto
10.16 Development and License Agreement dated December 1, 1999 between
SmartDisk and Sony Corporation
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule