-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NiWGRf7zOA7Lpa7sMFY1sO8cjYAB4aaOVP8eQ71TO02o13H8qIgtgJ5hLe+TNQtG c5EC4jMSioKPx+NmslFDCQ== 0000891618-97-002579.txt : 19970613 0000891618-97-002579.hdr.sgml : 19970613 ACCESSION NUMBER: 0000891618-97-002579 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 34 FILED AS OF DATE: 19970612 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCM MICROSYSTEMS INC CENTRAL INDEX KEY: 0001036044 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-29073 FILM NUMBER: 97623205 BUSINESS ADDRESS: STREET 1: 131 ALBRIGHT WAY CITY: LOS GATOS STATE: CA ZIP: 95030 MAIL ADDRESS: STREET 1: 131 ALBRIGHT WAY CITY: LOS GATOS STATE: CA ZIP: 95030 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SCM MICROSYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3577 77-0444317 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
SCM MICROSYSTEMS, INC. 131 ALBRIGHT WAY LOS GATOS, CA 95032 (408) 370-4888 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ STEVEN HUMPHREYS PRESIDENT AND CHIEF EXECUTIVE OFFICER SCM MICROSYSTEMS, INC. 131 ALBRIGHT WAY LOS GATOS, CA 95032 (408) 370-4888 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: JEFFREY D. SAPER, ESQ. MICHAEL S. IMMORDINO, ESQ. KENNETH M. SIEGEL, ESQ. KARL A. ROESSNER, ESQ. THEODORE C. CHEN, ESQ. DAVID M. DETWEILER, ESQ. JAN-MARC VAN DER SCHEE, ESQ. JOHN CAFIERO, ESQ. WILSON SONSINI GOODRICH & ROSATI ROGERS & WELLS PROFESSIONAL CORPORATION CITY TOWER 650 PAGE MILL ROAD 40 BASINGHALL STREET PALO ALTO, CA 94304 LONDON, EC2V 5DE (415) 493-9300 ENGLAND 44-171-628-0101
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ============================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------- Common Stock, $0.001 par value................ $31,625,000 $9,583 ==============================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Dated June 12, 1997 2,750,000 Shares LOGO Common Stock ----------------------------- All of the 2,750,000 shares of Common Stock offered hereby are being sold by SCM Microsystems, Inc. ("SCM Microsystems" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "SCMM." It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the determination of the initial public offering price. ----------------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF. ----------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================ Price to Underwriting Proceeds to Public Discount (1) Company (2) - ------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ Total (3)................................. $ $ $ ================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $975,000, payable by the Company. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 412,500 additional shares of Common Stock at the Price to Public less the Underwriting Discount to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------------------------- The Common Stock is offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates for such shares will be made at the offices of Cowen & Company, New York, New York, on or about , 1997. COWEN & COMPANY HAMBRECHT & QUIST , 1997 3 [ARTWORK] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Except as set forth in the Consolidated Financial Statements or as otherwise indicated, all information in this Prospectus assumes (i) the issuance of an aggregate of 849,790 shares of Preferred Stock subsequent to March 31, 1997, (ii) the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, effective upon the closing of this offering (the "Automatic Conversion"), and (iii) that the Underwriters' over-allotment option is not exercised. All information in this Prospectus, including the Consolidated Financial Statements, reflects the conversion of certain convertible debt into 377,580 shares of stock as if such conversion had been completed as of March 31, 1997. See Note 3 of Notes to Consolidated Financial Statements. THE COMPANY SCM Microsystems designs, develops and manufactures hardware, firmware and software products for data security and access control applications. The Company sells security and access products to OEM computer, telecommunication and digital video broadcasting ("DVB") component and system manufacturers. The Company's objective is to leverage its expertise in PCMCIA and smart card technologies and its extensible, upgradeable smart card token-based security architecture to capitalize on the growing demand for data and network security and the need to control access to digital information. The Company markets, sells and licenses its products through a direct sales and marketing organization primarily to OEMs and also through distributors, VARs, system integrators and resellers worldwide. OEM customers include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital), Schlumberger, Security Dynamics, Siemens/ Nixdorf, Sun Microsystems and Telenor. The Company addresses the needs of the enterprise data security market by: (i) providing a range of products which enable smart cards and other security tokens to be read through standard PCMCIA slots thus bridging the gap between smart cards and PCs, network computers and other devices; (ii) employing an open-systems, remotely upgradeable architecture that provides compatibility across a range of hardware platforms and software environments; and (iii) including in certain of its smart card reader products encryption/decryption capabilities that address the inherent speed and performance limitations of smart cards. The Company addresses the needs of the DVB market by: (i) providing smart card-based conditional access readers and modules which adhere to the DVB-Common Interface ("DVB-CI") standard; (ii) including real time, high-bandwidth decryption capabilities which can be unlocked by smart card-based tokens, which by themselves are not capable of decrypting digital video data at the rate required for DVB; and (iii) incorporating read/write capabilities which permit DVB content and service providers to perform a virtually no-cost upgrade of users' access rights as new products are developed and introduced and as users' subscription desires change. With the increasing proliferation and reliance upon digital data, data security has become a paramount concern of businesses, government, educational institutions and consumers. Whether the issue is controlling access to proprietary or confidential information such as business data or health records, or attempting to limit access to digital video broadcasts or paying subscribers, content providers, network and data managers and users of digital data are concerned with controlling access to data and maintaining data security. Through 1994, the Company focused on PCMCIA peripheral products, including flash memory and fax/modem devices. In 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. As a result of the Company's shift in product focus, net sales of security and access products increased from 22.1% of total net sales in 1994 to 77.3% of total net sales in 1996. Beginning in 1997, 3 5 the Company will be dependent upon the sales of its security and access products. The Company has formed strategic relationships, including technology sharing agreements, with a number of key industry players such as Intel, Matra Communications, France Telecom and Telenor. In addition, Intel and Telenor made equity investments in the Company of $2.0 million and $5.5 million, respectively, in early 1997. The Company was originally formed in 1990 as a German corporation, and in 1993 the Company merged with two affiliated companies. The Company reincorporated in Delaware in December 1996. The Company maintains headquarters in Los Gatos, California and Pfaffenhofen, Germany. The Company's address is 131 Albright Way, Los Gatos, California 95032 and its telephone number is (408) 370-4888. THE OFFERING Common Stock offered by the Company........... 2,750,000 shares Common Stock to be outstanding after the 9,404,489 shares(1) offering.................................... Use of proceeds............................... For repayment of indebtedness, capital expenditures and general corporate purposes, including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ SCMM
- --------------- (1) Excludes 358,174 shares of Common Stock issuable upon exercise of stock options outstanding as of March 31, 1997 at a weighted average exercise price of $0.10 per share and an aggregate of 384,121 shares of Common Stock and Preferred Stock issuable upon exercise of warrants issued subsequent to March 31, 1997 at a weighted average exercise price of $7.17 per share. See "Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements. "SwapBox" is a registered trademark of the Company. This Prospectus also contains trademarks of other companies. 4 6 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- --------------- 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------ ------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales(1): Security and access products.......... $ -- $ 1,426 $12,520 $16,628 $2,811 $4,202 PCMCIA peripheral products............ 2,379 5,020 5,546 4,892 1,446 163 ------- ------- ------- ------- ------ ------ Total net sales.................. 2,379 6,446 18,066 21,520 4,257 4,365 ------- ------- ------- ------- ------ ------ Gross profit............................. 600 1,359 2,295 6,640 1,189 1,565 Operating expenses....................... 1,601 2,966 4,895 7,620 1,696 2,041 ------- ------- ------- ------- ------ ------ Loss from operations..................... (1,001) (1,607) (2,600) (980) (507) (476) Net loss................................. $(1,096) $(1,868) $(2,926) $(1,110) $ (497) $ (475) ======= ======= ======= ======= ====== ====== Pro forma net loss per share(2).......... $ (0.19) $(0.08) ======= ====== Shares used to determine pro forma net loss per share(2)..................... 5,272 6,054 ======= ======
MARCH 31, 1997 --------------------------------------- PRO PRO FORMA CONSOLIDATED BALANCE SHEET DATA: ACTUAL FORMA(3) AS ADJUSTED(4) ------- -------- -------------- Cash and cash equivalents............................... $ 4,946 $11,937 $ Working capital......................................... 6,976 13,967 Total assets............................................ 13,374 20,365 Redeemable convertible preferred stock.................. 14,554 -- Total stockholders' equity (deficit).................... (6,750) 14,795
- --------------- (1) Through 1994, the Company focused on PCMCIA peripheral products, including flash memory and fax/modem devices. In 1994, the Company began to shift its focus away from these products toward security and controlled access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. (2) Share and per share information gives pro forma effect to the Automatic Conversion. See Notes 1, 4 and 10 of Notes to Consolidated Financial Statements. (3) Reflects (i) the issuance of 849,790 shares of Preferred Stock subsequent to March 31, 1997 and (ii) the Automatic Conversion. (4) Adjusted to reflect the sale of 2,750,000 shares of Common Stock by the Company hereby at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and offering expenses payable by the Company and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 7 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). All forward-looking statements included in this Prospectus are based on information available to the Company on the date hereof and assumptions which the Company believes are reasonable, and the Company assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this Prospectus. HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY Although the Company was profitable for the fiscal quarters ended September 30, 1996 and December 31, 1996, the Company has incurred a loss for the fiscal quarter ended March 31, 1997 and net operating losses on an annual basis since its inception in 1993. As of March 31, 1997, the Company had an accumulated deficit of $8.6 million. In view of the Company's loss history, there can be no assurance that the Company will be able to achieve or sustain profitability on an annual or quarterly basis in the future. The Company's quarterly operating results have in the past varied and may in the future vary significantly. Factors affecting operating results include: the level of competition; the size, timing, cancellation or rescheduling of significant orders; market acceptance of new products and product enhancements; new product announcements or introductions by the Company's competitors; adoption of new technologies and standards; changes in pricing by the Company or its competitors; the ability of the Company to develop, introduce and market new products and product enhancements on a timely basis, if at all; hardware component costs and availability, particularly with respect to hardware components obtained from sole or limited source suppliers; the Company's success in expanding its sales and marketing organization and programs; technological changes in the market for digital information security products; levels of expenditures on research and development; foreign currency exchange rates; and general economic trends. In addition, because a high percentage of the Company's operating expenses are fixed, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company has experienced significant seasonality in its business, and the Company's business and operating results are likely to be affected by seasonality in the future. The Company has typically experienced higher net sales in the third quarter and fourth quarter of each calendar year followed by lower net sales and operating income in the first quarter and second quarter of the following year. The Company believes that this trend has been principally due to budgeting requirements of the U.S. government which influence the purchasing patterns of OEMs which supply PCs and workstations incorporating the Company's products to the U.S. government. In addition, a significant portion of the Company's net sales are generated during the fourth quarter as a result of the year-end holiday buying season. The Company's dependence on fourth quarter results is expected to increase to the extent that net sales of its Digital Video Broadcasting - Conditional Access Module ("DVB-CAM") product increase. Initial sales of the Company's products to a new customer typically involve a relatively lengthy sales cycle, which can range from six to nine months, during which the Company may expend substantial financial resources and management time and effort with no assurance that a sale will ultimately result. The length of the sales cycle may vary depending on a number of factors over which the Company may have little or no control, including product and technical requirements, and the level of competition which the Company encounters in its selling activities. Any delays in the sales cycle for new customers could have a material adverse effect on the Company's business and operating results. 6 8 Based upon the factors enumerated above, the Company believes that its operating results may vary significantly in future periods and that period-to-period comparisons should not be relied upon as necessarily reliable indicators of future performance. It is likely that, in some future quarter, the Company's operating results will be below the expectations of stock market analysts and investors. In such event, the price of the Company's Common Stock could be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." DEPENDENCE ON EMERGING PRODUCT MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS From the Company's inception through 1994, the Company focused on Personal Computer Memory Card Industry Association ("PCMCIA") peripheral products, including flash memory and fax/modem devices. In 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. As a result of the Company's strategic shift in product focus, the proportion of security and access product sales increased from 22.1% of total net sales in 1994 to 77.3% of total net sales in 1996. Beginning in 1997, the Company's net sales will be dependent upon the success of its security and access products. The Company's future growth and operating results will depend to a large extent on the successful marketing and commercial viability of the Company's security and access product families, particularly smart card-based readers and DVB-CAMs. Each of these product families addresses needs in different emerging markets. Smart card token-based security applications are able to provide protection from unauthorized access of digital information. The Company believes that smart cards are ideally suited to serve as tokens for network and electronic commerce security. Accordingly, the Company's SwapBox and SwapSmart product families are targeted to provide token-based security for PCs. However, there can be no assurance that the smart card will become the industry standard for network and electronic commerce security applications. The Company's DVB product family provides a means of controlling access to digital television broadcasts. The Company's DVB-CAM product implements the Digital Video Broadcasting-Common Interface ("DVB-CI") standard. To date, the Company's DVB-CAM product has been implemented in a relatively limited number of DVB set-top boxes in Europe. Although the Company believes that the DVB-CI standard will eventually become the European standard for DVB conditional access applications, there can be no assurance that the standard will be adopted, that the European DVB market will further develop or that even if such standard is adopted and the market further develops, the Company's DVB-CAM products will be widely adopted. Furthermore, the market for DVB products in the United States has only recently begun to develop and there can be no assurance whether, or to what extent, this market will grow. In addition, the substantial installed base of analog set-top boxes in the United States may cause the market for the Company's DVB products to grow slower than expected, if at all. If the market for the products described above or any of the Company's other products fails to develop or develops more slowly than expected or if any of the standards supported by the Company do not achieve or sustain market acceptance, the Company's business and operating results would be materially and adversely affected. See "-- Competition." PRODUCT SALES CONCENTRATION The Company's SwapBox product has historically represented and is expected to continue to represent a substantial portion of the Company's net sales. Sales of this product comprised 62.2% and 54.4% of net sales during fiscal 1995 and 1996, respectively. Should the demand for, or pricing of, this product decline due to the introduction of superior or lower cost systems by competitors, changes in the computer industry or other factors, the Company's business and operating results would be materially adversely affected. While diversifying its products is a key element of the Company's business strategy, there can be no assurance that the Company will be able to successfully introduce or market other products in a timely and cost effective manner or that any new products or improvements will achieve market acceptance. DEPENDENCE ON SALES TO OEMS A substantial majority of the Company's security and access products are intended for use as components or subsystems in systems manufactured and sold by third party OEMs. In 1996, sales to IBM accounted for 7 9 12% of total net sales, sales to BetaDigital (a division of the Kirch Group) accounted for 11% of total net sales and sales to the Company's top 10 customers accounted for 55.0% of total net sales. In order for an OEM to incorporate the Company's products into its systems, the Company must demonstrate that its products provide significant commercial advantages to OEMs over competing products. There can be no assurance that the Company can successfully demonstrate such advantages or that the Company's products will continue to provide any advantages. Moreover, even if the Company is able to demonstrate such advantages, there can be no assurance that OEMs will elect to incorporate the Company's products into their current or future systems, or if they do, that related system and manufacturing requirements can or will be met. Failure of OEMs to incorporate the Company's products into their systems or failure of such OEMs' systems to achieve market acceptance would have a material adverse effect on the Company's business and operating results. See "Business -- Customers and Applications." DEPENDENCE ON SALES TO GOVERNMENT CONTRACTORS Approximately 50.6% and 39.2% of the Company's net sales during 1995 and 1996, respectively, were derived from sales of the Company's SwapBox product for use by the U.S. government, all of which were made under contracts between the Company and major OEMs that sell PCs to the United States Department of Defense (the "DoD"). The Company believes that indirect sales to the DoD are subject to a number of significant uncertainties, including timing and availability of funding, unforeseen changes in the timing and quantity of government orders and the competitive nature of government contracting generally. Furthermore, the DoD has been reducing total expenditures over the past few years in a number of areas and there can be no assurance that such funding will not be reduced in the future. In addition, there is no assurance that the Company will be able to modify existing products or develop new products that will continue to meet the specifications of OEM supplies to the DoD. Absent significant future revenues from alternative sources, a significant loss of indirect sales to the United States government would have a material adverse effect on the Company's business and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS The Company is party to collaborative arrangements with a number of corporations and is a member of key industry consortia. The Company has formed strategic relationships, including technology sharing agreements, with a number of key industry players such as Intel, Matra Communications, France Telecom and Telenor. In addition, Intel and Telenor made equity investments in the Company of $2.0 million and $5.5 million, respectively, in early 1997. The Company evaluates, on an ongoing basis, potential strategic alliances and intends to continue to pursue such relationships. The Company's future success will depend significantly on the success of its current arrangements and its ability to establish additional arrangements. There can be no assurance that these arrangements will result in commercially successful products. See "Business -- Collaborative Industry Relationships." COMPETITION The market for digital data security is intensely competitive and characterized by rapidly changing technology. The Company believes that competition in this market is likely to intensify as a result of increasing demand for security products. The Company currently experiences competition from a number of sources, including (i) ActionTec, Carry Computer Engineering, Greystone and Litronics in PC Card adapters, (ii) GemPlus, Hitachi and Toshiba in smart card readers and universal smart card reader interfaces and (iii) GemPlus in DVB-CAM modules. The Company also experiences indirect competition from certain of its customers which currently offer alternative products or are expected to introduce competitive products in the future. In some cases, these vendors also support the Company's products and those of its competitors. The Company may in the future face competition from these and other parties including new entrants, such as Motorola, that develop digital information security products based upon approaches similar to or different from those employed by the Company. In addition, there can be no assurance that the market for digital data 8 10 security products will not ultimately be dominated by approaches other than the approach marketed by the Company. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources than the Company, and as a result, may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or may be able to devote greater resources to the development, promotion and sale of products, or 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 the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share, any of which could have a material adverse effect on the Company's business and operating results. The Company believes that the principal competitive factors affecting the market for digital data security products include support standards and interoperability, technical features, ease of use, quality/reliability, level of security, distribution channels and price. While the Company believes that it competes favorably with respect to these factors, there can be no assurance that the Company will be able to successfully incorporate these factors into its products and to compete against current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business and operating results. MANAGEMENT OF GROWTH The Company's business has grown substantially in recent periods, with net sales increasing from $6.4 million in fiscal 1994 to $21.5 million in fiscal 1996. The growth of the Company's business has placed a significant strain on the Company's management and operations. In addition, a number of key members of the Company's management, including its President and Chief Executive Officer, Chief Financial Officer, Vice President-Operations, and Vice President-Marketing have joined the Company within the past 12 months. Furthermore, in 1993 the Company commenced operations in North America which included the establishment of a U.S. management team. As a result, the Company has a limited operating history under its current U.S. management. In addition, the number of employees has grown from 50 at December 31, 1995 to 64 as of March 31, 1997. If the Company is successful in achieving its growth plans, such growth is likely to place a significant burden on the Company's operating and financial systems, resulting in increased responsibility for senior management and other personnel within the Company. There can be no assurance that the Company's existing management or any new members of management will be able to augment or improve existing systems and controls or implement new systems and controls in response to anticipated future growth. The Company's failure to do so could have a material adverse effect on the Company's business and operating results. See "-- Dependence on Key Personnel; Ability to Recruit Personnel," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTEGRATION OF GLOBAL LOCATIONS The Company's headquarters are located in Los Gatos, California and Pfaffenhofen, Germany, and the Company's research and development facilities are located in Erfurt, Germany and La Ciotat, France. In addition, a significant portion of the Company's contract manufacturing occurs in Singapore. Although the Company seeks to mitigate its diverse geographic locations through the extensive use of electronic mail and teleconferencing, there can be no assurance that it will not encounter unforeseen difficulties or logistical barriers in operating in diverse locations. Furthermore, operations in widespread geographic locations require the Company's information systems to be consolidated, to function in a complex environment and to be fully scalable. Although the Company believes that its information systems are adequate, the Company may in the future have to implement new information systems. Implementation of such new information systems may be costly and may require training of personnel. Any failure or delay in implementing these systems, procedures and controls on a timely basis, if necessary, or in expanding these areas in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's business and operating results. 9 11 PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company generally enters into confidentiality and non-disclosure agreements with its employees and with key vendors and suppliers. The Company's SwapBox trademark is registered in the United States, and the SwapSmart trademark is the subject of an allowed, pending application. The Company will continue to evaluate the registration of additional trademarks as appropriate. The Company currently has one U.S. patent issued; six U.S., one French and one Japanese patent applications pending; and exclusive licenses under four other U.S. patents associated with its products. Furthermore, the Company intends to obtain an exclusive license from one of its employees to five other patents relating to its products. There can be no assurance that any new patents will be issued, that the Company will develop proprietary products or technologies that are patentable, that any issued patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's business. There has also been substantial litigation in the technology industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary technology. The Company has from time to time received claims that it is infringing upon third parties' intellectual property rights, and there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, patents, trademarks or other proprietary rights. On April 28, 1997, Gemplus served the Company with a complaint alleging that the Company's SwapSmart product infringes certain claims of a French patent held by Gemplus. See "Business -- Legal Proceedings." The Company expects that companies in the computer and digital information security market will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business and operating results. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information and software that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary and intellectual property rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company. DEPENDENCE ON CONTRACT AND OFFSHORE MANUFACTURING; LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS The Company has implemented a global sourcing strategy that it believes will enable it to achieve greater economies of scale, improve gross margins and maintain uniform quality standards for its products. The Company currently sources its products through three contract manufacturers in Europe and Asia. In the event any of the Company's contract manufacturers are unable or unwilling to continue to manufacture the Company's products, the Company may have to rely on other current manufacturing sources or identify and qualify new contract manufacturers. In this regard, one of the Company's contract manufacturers has recently been involved in bankruptcy proceedings and may be unable to continue manufacturing the Company's products. Although the Company believes it will be able to rely on other manufacturing sources in order to meet its near-term capacity requirements, there can be no assurance that the Company would be able to identify or qualify new contract manufacturers in a timely manner or that such manufacturers would allocate sufficient capacity to the Company in order to meet its requirements. Any significant delay in the Company's ability to obtain adequate supplies of its products from its current or alternative sources would materially and adversely affect the Company's business and operating results. 10 12 In an effort to reduce manufacturing costs, the Company has shifted volume production of many components of its products to Singapore. The Company is currently considering shifting the production of other components of its products to other suppliers in Europe or Asia. The potential transfer or expansion of production in these facilities will require tight ongoing inventory and cost controls. Difficulties encountered in transferring production may have a disruptive effect on the Company's manufacturing process and increase overall production costs. Due to the substantial concentration of the Company's manufacturing operations in Singapore, a disruption of operations at its facilities in Singapore could have a material adverse effect on the Company's business and operating results. Foreign manufacturing is subject to a number of risks, including transportation delays and interruptions, difficulties in staffing, currency fluctuations, potentially adverse tax consequences and unexpected changes in regulatory requirements, tariffs and other trade barriers, and political and economic instability. The Company relies upon a limited number of suppliers of several key components utilized in the assembly of the Company's products. For example, the Company purchases many of the components for use in its SwapSmart and SwapBox products from Intellicard Systems, a Singapore corporation, and mechanical components for use in its smart card reader product exclusively from Stocko, a German corporation. The Company's reliance on its suppliers involves several risks, including a potential inability to obtain an adequate supply of required components, price increases, late deliveries and poor component quality. Although to date the Company has been able to purchase its requirements of such components, there can be no assurance that the Company will be able to obtain its full requirements of such components in the future or that prices of such components will not increase. In addition, there can be no assurance that problems with respect to yield and quality of such components and timeliness of deliveries will not occur. Disruption or termination of the supply of these components could delay shipments of the Company's products and could have a material adverse effect on the Company's business and operating results. Such delays could also damage relationships with current and prospective customers. See "Business -- Manufacturing." DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE The markets for the Company's products are characterized by rapid technological change, changing customer needs, frequent new product introduction and evolving industry standards and short product lifecycles. The introduction by the Company or its competitors of products embodying new technologies and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. Therefore, the Company's future success will depend upon its ability to successfully develop and to introduce new and enhanced products on a timely and continuous basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. During the second half of 1997, the Company intends to introduce several new products which incorporate new and complex technologies and are expected to be critical to the Company's business and operating results in future periods. The timing and success of product development is unpredictable due to the inherent uncertainty in anticipating technological developments, the need for coordinated efforts of numerous technical personnel and the difficulties in identifying and eliminating design flaws prior to product release. Any significant delay in releasing new products could have a material adverse effect on the ultimate success of a product and other related products and could impede continued sales of predecessor products, any of which could have a material adverse effect on the Company's business and operating results. There can be no assurance that the Company will be able to introduce new products on a timely basis, that new products introduced by the Company will achieve any significant degree of market acceptance or that any such acceptance will be sustained for any significant period. Failure of new products to achieve or sustain market acceptance could have a material adverse effect on the Company's business and operating results. See "Business -- Research and Development." RISKS OF INTERNATIONAL SALES; CURRENCY FLUCTUATIONS The Company was originally a German corporation and continues to conduct a substantial portion of its business in Europe. As a result, approximately 82.5%, 49.0% and 52.5% of the Company's revenues in 1994, 1995 and 1996, respectively, were derived from customers located outside the United States. Because a 11 13 significant number of the Company's principal customers are located in other countries, the Company anticipates that international sales will continue to account for a significant portion of its revenues. As a result, a significant portion of the Company's sales and operations may continue to be subject to certain risks, including tariffs and other trade barriers, difficulties in staffing and managing disparate branch operations, currency exchange risks and exchange controls and potential adverse tax consequences. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business and operating results. As a result of the Company's multinational operations and sales, the Company's operating results are subject to significant fluctuations based upon changes in the exchange rates of certain currencies, particularly the German mark, in relation to the U.S. dollar. Although the Company does not currently engage in hedging activities with respect to its foreign currency exposure, the Company may evaluate hedging strategies intended to reduce such exposure in the future. Although management will continue to monitor the Company's exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company's business and operating results. In the future, the Company could be required to denominate its product sales in other currencies, which would make the management of currency fluctuations more difficult and expose the Company to greater risks in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PRODUCT LIABILITY RISKS Customers rely on the Company's token-based security products to prevent unauthorized access to their digital content. A malfunction of or design defect in the Company's products could result in tort or warranty claims. Although the Company attempts to reduce the risk of exposure from such claims through warranty disclaimers and liability limitation clauses in its sales agreements and by maintaining product liability insurance, there can be no assurance that such measures will be effective in limiting the Company's liability for any such damages. Any liability for damages resulting from security breaches could be substantial and would have a material adverse effect on the Company's business and operating results. In addition, a well-publicized actual or perceived security breach involving token-based security systems could adversely affect the market's perception of token-based security products in general, or the Company's products in particular, regardless of whether such breach is attributable to the Company's products. This could result in a decline in demand for the Company's products, which would have a material adverse effect on the Company's business and operating results. DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL The Company's future performance depends in significant part upon the continued service of Robert Schneider, the Company's Chairman of the Board, Steven Humphreys, the Company's President and Chief Executive Officer, and Bernd Meier, the Company's Chief Operations Officer, as well as its other key technical and senior management personnel. The Company provides compensation incentives such as bonuses, benefits and option grants (which are typically subject to vesting over four years) to attract and retain qualified employees. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business and operating results. The Company believes that its future success will depend in large part on its continuing ability to attract and retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate or retain other highly qualified technical and management personnel in the future. See "Business -- Employees" and "Management." BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS; RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS The Company currently has no specific use planned for a substantial portion of the net proceeds from this offering. As a consequence, the Company's management will have broad discretion to allocate a large percentage of these proceeds to uses which the stockholders may not deem desirable, and there can be no 12 14 assurance that the proceeds can or will yield a return. Although it currently has no present plans, agreements or commitments with respect to any material transaction, the Company could use a portion of these funds for the acquisition of complementary businesses, products and technologies. Future acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and amortization of goodwill and other intangible assets, which could materially adversely affect the Company's business and operating results. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, products and personnel of the acquired company, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no direct prior experience and the potential loss of key employees of both the acquired company and the Company. There can be no assurance that the Company will ever successfully complete an acquisition. The Company has no present plans, agreements or commitments with respect to any material acquisitions of other businesses, products or technologies. See "Use of Proceeds." CONCENTRATION OF STOCK OWNERSHIP; ANTI-TAKEOVER PROVISIONS Upon completion of this offering, the Company's executive officers and directors, together with their affiliates, will beneficially own approximately 23.0% of the Company's outstanding shares of Common Stock. Accordingly, these stockholders, acting together, will continue to be able to exert significant influence over all matters requiring stockholder approval, including the election of the Company's directors and the approval of mergers and other change in control transactions involving the Company. See "Management," "Principal Stockholders" and "Description of Capital Stock." Certain provisions of the Company's Amended and Restated Certificate of Incorporation, amended Bylaws, Delaware law and the Company's indemnification agreements with certain officers and directors of the Company may be deemed to have an anti-takeover effect. Such provisions may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in that stockholder's best interests, including attempts that might result in a premium over the market price for the shares held by stockholders. The Company's Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock, having the number of shares (up to 10,000,000), designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations as determined by the Board of Directors without stockholder approval. The Company's Certificate of Incorporation, as amended and restated, and Bylaws, as amended, also contain a number of provisions that could impede a takeover or change in control of the Company, including but not limited to the elimination of stockholders' ability to take action by written consent without a meeting and the elimination of cumulative voting in the election of directors. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Each of the foregoing provisions gives the Board of Directors, acting without stockholder approval, the ability to prevent, or render more difficult or costly, the completion of a takeover transaction that stockholders might view as being in their best interests. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial offering price will be determined by negotiation between the Company and the Underwriters based upon several factors and may not be indicative of future market prices. The trading price of the Company's Common Stock could be subject to wide fluctuations in response to a number of factors, including quarterly variations in operating results, announcements of technological innovations or new 13 15 products, applications or product enhancements by the Company or its competitors, changes in financial estimates by securities analysts and other events. In addition, the stock market has experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market after this offering could adversely affect the market price of the Company's Common Stock and could impair the Company's ability to raise capital through the sale of equity or equity-related securities. Upon completion of this offering, the Company will have outstanding 9,404,489 shares of Common Stock, assuming no further exercise of options or warrants outstanding as of March 31, 1997. Of these shares, the 2,750,000 shares offered hereby (3,162,500 shares if the Underwriters' overallotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144") described below. The remaining 6,654,489 shares of Common Stock outstanding upon completion of this offering are "restricted securities" as that term is defined in Rule 144. Of the restricted securities, 57,618 shares will be eligible for immediate sale upon commencement of this offering, an additional 94,751 shares will become eligible for sale beginning 90 days after commencement of this offering. Upon expiration of certain Lock-Up Agreements (which occurs on the date 180 days after commencement of this offering), an aggregate of 3,769,539 shares will become eligible for sale pursuant to Rule 144 or Rule 701 under the Securities Act, and 2,732,581 additional shares will become eligible for sale thereafter under Rule 144. See "Shares Eligible for Future Sale." Holders of an aggregate of 6,078,947 shares will have the right to require the Company to register such shares for sale under the Securities Act. See "Description of Capital Stock -- Registration Rights." IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. At an estimated offering price of $ per share, investors purchasing shares in this offering will incur immediate dilution of $ per share. To the extent outstanding options and warrants to purchase the Company's Common Stock are exercised, there will be further dilution to new stockholders. See "Dilution." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,750,000 shares of Common Stock being offered hereby, based on an assumed initial public offering price of $ per share and after deducting the estimated underwriting discount and offering expenses payable by the Company, are estimated to be approximately $ ($ if the Underwriters' over-allotment option is exercised in full). The Company expects to use the net proceeds from this offering for repayment of indebtedness, capital expenditures and general corporate purposes, including working capital. The Company intends to repay approximately $2.5 million, consisting of a term loan from a German bank. This agreement terminates on December 31, 2005 and bears interest at rates ranging from 5.0% to 6.0%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." A portion of the net proceeds may also be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. The Company has no present plans, agreements or commitments and is not currently engaged in any negotiations with respect to any such transactions. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment grade obligations. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock or other securities. The Company has a $2.5 million revolving line of credit with a U.S. bank expiring in August 1997. Under such line of credit, the Company must obtain the bank's prior written consent in order to declare or pay any cash dividends. The Company currently anticipates that it will retain all of its future earnings for use in the expansion and operation of its business and does not anticipate paying any cash dividends in the foreseeable future. 15 17 CAPITALIZATION The following table sets forth: (i) the total capitalization of the Company at March 31, 1997; (ii) such capitalization adjusted on a pro forma basis to give effect to (a) the issuance of 849,790 shares of Preferred Stock subsequent to March 31, 1997 and (b) the Automatic Conversion; and (iii) such pro forma capitalization as adjusted to give effect to the sale by the Company of the 2,750,000 shares of Common Stock offered hereby at an assumed initial public offering price of $ per share (after deducting the underwriting discount and estimated offering expenses) and the application of net proceeds therefrom. See "Principal Stockholders." This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Short-term debt, including current portion of long-term debt(1).................................................. $ 2,523 $ 2,523 $ 2,523 ------- ------- ------- Redeemable Convertible Preferred Stock, $0.001 par value; 6,000,000 shares authorized, 3,094,705 shares issued and outstanding actual; 10,000,000 shares authorized, no shares issued and outstanding pro forma and pro forma as adjusted................................................. $14,554 $ -- $ -- Stockholders' equity (deficit): Preferred Stock, $0.001 par value; 854,038 shares authorized, issued and outstanding actual; no shares pro forma and pro forma as adjusted................... 1 -- -- Common Stock, $0.001 par value; authorized -- 40,000,000 shares actual, pro forma and pro forma as adjusted; issued and outstanding -- 1,855,956 shares actual, 6,654,489 shares pro forma and 9,404,489 shares pro forma as adjusted(2).................................. 2 7 9 Additional paid-in capital............................... 2,444 23,985 Deferred compensation.................................... (204) (204) (204) Accumulated deficit...................................... (8,649) (8,649) (8,649) Currency translation adjustment.......................... (344) (344) (344) ------- ------- ------- Total stockholders' equity (deficit).................. (6,750) 14,795 ------- ------- ------- Total capitalization............................. $10,327 $17,318 $ ======= ======= =======
- --------------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) As of March 31, 1997, there were outstanding options to purchase an aggregate of 358,174 shares of Common Stock a weighted average exercise price of $0.10 per share and 1,225,000 shares were reserved for future issuance under the Company's stock plans. Subsequent to March 31, 1997, the Company issued warrants to purchase an aggregate of 384,121 shares of Common and Preferred Stock at a weighted average exercise price of $7.17 per share. See "Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements. 16 18 DILUTION The pro forma net tangible book value of the Company as of March 31, 1997 was $14,795,000 or $2.22 per common share. Pro forma net tangible book value per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of shares of Common Stock outstanding at that date after giving pro forma effect to (i) the issuance of an aggregate of 849,790 shares of Preferred Stock subsequent to March 31, 1997 and (ii) the Automatic Conversion. After giving effect to the sale by the Company of the 2,750,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $ per share and after deduction of the estimated underwriting discount and offering expenses payable by the Company), the Company's pro forma net tangible book value at March 31, 1997 would have been $ or $ per share. This represents an immediate increase in net tangible book value to existing stockholders of $ per share and an immediate dilution to new investors of $ per share. The following table illustrates the per share dilution: Assumed initial public offering price per share............... $ Net tangible book value per share as of March 31, 1997...... $2.22 Increase per share attributable to new investors............ ----- Pro forma net tangible book value per share after this offering.................................................... ------ Dilution per share to new investors........................... $ ======
The following table sets forth, on the pro forma basis described above, as of March 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by (i) existing stockholders and (ii) new investors at an assumed offering price of $ per share (before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders..................... 6,654,489 70.8% $14,795,000 % $ 2.22 New investors............................. 2,750,000 29.2 --------- ----- ----------- ----- Total........................... 9,404,489 100.0% $ 100.0% ========= ===== =========== =====
The foregoing computations assume no exercise of the Underwriters' over-allotment option and no exercise of stock options outstanding at March 31, 1997. As of March 31, 1997, there were outstanding options to purchase an aggregate of 358,174 shares of Common Stock at a weighted average exercise price of $0.10 per share and 1,225,000 shares were reserved for future issuance under the Company's stock plans. Subsequent to March 31, 1997, the Company issued warrants to purchase an aggregate of 384,121 shares of Common Stock and Preferred Stock at a weighted average exercise price of $7.17 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. See "Capitalization," "Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements. 17 19 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data at December 31, 1995 and 1996 and for each of the years in the three-year period ended December 31, 1994, 1995 and 1996 are derived from consolidated financial statements of the Company that have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included elsewhere in this Prospectus. The consolidated balance sheet data at December 31, 1994 is derived from the audited Consolidated Financial Statements of the Company that are not included herein. The consolidated statement of operations data for the year ended December 31, 1993 and the consolidated balance sheet data at December 31, 1993 are derived from unaudited Consolidated Financial Statements of the Company that are not included herein. The following selected consolidated financial data at March 31, 1997 and for the three-month periods ended March 31, 1996 and 1997 are unaudited but have been prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, that management believes necessary for a fair presentation of the financial position and results of operations for these periods. The historical results are not necessarily indicative of the operating results to be expected in the future. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------- ------------------- 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales(1): Security and access products.................... $ -- $ 1,426 $12,520 $16,628 $ 2,811 $ 4,202 PCMCIA peripheral products...................... 2,379 5,020 5,546 4,892 1,446 163 ------- ------- ------- ------- ------ ------ Total net sales............................... 2,379 6,446 18,066 21,520 4,257 4,365 Cost of sales..................................... 1,779 5,087 15,771 14,880 3,068 2,800 ------- ------- ------- ------- ------ ------ Gross profit...................................... 600 1,359 2,295 6,640 1,189 1,565 Operating expenses: Research and development........................ 691 1,162 1,399 2,386 624 628 Sales and marketing............................. 564 1,224 2,057 3,230 631 895 General and administrative...................... 346 580 1,439 2,004 441 518 ------- ------- ------- ------- ------ ------ Total operating expenses...................... 1,601 2,966 4,895 7,620 1,696 2,041 ------- ------- ------- ------- ------ ------ Loss from operations.............................. (1,001) (1,607) (2,600) (980) (507) (476) Foreign currency transaction gain................. -- -- 11 174 35 67 Interest expense.................................. (95) (261) (337) (304) (25) (66) ------- ------- ------- ------- ------ ------ Net loss.......................................... $(1,096) $(1,868) $(2,926) $(1,110) $ (497) $ (475) ======= ======= ======= ======= ====== ====== Pro forma net loss per share(2)................... $ (0.19) $ (0.08) ======= ====== Shares used to determine pro forma net loss per share(2)........................................ 5,272 6,054 ======= ======
DECEMBER 31, ------------------------------------------- MARCH 31, 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................ $ 115 $ 70 $ 739 $ 2,593 $ 4,946 Working capital (deficit)........................ 454 823 1,620 (1,787) 6,976 Total assets..................................... 1,829 3,452 8,143 11,459 13,374 Long-term debt, less current portion............. 503 3,027 2,147 -- -- Redeemable convertible preferred stock........... -- -- 4,781 5,068 14,554 Total stockholders' equity (deficit)............. 19 (2,027) (4,760) (6,024) (6,750)
- --------------- (1) Through 1994, the Company focused on PCMCIA peripheral products, including flash memory and fax/modem devices. In 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. (2) Share and per share information gives pro forma effect to the Automatic Conversion. See Notes 1, 4 and 10 of Notes to Consolidated Financial Statements. (3) Reflects (i) the issuance of 849,790 shares of Preferred Stock subsequent to March 31, 1997 and (ii) the Automatic Conversion. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section as well as those discussed under the caption "Risk Factors" elsewhere in this Prospectus. OVERVIEW SCM Microsystems designs, develops and manufactures hardware, firmware and software products for data security and access control applications. The Company sells security and access products to OEM computer, telecommunication and DVB component and system manufacturers. The Company's objective is to leverage its expertise in PCMCIA and smart card technologies and its extensible, upgradeable smart card token-based security architecture to capitalize on the growing demand for data and network security and the need to control access to digital information. The Company markets, sells and licenses its products through a direct sales and marketing organization primarily to OEMs and also through distributors, VARs, system integrators and resellers worldwide. OEM customers include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital), Schlumberger, Security Dynamics, Siemens/Nixdorf, Sun Microsystems and Telenor. The Company focuses on security and access products that provide secure access to digital data. The Company's security and access products are targeted at OEM computer, telecommunication and DVB component and system manufacturers. Through 1994, the Company focused primarily on PCMCIA peripheral products, including flash memory and fax/modem devices, which carried a significantly lower gross margin than the Company's current products. In 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. As a result of the Company's strategic shift in product focus, the proportion of security and access product sales increased from 22.1% of total net sales in 1994 to 77.3% of total net sales in 1996. Beginning in 1997, the Company's net sales will be dependent upon the success of its security and access products. A substantial majority of the Company's security and access products are intended for use as components or subsystems in systems manufactured and sold by third party OEMs. In 1996, sales to IBM accounted for 12% of total net sales, sales to BetaDigital, a division of the Kirch Group, accounted for 11% of total net sales and sales to the Company's top 10 customers accounted for 55.0% of total net sales. In addition, sales of the Company's SwapBox product accounted for 62.2% and 54.4% of total net sales in 1995 and 1996, respectively. A substantial majority of the SwapBox products sold by the Company are sold to a number of major OEMs, including IBM, Dell and Packard Bell, each of which in turn supplies products, such as desktop PCs, to the DoD. The Company expects its business to continue to be substantially dependent upon sales of SwapBox products to OEMs that are supplying the DoD, although such dependence may decline as the Company expands its product lines and customer base. The Company frequently enters into contracts with OEMs which provide for shipment of certain quantities of products at specified future dates. Revenue from these contracts, as well as from other sales, is recognized upon shipment of products. As a result of the Company's multinational operations and sales, the Company's operating results are subject to significant fluctuations based upon changes in the exchange rates of certain currencies, particularly the German mark, in relation to the U.S. dollar. For example, the Company's headquarters are located in Los Gatos, California, its international headquarters are located near Munich, Germany and its research and development facilities are located in Erfurt, Germany and La Ciotat, France. In addition, the Company sources its products from contract manufacturers located in Europe and Asia. As a result, a substantial portion of the Company's costs and expenses are denominated in currencies other than the U.S. dollar. For the year ended December 31, 1996, the Company's sales denominated in U.S. dollars was $16.4 million, representing 76.3% of the Company's total net sales. Although the Company does not currently engage in risk management activities with respect to its foreign currency exposure, the Company may evaluate hedging strategies intended 19 21 to reduce such exposure in the future. Although management will continue to monitor the Company's exposure to currency fluctuations, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the Company's business and operating results. The Company experiences substantial seasonality in its business, with approximately one-third of annual net sales being realized in the first half of the year and the remaining two-thirds being realized in the second half of the year. In recent periods, this seasonality has been primarily the result of the Company's reliance on sales of its SwapBox products to OEMs that in turn are selling to U.S. government agencies. The buying pattern of U.S. government agencies tend to be substantially weighted to the third quarter and, to a somewhat lesser extent, the fourth quarter of the calendar year. The strength in net sales in the third quarter which results from the U.S. government buying patterns is somewhat offset by relatively weaker sales in Europe in the same quarter as a result of the traditional European summer vacation patterns. The Company expects that as sales of its DVB products, which are sold to OEMs mainly in Europe for the consumer market, begin to represent a larger percentage of net sales, the seasonality that the Company experiences may be further exacerbated as such sales are likely to be strongest in the fourth quarter of the year. In contrast to net sales, operating expenses tend to be spread relatively evenly across the year. As a result, the Company's operating results have tended to be weakest in first and second quarter of the year. See "-- Quarterly Results of Operations." RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statement of operations as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net sales: Security and access products..................... 22.1% 69.3% 77.3% 66.0% 96.3% PCMCIA peripheral products....................... 77.9 30.7 22.7 34.0 3.7 ----- ----- ----- ----- ----- Total net sales............................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of sales...................................... 78.9 87.3 69.1 72.1 64.1 Gross profit....................................... 21.1 12.7 30.9 27.9 35.9 ----- ----- ----- ----- ----- Operating expenses: Research and development......................... 18.0 7.7 11.1 14.6 14.4 Sales and marketing.............................. 19.0 11.4 15.0 14.8 20.5 General and administrative....................... 9.0 8.0 9.3 10.4 11.9 ----- ----- ----- ----- ----- Total operating expenses...................... 46.0 27.1 35.4 39.8 46.8 ----- ----- ----- ----- ----- Loss from operations............................... (24.9) (14.4) (4.6) (11.9) (10.9) Foreign currency transaction gain.................. 0.0 0.1 0.8 0.8 1.5 Interest expense................................... (4.1) (1.9) (1.4) (0.6) (1.5) ----- ----- ----- ----- ----- Net loss........................................... (29.0)% (16.2)% (5.2)% (11.7)% (10.9)% ===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Net Sales. Net sales reflect the invoiced amount for goods shipped less estimated returns. Revenue is recognized upon product shipment. Net sales for the first quarter of 1997 were $4.4 million, compared with $4.3 million in the first quarter of 1996. Sales of security and access products were $4.2 million in the first quarter of 1997, compared to $2.8 million in the comparable quarter of 1996, an increase of 48%, reflecting the Company's shift in product strategy toward security and access products. This increase was primarily due to an increase in sales of the Company's DVB products, which commenced in the fourth quarter of 1996. The 20 22 Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. Gross Profit. Gross profit for the first quarter of 1997 was $1.6 million, or 35.9% of net sales, compared to $1.2 million, or 27.9% of net sales in the comparable quarter of 1996. The increase in gross profit, both in absolute amount and as a percentage of net sales, was primarily due to the increase in DVB product sales and the corresponding mix shift away from lower margin PCMCIA peripheral products. In addition, the Company's transition from the PCMCIA peripheral products business resulted in reduced labor requirements. The Company believes that its gross profit during 1997 will continue to be above the levels experienced in 1996. The Company's gross profit has been and will continue to be affected by a variety of factors, including competition, product configuration and mix, the availability of new products and product enhancements which tend to carry higher gross profit than older products and the cost and availability of components. Accordingly, there can be no assurance that the Company will achieve the forecasted levels of gross profit. Research and Development. Research and development expenses consist primarily of employee compensation and prototype expenses. To date, the period between achieving technological feasibility and completion of software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Research and development expenses for the first quarter of 1997 were $628,000, compared to $624,000 in the first quarter of 1996, an increase of less than one percent. In the first quarter of 1996, subcontractor expenses for prototype manufacturing were unusually high, due to accelerated development schedules for the Company's new line of smart card readers. Had these expenses been consistent with prior levels, research and development expenses would have shown a 9% increase in the first quarter of 1997 over the comparable quarter of 1996, with this increase due primarily to higher engineering headcount in the Company's French development center. Sales and Marketing. Sales and marketing expenses consist primarily of employee compensation and trade show and other marketing costs. Sales and marketing expenses for the first quarter of 1997 were $895,000, or 20.5% of net sales, compared to $631,000 or 14.8% of net sales in the comparable period of 1996, an increase of 42%. This increase in absolute amount and as a percentage of net sales was due primarily to growth of the Company's sales and marketing headcount in the U.S. and initial promotional efforts in the Asia-Pacific region. Sales and marketing expenses in 1997 are expected to increase in absolute amounts as the Company continues to expand its headcount to support a larger customer base and expanded product line, but to generally remain consistent with or decline slightly from the 1996 results as a percentage of net sales. General and Administrative. General and administrative expenses consist primarily of compensation expenses for employees performing the Company's administrative functions. General and administrative expenses for the first quarter of 1997 were $518,000, or 11.9% of net sales, compared to $441,000, or 10.4% of net sales in the first quarter of 1996, an increase of 17%. General and administrative expenses increased in absolute amount in the first quarter of 1997 and as a percentage of net sales primarily as a result of an increase of administrative headcount in the Company's U.S. and German offices in support of higher levels of business activities. The Company believes general and administrative expenses in 1997 will continue to increase in absolute amount as a result of operating as a public company but that such expenses will remain relatively consistent with the 1996 results as a percentage of net sales. Interest Expense. Interest expense consists of interest on outstanding debt, and was immaterial in the first quarters of 1997 and 1996. In future periods, the Company expects that interest expense will be reduced as a result of the conversion into equity of certain convertible debt on or before the closing of this offering and that interest income will increase as a result of the investment of the proceeds of this offering. Income Taxes. The Company incurred losses in 1995, 1996 and the quarter ended March 31, 1997, and therefore did not incur income tax obligations in these periods. As of December 31, 1996, the Company had German net operating loss carryforwards of approximately $4.6 million available to offset income from the Company's German operations for an indefinite period. In addition, the Company had net operating loss carryforwards of approximately $1.9 million and $800,000 for United States federal and California income tax purposes, respectively. The Company's utilization of United States federal net operating loss carryforwards is limited to approximately $340,000 per year. 21 23 1996 COMPARED TO 1995 Net Sales. Net sales increased 19.1% to $21.5 million in 1996, compared to $18.1 million in 1995. Sales of security and access products represented 77.3% of total net sales in 1996 compared to 69.3% in 1995, reflecting the continued shift in the Company's product strategy toward security and access products. Security and access product sales increased 32.8% to $16.6 million in 1996 compared to $12.5 million in 1995. This increase resulted primarily from increased sales of SwapBox products which began shipping in 1995, as well as sales of security and access products introduced during 1996, including SwapSmart and the Company's DVB products. Consistent with the Company's shift away from PCMCIA peripheral products, sales of such products decreased 11.8% to $4.9 million in 1996 compared to $5.5 million in 1995. In 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. Gross Profit. Gross profit for 1996 was $6.6 million, or 30.9% of net sales, compared to $2.3 million, or 12.7% of net sales in 1995. The substantial increase in gross profit as a percentage of net sales in 1996 was primarily attributable to three factors: (i) during 1996, the Company benefited from manufacturing cost efficiencies associated with the increased sales of security and access products; (ii) as part of the continued shift in 1996 from PCMCIA peripheral products to security and access products, the Company introduced certain new security and access products during 1996 which carried higher gross margins than other products in the security and access product family; and (iii) during 1996, the Company received approximately $1.6 million in nonrecurring engineering revenues with relatively minimal cost of sales. Research and Development. Research and development expenses for 1996 totaled $2.4 million, or 11.1% of net sales, compared to $1.4 million, or 7.7% of net sales in 1995. The increase in research and development spending during 1996 was primarily a result of increased headcount and development activity associated with new product introductions and the opening of the Company's research and development facility in France. Sales and Marketing. Sales and marketing expenses for 1996 totaled $3.2 million, or 15.0% of net sales, compared to $2.1 million, or 11.4% of net sales in 1995. Sales and marketing expenses in 1996 in absolute amount increased primarily as a result of the costs associated with introducing several significant new products during 1996 and the higher headcount costs associated with supporting a broader base of customers and expanded line of products. General and Administrative. General and administrative expenses for 1996 totaled $2.0 million, or 9.3% of net sales, compared to $1.4 million, or 8.0% of net sales in 1995. General and administrative expenses increased in absolute amount in 1996 and as a percentage of net sales primarily as a result of increasing headcount and expanded facilities associated with the overall growth in the business. Interest Expense. Interest expense was immaterial as a percentage of sales in both 1996 and 1995. Income Taxes. The Company incurred losses in 1995 and 1996 and therefore did not incur income tax obligations in these periods. As of December 31, 1996, the Company had deferred tax assets of approximately $2.2 million, resulting primarily from the net operating loss carryforwards. At December 31, 1996, the Company recorded a full valuation allowance for these deferred tax assets as management has concluded that it is more likely than not that the deferred tax assets would not be realized in the future. A future change in the Company's assessment of the likelihood of future realization of deferred tax assets could result in a reduction of the valuation allowance, a corresponding reduction in the Company's income tax expense recorded for financial statement purposes and a corresponding increase in net income. This would not, however, result in a change in actual income taxes payable by the Company in any future period. See Note 6 to the Consolidated Financial Statements. 1995 COMPARED TO 1994 Net Sales. Net sales increased to $18.1 million in 1995, compared to $6.4 million during 1994. Sales of security and access products and sales of PCMCIA peripheral products represented 69.3% and 30.7%, respectively, of total net sales in 1995 compared to 22.1% and 77.9%, respectively, in 1994, reflecting the shift in the Company's product strategy toward security and access products. Security and access product sales increased to $11.1 million in 1995, compared to $1.4 million in 1994. This substantial increase resulted 22 24 primarily from sales of SwapBox products which began shipping in 1995. PCMCIA peripheral product sales increased to $5.5 million in 1995, compared to $5.0 million in 1994. This increase resulted primarily from the expansion in 1995 of the Company's PCMCIA peripheral product line to include fax/modem PC Cards. Gross Profit. Gross profit for 1995 was $2.3 million, or 12.7% of net sales, compared to $1.4 million, or 21.1% of net sales in 1994. The substantial decrease in gross profit as a percentage of net sales in 1995 was primarily attributable to continuing price erosion for the Company's older PCMCIA peripheral products, partially offset by the somewhat better margins associated with the fax/modem product, and to relatively high manufacturing and procurement costs associated with the security access products, particularly SwapBox which was first shipped in 1995. Research and Development. Research and development expenses for 1995 totaled $1.4 million, or 7.7% of net sales, compared to $1.2 million, or 18.0% of net sales in 1994. The decrease in research and development spending in absolute amount in 1995 resulted primarily from a lower level of development effort being devoted to PCMCIA peripheral products and the transfer of certain personnel from research and development functions to operating functions as the Company's products, primarily SwapBox, moved from development stage to production stage. Sales and Marketing. Sales and marketing expenses for 1995 totaled $2.1 million, or 11.4% of net sales, compared to $1.2 million, or 19.0% of net sales in 1994. Sales and marketing expenses increased in absolute amount in 1995 as the Company's headcount expanded, particularly in the United States, and as the Company expanded marketing activities in the U.S. General and Administrative. General and administrative expenses for 1995 totaled $1.4 million, or 8.0% of net sales, compared to $580,000, or 9.0% of net sales in 1994. General and administrative expenses increased in absolute amount in 1995 primarily as a result of an increase in administrative personnel during 1995 to support the growth in the Company's business. Interest Expense. Interest expense was immaterial as a percentage of net sales in 1994 and 1995. Income Taxes. Due to the Company's operating losses, the Company did not incur income tax expense in 1994 or 1995. 23 25 QUARTERLY RESULTS OF OPERATIONS The following tables present certain unaudited consolidated statement of operations data for the third and fourth quarters of 1995, each of the four quarters in the year ended December 31, 1996 and the first quarter of 1997, as well as such data expressed as a percentage of the Company's total net sales for the periods indicated. This data has been derived from unaudited consolidated financial statements and has been prepared on the same basis as the Company's audited Consolidated Financial Statements which appear elsewhere in this Prospectus. In the opinion of the Company's management, this data includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data.
THREE MONTHS ENDED ------------------------------------------------------------------------------------ SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1995 1995 1996 1996 1996 1996 1997 --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS) STATEMENTS OF OPERATIONS DATA: Net sales: Security and access products.... $ 3,952 $4,745 $ 2,811 $2,978 $ 4,927 $5,912 $ 4,202 PCMCIA peripheral products...... 1,476 1,737 1,446 1,278 1,073 1,095 163 ------- -------- ------- ------- - ------- ------- - ------- Total net sales............... 5,428 6,482 4,257 4,256 6,000 7,007 4,365 ------- -------- ------- ------- - ------- ------- - ------- Cost of sales..................... 4,765 5,489 3,068 3,103 3,903 4,806 2,800 Gross profit...................... 663 993 1,189 1,153 2,097 2,201 1,565 ------- -------- ------- ------- - ------- ------- - ------- Operating expenses: Research and development........ 418 437 624 556 598 608 628 Sales and marketing............. 588 726 631 777 889 933 895 General and administrative...... 356 515 441 467 605 491 518 ------- -------- ------- ------- - ------- ------- - ------- Total operating expenses...... 1,362 1,678 1,696 1,800 2,092 2,032 2,041 ------- -------- ------- ------- - ------- ------- - ------- Income (loss) from operations..... (699) (685) (507) (647) 5 169 (476) ------- -------- ------- ------- - ------- ------- - ------- Foreign currency transaction gain (loss).......................... (62) 20 35 21 92 26 67 Interest expense.................. (46) (136) (25) (123) (70) (86) (66) ------- -------- ------- ------- - ------- ------- - ------- Net income (loss)................. $ (807) $ (801) $ (497) $ (749) $ 27 $ 109 $ (475) ======= ======== ======= ======== ======= ======== ======= AS A PERCENTAGE OF TOTAL NET SALES: Net sales: Security and access products.... 72.8% 73.2% 66.0% 70.0% 82.1% 84.4% 96.3% PCMCIA peripheral products...... 27.2 26.8 34.0 30.0 17.9 15.6 3.7 ----- ----- ----- ----- ----- ----- ----- Total net sales............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- ----- ----- Cost of sales..................... 87.8 84.7 72.1 72.9 65.1 68.6 64.1 Gross profit...................... 12.2 15.3 27.9 27.1 35.0 31.4 35.9 ----- ----- ----- ----- ----- ----- ----- Operating expenses: Research and development........ 7.7 6.7 14.7 13.1 10.0 8.7 14.4 Sales and marketing............. 10.8 11.2 14.8 18.2 14.8 13.3 20.5 General and administrative...... 6.6 8.0 10.3 11.0 10.1 7.0 11.9 ----- ----- ----- ----- ----- ----- ----- Total operating expenses...... 25.1 25.9 39.8 42.3 34.9 29.0 46.8 ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations..... (12.9) (10.6) (11.9) (15.2) 0.1 2.4 (10.9) ----- ----- ----- ----- ----- ----- ----- Foreign currency transaction gain (loss).......................... (1.1) 0.3 0.8 0.5 1.5 0.4 1.5 Interest expense.................. (0.9) (2.1) (0.6) (2.9) (1.2) (1.2) (1.5) ----- ----- ----- ----- ----- ----- ----- Net income (loss)................. (14.9)% (12.4)% (11.7)% (17.6)% 0.5% 1.6% (10.9)% ===== ===== ===== ===== ===== ===== =====
24 26 The Company experiences substantial seasonality in its business, with approximately one-third of annual net sales being realized in the first half of the year and the remaining two-thirds being realized in the second half of the year. In recent periods, this seasonality has been primarily the result of the Company's reliance on sales of its SwapBox products to OEMs that in turn sell to U.S. government agencies. The buying pattern of U.S. government agencies tend to be substantially weighted to the third quarter and, to a somewhat lesser extent, the fourth quarter of the calendar year. The strength in net sales in the third quarter which results from the U.S. government buying patterns is somewhat offset by relatively weaker sales in Europe in the same quarter as a result of the traditional European summer vacation patterns. The Company expects that as sales of its DVB products, which are sold to OEMs mainly in Europe for the consumer market, begin to represent a larger percentage of net sales, the seasonality that the Company experiences may be further exacerbated as these sales are likely to be strongest in the fourth quarter of the year. In contrast to net sales, operating expenses tend to be spread relatively evenly across the year. As a result, the Company's operating results have tended to be weakest in first and second quarter of the year. This revenue seasonality is evident in the table above, in which the Company's net sales in 1996 increased each quarter, then declined in the first quarter of 1997. Gross margin generally improved in the second half of 1996 due primarily to the shift in focus away from lower margin PCMCIA peripheral products. Gross margin in the third quarter of 1996 was higher than other quarters in the year due primarily to favorable product mix shift driven by higher sales to OEMs supplying the DoD, combined with volume purchasing which lowered certain component costs. Research and development expenses have generally increased each quarter, due primarily to increased headcount and related expenses in the Company's development centers in La Ciotat, France and Erfurt, Germany. Unusually high research and development expenses were incurred in the first quarter of 1996 due primarily to substantial prototype manufacturing and test expenses related to accelerated project timetables on key development projects. Sales and marketing expenses have generally increased each quarter. In addition, certain sales compensation costs typically fluctuate based on the levels of revenue bookings and shipments. General and administrative expenses have generally increased each quarter to support the increase in business activity. In the fourth quarter of 1995, general and administrative expenses were higher than previous quarters due primarily to additional legal expenses and achievement and accrual of year end management bonuses. In the third quarter of 1996, general and administrative expenses were impacted by costs associated with the recruitment of the Company's President and CEO. The Company's quarterly operating results have in the past varied and may in the future vary significantly. In addition to seasonality, factors affecting operating results include: level of competition; size, timing, cancellation or rescheduling of significant orders; product configuration and mix; market acceptance of new products and product enhancements; new product announcements or introductions by the Company's competitors; adoption of new technologies and standards; deferrals of customer orders in anticipation of new products or product enhancements; changes in pricing by the Company or its competitors; the ability of the Company to develop, introduce and market new products and product enhancements on a timely basis; hardware component costs and availability, particularly with respect to hardware components obtained from sole sources; the Company's success in expanding its sales and marketing programs; technological changes in the market for digital information security products; levels of expenditures on research and development; foreign currency exchange rates; general economic trends and other factors. Because a high percentage of the Company's operating expenses are fixed, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. See "-- Overview." LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations to date principally through private placements of debt and equity securities and, to a lesser extent, borrowings under bank lines of credit. As of March 31, 1997, the Company's working capital was $7.0 million. Working capital increased during the first quarter of 1997 due to $5.1 million proceeds from the private placement of redeemable convertible preferred stock, partially offset by $1.3 million in repayments of bank and other debt, $1.1 million used in operations, and $100,000 for equipment purchases. Working capital also benefited from the conversion of approximately $4.2 million of 25 27 notes payable into redeemable convertible preferred stock. Subsequent to March 31, 1997, the Company raised an additional $7.0 million from the private placement of redeemable convertible preferred stock. The Company has revolving lines of credit with three banks in Germany providing total borrowings of up to 4.5 million DM (approximately $2.7 million). These lines expire at dates ranging from September 30, 1997 to March 31, 1998. The German lines of credit bear interest at rates ranging from 8.0% to 8.75%. Borrowings under the German lines of credit are unsecured. At March 31, 1997, no amounts were outstanding under the German lines of credit. In addition, the Company has a $2.5 million revolving line of credit with a U.S. bank expiring in August 1997. The U.S. line of credit bears interest at the rate of prime plus 1.0% (9.25% at March 31, 1997). Borrowings under the U.S. line of credit are secured by all of the Company's assets. At March 31, 1997, no amounts were outstanding under the U.S. line of credit. In addition to the lines of credit, the Company had outstanding debt at March 31, 1997 totaling approximately $2.5 million, consisting of a term loan from a German bank. This debt bears interest at rates ranging from 5.0% to 6.0%. The term loan also contains certain profit sharing and prepayment provisions. Subsequent to March 31, 1997, the Company and the German bank agreed to amend the loan agreement to eliminate the prepayment provisions in exchange for a warrant to purchase 138,000 shares of Common Stock at an exercise price of $5.72 per share. The Company expects to use a portion of the proceeds of this offering to repay the term loan. See "Use of Proceeds." The Company presently expects that the proceeds of this offering, together with its current capital resources and available borrowings should be sufficient to meet its operating and capital requirements through at least the end of 1998. The Company may, however, seek additional debt or equity financing prior to that time. There can be no assurance that additional capital will be available to the Company on favorable terms or at all. The sale of additional debt or equity securities may cause dilution to existing stockholders. 26 28 BUSINESS SCM Microsystems designs, develops and manufactures hardware, firmware and software products for data security and access control applications. The Company sells security and access products to OEM computer, telecommunication and DVB component and system manufacturers. The Company's objective is to leverage its expertise in PCMCIA and smart card technologies and its extensible, upgradeable smart card token-based security architecture to capitalize on the growing demand for data and network security and the need to control access to digital information. The Company markets, sells and licenses its products through a direct sales and marketing organization primarily to OEMs and also through distributors, VARs, system integrators and resellers worldwide. OEM customers include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital), Schlumberger, Security Dynamics, Siemens/Nixdorf, Sun Microsystems and Telenor. INDUSTRY BACKGROUND Individuals and corporations increasingly rely upon computer networks, the Internet and intranets and direct broadcast systems to access information, entertainment and data in a digital form from their homes and workplaces. This increasing proliferation and reliance upon digital data has caused data security to become a paramount concern of businesses, government, educational institutions and consumers. Regardless of whether the issue is controlling access to proprietary or confidential information such as business data or health records, or whether it is attempting to limit access to digital video broadcasts to paying subscribers, content providers, network and data managers and users of digital data are concerned with controlling access to data and maintaining data security. The enterprise data security market, including electronic commerce applications, and the market for DVB conditional access require a range of products to address their needs. ENTERPRISE DATA SECURITY AND ELECTRONIC COMMERCE Enterprise Data Security Enterprise computing has evolved from highly centralized mainframe computers to widely distributed client/server network-based solutions. Modern enterprises frequently employ one or more local area networks to connect computer users located in a single facility, wide area networks and intranets to connect users in disparate facilities, and the Internet or other direct electronic link to provide internal users access to third party information and to provide customers, vendors and other interested third parties with access to an enterprise's computing resources or information. The growth in Internet usage is expected to increase from approximately 35 million Web users worldwide in 1996 to approximately 160 million users worldwide by 2000 according to International Data Corporation ("IDC"). This shift towards distributed computing is being fueled in part by the growing number of mobile computer users and telecommuters that perform some or all of their work from home or other remote locations. As enterprises move toward distributed computing and make data more accessible to internal and external users, this data has become increasingly vulnerable to unauthorized access. According to the Computer Security Institute ("CSI"), 42% of respondents to its 1996 CSI/FBI Computer Crime and Security Survey acknowledged that they had experienced unauthorized use of their computer systems within the last 12 months. Unauthorized access can range from users who are authorized to access portions of an enterprise's computing resources accessing unauthorized portions, to hackers who have no legitimate access breaking into a network and stealing or corrupting data. The consequences of unauthorized access, which can often go undetected, can range from theft of proprietary information or other assets to the alteration or destruction of stored data. Approximately 78% of respondents to the Fourth Annual Information Week/Ernst & Young Information Security Survey reported that their company suffered a loss related to information security and disaster recovery in the past two years. Some companies reported losses of up to $1 million due to security breaches. As a result of the consequences of unauthorized access, many enterprises have been reluctant to make their computing resources as open as may be desirable, and those that allow access are adopting various security measures to guard against unauthorized access. The Company believes that enterprises seek solutions which will allow them to expand access to data while maintaining adequate security. 27 29 Electronic Commerce The proliferation of PCs in both the home and office combined with widespread access to the Internet have created significant opportunities for online shopping and other electronic commerce. IDC estimates that the total value of goods and services purchased over the Web grew from $3 billion in 1996 to $100 billion in 2000. The Company believes that a key factor constraining the growth in online purchasing has been the lack of adequate data security. As a result of the anonymity of the Internet, merchants and consumers need assurances that customers are correctly identified and that the confidentiality of information such as credit card numbers is maintained. Accordingly, the Company believes that successful expansion of electronic commerce will require the implementation of improved security measures which accurately identify and authenticate users and reliably encrypt data transmissions over the Internet. Common Solutions to Enterprise Data Security and Secure Electronic Commerce Data security and secure electronic commerce generally involve implementing a patchwork of hardware and software solutions operating at a variety of points in a data environment, including router, gateway and server-based hardware solutions, and operating system and applications-level software solutions. [THE DATA SECURITY "PATCHWORK" ILLUSTRATION] Currently, the most common security solution is the installation of one or more firewalls that control the flow of data between segments of an internal network or between an internal network and the Internet or other remote access paths. Firewalls essentially serve as a funnel, analyzing whether a particular communication passing through the funnel is authorized. With the increasing volumes of network traffic, firewalls may no longer be capable of providing adequate levels of protection without impairing the speed of communications. Moreover, new Internet technologies such as Sun Microsystems' Java and Microsoft's ActiveX, which involve the transfer of active programs (applets), and broadcast applications such as PointCast and Marimba, present security risks that are not readily addressed by firewalls. The key to any security system is the ability to reliably identify users in order to prevent unauthorized access to information and resources. Authentication of a user's identification is generally accomplished by one of two approaches: passwords, which are a code known only by a specific user; and tokens, which are user-specific physical devices that only authorized users possess. Passwords, while easier to use, are also the least 28 30 secure because they tend to be short and static, and are often transmitted without encryption. As a result, passwords are vulnerable to decoding or observation and subsequent use by unauthorized persons. Tokens are small devices ranging from simple credit card-like devices to more complex devices capable of generating time-synchronized or challenge-response access codes. Certain token-based systems require both possession of the token itself and a personal identification number ("PIN") to indicate that the token is being used by an authorized user. Such an approach, referred to as two-factor authentication, provides much greater security than single factor systems such as passwords or simple possession of a token. Early implementation of tokens include automatic teller machine ("ATM") cards, which are plastic cards with data encoded on a magnetic strip on the card. ATM cards require the user to possess the ATM card and to know the PIN before engaging in any transaction. While suitable for certain applications, the ATM type card is subject to counterfeiting, tampering and inadvertent data deletion, and can hold only a very limited amount of information. PC Cards represent a more advanced form of token, although their use in security applications has been limited to date. PC Cards are computer peripherals built into a form factor similar in width and length to, but substantially thicker than, a credit card. The standards for PC Cards and the corresponding slots were developed by the PCMCIA. With an installed base of approximately 10 million PCMCIA slots in 1995 according to IDC, PC Card products have been developed for a variety of functions including modems and memory devices. While virtually all portable PCs being sold today contain at least one, and in many cases two, PCMCIA slots as a standard feature, the PCMCIA standard has generally not been widely adopted for desktop computers. The use of PC Cards as security tokens has been endorsed by the DoD as part of its Defense Messaging System ("DMS"). The DMS uses a PC Card known as "Fortezza" as its standard security token. In connection with the DMS, the DoD has mandated that desktop computers supplied to the DoD and its affiliated agencies must incorporate PCMCIA slots in order to accept the Fortezza PC Card identification/authentication token. A further advancement in token implementation is the smart card. Smart cards are credit card-sized plastic cards that contain an embedded microprocessor, memory and a secure operating system. Smart cards have significant advantages over PC Cards, including lower cost, portability and greater durability. Smart cards have been used in applications such as stored value cards, either for making general purchases or for specific applications such as prepaid telephone calling cards, and as health care cards, which are used to store patient and provider information and records. Smart cards are useful as health care cards because they identify the holder for insurance or government payment purposes and store health records that can be accessed and updated by health care providers. Smart card use for these applications has become widespread in Europe, where the existence of multiple languages and currencies has created a demand for common solutions that enable businesses and consumers to conduct their affairs effectively and efficiently while moving from country to country. According to Dataquest, the European market for smart cards has far outpaced that of the United States. Dataquest estimates that in 1995 the U.S. accounted for approximately 10 million units (2%) of the 544 million unit worldwide microprocessor-based smart card market, and projects that this market will grow to 3.4 billion units worldwide by 2001. By the year 2001, Dataquest estimates that Europe, Asia/Pacific and the Americas will account for 40%, 25% and 20%, respectively, of this market. In addition to providing a common record-keeping and stored value solution across multiple languages and currencies, the Company believes that smart cards are ideally suited to serve as tokens for network and electronic commerce security. Microsoft, with its PC/SC Workgroup, and Netscape, with its Security Infrastructure group, have both endorsed smart cards as key components of their respective data security architectures, have released application program interfaces ("APIs") for smart cards and have stated their intentions to support smart cards in future generations of their software products. The Company believes that these companies, together with other enterprises with a financial stake in securing access to digital data and enabling secure electronic commerce such as Verisign and Security Dynamics, will drive the adoption of smart card technology for security applications in the United States. The Company also believes that as smart card- 29 31 based security systems become accepted in the United States, users outside the United States will adopt similar systems. To date, a number of factors have limited broad adoption of smart cards as security tokens. These factors include the requirement for special purpose readers which have been expensive and therefore not widely deployed and the lack of standards governing the operating systems, communication protocols, APIs and similar features of the tokens. These factors have resulted in the deployment of proprietary, closed systems that are not compatible with other systems. In addition, smart cards are relatively low speed serial interface devices which, although capable of providing encryption of passwords or other limited data, are not capable of providing the real-time bulk encryption required for many secured access applications. DIGITAL VIDEO BROADCASTING DVB involves the transmission of video signals in a digital format. In contrast to the traditional analog approach, digital signals allow content providers ranging from broadcast television stations and cable carriers to specialty programming producers to deliver very high resolution, high quality video images. DVB may take the form of currently available direct satellite broadcast services, or alternative services that are expected to be introduced in the near future such as digital cable services and direct broadcast digital television. DVB makes it possible to provide a broader range of private content and nontraditional services than previously available. Businesses, educational institutions and other enterprises could broadcast private content such as product information updates and training or educational content to users in disparate locations, or could provide various interactive products and services via the DVB medium. The Company believes that a primary challenge for broadcasters will be to limit access to their content to the intended users such as those who have purchased appropriate subscriptions or event-by-event pay-per-view privileges. The traditional approach to controlling access has been to sell or lease proprietary set-top boxes (and, in the case of satellite direct broadcast, a receiving antenna) to subscribers. These set-top boxes descramble digital signals and then convert them into analog signals in order to be compatible with the viewer's analog television. While this approach provides the controlled access desired by broadcasters, it limits the range of content available to the consumer. Consumers wishing to obtain content or services from more than one provider would be required to purchase multiple proprietary set-top boxes. Similarly, the use of proprietary set-top boxes may limit broadcasters' ability to upgrade systems that have already been installed in their customers' homes without a costly replacement process. To address the limitations of the closed-system set-top box, the DVB Project, an international consortium of over 170 enterprises involved in varying aspects of DVB including France Telecom, Deutsche Telekom, Nokia, Sony and Philips, has developed standards for the DVB-CI. DVB-CI makes it possible to deliver a universal set-top box capable of receiving content from a variety of providers. The universal set-top box requires use of a smart card token that "unlocks" the specific services to which a consumer has subscribed. With this approach, multiple service providers can deliver digital content to the same "open" set-top box and consumers, using the appropriate conditional access module, can access the content to which they have subscribed. When consumers subscribe to different or additional content services or parents seek to limit the viewing privileges of their children, the service providers need only provide the appropriate smart card to allow access to the new or additional services. The DVB-CI standard addresses the limitations of the closed-system set-top box by making it possible for (i) broadcasters to upgrade systems installed in their customers' homes by downloading new operating system software onto the universal set-top box, (ii) customers to use one universal set-top box to access digital content from various service providers by inserting the appropriate 30 32 conditional access module for each particular service provider and (iii) service providers to secure access to new or additional services by issuing new tokens coded for access to such services. [SECURING DIGITAL VIDEO BROADCASTS ILLUSTRATION] The Company believes that the members of the DVB Project and other interested enterprises will continue to drive the adoption of DVB-CI as the European standard for conditional access to digital content. Moreover, legislation has been enacted in Spain (and may be enacted elsewhere in the future) mandating that set-top boxes comply with the DVB-CI standard in order to assure broad access to digital content without requiring consumers to purchase multiple set-top boxes. The Company believes that similar standards may be adopted in certain Asian countries and the United States in the future. The Company believes that successful implementation of the DVB-CI standard will require the development of hardware that is capable of real time, high bandwidth decryption of the video signal and is remotely updatable to permit providers to offer new content and services without the need to replace equipment. While the current implementation of DVB-CI uses set-top boxes, the Company believes that as the standard evolves and as flexible hardware solutions become available, the DVB-CI capability will be built directly into televisions, PCs and network computers. These devices would then contain the appropriate DVB token slot and reader capabilities, thereby eliminating the need for the separate set-top box while providing the same smart card-based conditional access of current systems. THE SCM MICROSYSTEMS SOLUTION SCM Microsystems provides OEMs with key standards-compliant enabling hardware, firmware and software products and technologies for smart card and other token-based network security systems and conditional access to DVB content and services. Through the use of its extensible core technologies, the Company is able to offer products that address the specific needs of diverse market applications such as enterprise data security and DVB conditional access. 31 33 Enterprise Data Security and Electronic Commerce. The Company's products address the needs of the enterprise data security and electronic commerce markets by providing: PCMCIA BRIDGES FOR SMART CARDS. The Company offers a range of products which enable smart cards to be read and written through standard PCMCIA ports, which eliminates the requirement for special purpose smart card readers and provides interoperability between smart cards and PCs, network computers and other devices. STANDARDS-BASED, INTEROPERABLE PRODUCTS. The Company's products employ an open-systems architecture that provides unique compatibility across a range of hardware platforms and software environments, and that are remotely upgradeable, which provides OEMs with the assurance that their products will be broadly compatible and can be updated as the security infrastructure evolves. SPEED AND PERFORMANCE. The Company's products transparently extend the speed and performance capabilities of smart cards used as security tokens by including encryption/decryption capabilities in certain of its smart card reader products. Digital Video Broadcasting. The Company's products address the needs of the DVB market by providing: INEXPENSIVE, EASY TO DELIVER CONDITIONAL ACCESS MODULES. The Company provides smart card-based conditional access readers and modules which adhere to the DVB-CI standard. These products enable digital content and service providers to control and meter access to content and services through the use of inexpensive smart cards. REAL TIME, HIGH-BANDWIDTH DESCRAMBLING CAPABILITIES. The Company's products are structured to use smart cards as keys to activate the high-bandwidth capabilities of PC Cards. By this approach, smart card-based tokens, which by themselves are not capable of descrambling digital video data at the rate required for digital video broadcast, can still be used to control and meter access to DVB content and services. REMOTE UPGRADE CAPABILITIES. The Company's DVB products incorporate read/write capabilities which permits content and service providers to perform a virtually no-cost upgrade of users' access rights as new products and services are developed and introduced as users' subscription desires change. STRATEGY The Company's objective is to utilize its expertise in PCMCIA and smart card technologies and its extensible, updatable smart card token-based security architecture in order to capitalize on opportunities presented by the growing demand for secure and controlled access to digital information. The Company believes it is well positioned to capitalize on the significant growth projected for smart card-based security and controlled access systems. Key elements of the Company's strategy include the following: Leverage Technology Base; Support Open Systems and Interoperability. The Company has developed extensive expertise and intellectual property in both PCMCIA and smart card technologies. The Company intends to continue to leverage this technology base to provide smart card products that can operate across a variety of hardware platforms and software environments. This technology incorporates upgradeable, firmware-based features which enable smart card readers to be upgraded as new smart card operating systems and communication protocols are adopted. In addition to enabling the Company to respond quickly to industry developments with properly tailored products, this upgradeable architecture protects the investments in smart card hardware. Expand Range of Product Applications. The Company's current products are designed to provide flexible interoperability between smart cards and PCs or set-top boxes. The Company intends to expand the range of its product offerings to address specialized applications such as health care records and identification, televisions and television set-top boxes, customer loyalty programs, personal identification and Internet and intranet access. In addition, the Company intends to develop chip set-based versions of certain of its products in order to reduce their cost and facilitate their easy integration into future generations of televisions, PCs and network computers. 32 34 Increase Penetration of Major OEM Customers; Expand Customer Base. The Company currently sells its products to a number of OEM customers including Bull, Dell, France Telecom, Gateway 2000, IBM, Kirch Group, Packard Bell, Schlumberger, Siemens/Nixdorf and Sun Microsystems. The Company intends to pursue additional opportunities with its existing customers by leveraging its relationships to increase sales. For example, the Company's relationships with its existing customers provide the Company with advanced insight into the current and future needs of these customers, enabling the Company to design specific products to meet the additional product needs of each customer. Moreover, the Company believes that as the needs for data security increase and smart cards gain wider market acceptance, a significant number of additional participants will enter the market. The Company intends to expand its customer base by pursuing opportunities with these new market entrants. Expand Strategic Industry Relationships. The Company has formed strategic relationships with a number of key industry players such as Intel, Matra Communications, France Telecom and Telenor. These relationships provide the Company with access to leading edge technology, marketing and sales leverage and access to key customers and accounts. In addition, in certain cases, the Company's strategic partners have provided funding to the Company in the form of funded research, product purchase prepayment and equity investment. The Company intends to continue to leverage these relationships and to identify additional key industry players with which to form strategic relationships. See "-- Collaborative Industry Relationships." Support Standards Setting Organizations. The Company intends to continue to participate in the standards setting activities for the industries it serves. The Company is a founding member of the PCMCIA and the DVB Project and supports the Common Data Security Access standard developed by Intel and adopted by Netscape. The Company's products are compliant with the RSA public key cryptographic system number 11 ("PKCS #11") standard. Through its participation in standards setting organizations, the Company has successfully had the DVB-CI specification adopted as the standard by the PCMCIA. The Company intends to maintain an active role in these and other appropriate standards setting groups in order to continue to have its technologies adopted as standards where appropriate and to keep apprised of technological advancements as they are developed. TECHNOLOGY The Company believes that smart cards are ideally suited to serve as tokens for digital information security. A smart card is a credit card-sized plastic card which contains a microprocessor, memory and a secure operating system. The card is inserted into a device that reads the information contained on the card and performs an appropriate function. The Company has used its extensible smart card interface architecture to develop open and standard products that support virtually all smart cards regardless of the manufacturer, are accessible through a variety of operating systems and platforms and enable a wide range of secure applications. The Company's extensible smart card interface architecture consists of certain core technologies which provide this interoperability: Silicon and Firmware for Smart Card Readers. SCM Microsystems has developed physical interface technology which provides interoperability between PCs and smart cards from many different smart card manufacturers. The Company's interoperable architecture includes an ISO compliant layer as well as an additional layer for supporting non-ISO compliant smart cards. Through its proprietary integrated circuits and firmware, the Company's smart card reader can be updated electronically to accommodate new types of smart cards without the need to change the reader's hardware. Intel Corporation has become the first company to license the Company's smart card interface. Proprietary PC Card Case. The Company's proprietary PC Card case is an open side case which has guides to ensure the smart card is positioned correctly into the PC Card reader. This hardware technology solves the problem presented by the fact that smart cards and PC Cards have the same width and length. Proprietary Software. The Company has developed a flexible proprietary software architecture for real-time downloading of firmware for new smart card protocol handling requirements into a flash memory chip which resides on the smart card reader. This software, combined with the Company's proprietary integrated circuits and firmware described above, allows the reader to accommodate new types of smart cards without the 33 35 need to change the reader's hardware. Additionally, the Company has developed "flash filing" software, which enables PCMCIA flash memory to function as a flash disk. The Company has filed patent applications with respect to both software applications. Hardware for PC Card Adapters. The Company has developed the interface technology to accommodate multiple PCMCIA slots for ISA, SBus (Sun Microsystems) and PCI bus structures, thus enabling desktop PCs and workstations to be equipped with PCMCIA slots. In particular, the Company has developed a patented dual cable solution with special grounding and termination methods which prevents signal interference between the PCI/ISA bus slots and a large variety of PC Cards. PRODUCTS By bridging smart cards and other secure devices with PCs, workstations and set-top boxes, the Company's products provide cost-effective solutions for conditional access to mobile and desktop computers, workstations, DVB, virtual private networks, electronic files, e-mail and Internet firewalls and secure electronic commerce. The Company's products have been developed utilizing the Company's core competencies in smart card and PC interoperability, PC Card expertise and flash memory chip experience, and all are compliant with the PKCS #11 standard. SCM Microsystems provides high quality, easy-to-use solutions in the following product categories: - --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES - -------------------------------------------------------------------------------------------- SWAPBOX PC CARD ADAPTERS - A peripheral with a PC Card slot which enables desktop PCs (introduced in 1993) and workstations to accept all sizes of PC Cards (Types I, II and III) - Supports a wide variety of PC Card peripherals, including Ethernet, fax/data modems, SCSI, ATA hard drives, flash memory, GPS and Fortezza cards - Available in wide variety of configurations (single and dual slots, front and rear access, floppy/PC combination) - Supports a wide variety of platforms (Win 3.X, 95, NT, OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI, SBus, USB, EPP, SCSI) - Compliant with the PCMCIA standard
- -------------------------------------------------------------------------------- 34 36 - --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES - -------------------------------------------------------------------------------------------- SWAPSMART SMART - A smart card reader that fits in a PC Card slot CARD READERS - Supports all ISO 7816 smart card protocols as well as (introduced in 1995) asynchronous and synchronous smart cards, and supports dual or single card applications - Incorporates an upgradeable firmware-based chip set so that the reader can be automatically updated with additional smart card operating systems, protocols and emerging industry standards - Supports a wide variety of platforms (Win 3.X, 95, NT, OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI) - Compliant with the PCMCIA standard - -------------------------------------------------------------------------------------------- DVB-CAM MODULES - A multi-function PC Card that can include smart card (introduced in 1996) read/write capabilities, MPEG2 descrambling, DVB descrambling and pay-per-view functions - Utilizes a smart card to control access to digital content - Enables "open" set-top boxes - Compliant with the DVB-CI standard - -------------------------------------------------------------------------------------------- SMARTOS UNIVERSAL SMART - A chip and accompanying software which provides a CARD READER INTERFACES cost-effective universal smart card reader interface easily (introduced in 1997) integrated into a wide range of devices - Supports all ISO 7816 smart card protocols, as well as synchronous and asynchronous smart cards - Software upgradeable to support any new smart card protocols, functions and industry standards - Includes dual smart card support, serial and parallel interfaces, LCD and keypad controls
- -------------------------------------------------------------------------------- SWAPBOX PC CARD ADAPTERS Desktop PCs and workstations, in contrast to laptop and notebook PCs, generally do not come equipped with PC Card slots. The Company's SwapBox products are devices with PC Card slots designed to be installed by OEMs into desktop computers, workstations and servers. Coupled with PC Card security tokens, cards or smart card readers such as SCM Microsystems' SwapSmart reader, SwapBoxes allow enterprises to effectively provide authentication, integrity, and confidentiality services. Flash memory cards are widely used with SwapBoxes and SCM Microsystems' proprietary SwapFTL software for data collection applications. SwapBoxes accept any PC Card compliant cards including readers for small form factor memory devices such as Compact Flash, SSFDC, Multimedia and Miniature Cards, allowing flash memory cards to be connected to PCs for quick and easy exchange of electronic images, digital audio recordings and text files. SWAPSMART SMART CARD READERS The SwapSmart reader is a device in a PC Card form factor that provides a portable, universal, secure and cost effective bridge between smart cards and the mobile PC or other products which have PC Card slots. The SwapSmart reader supports all ISO 7816 smart card protocols as well as asynchronous and synchronous smart cards. Furthermore, because the SwapSmart reader incorporates an upgradeable firmware-based chip set, the functionality of SwapSmart products can be automatically updated as additional smart card operating systems and protocols come into use. In addition to broad smart card support, the SwapSmart reader is easily accessible from a wide variety of operating systems and platforms. The SwapSmart reader enables easy access to the growing number of smart card applications such as network, VPN and firewall security as well as local and remote computer access control. Additionally, the SwapSmart reader makes it possible to use smart cards for user authorization and authentication, for e-mail and for secure transactions required for electronic 35 37 commerce. Because of its encryption capabilities, the reader is particularly well suited for security applications, in particular, mobile computing security. Currently, the Company is working with Microsoft's PC/SC Workgroup and with Netscape's Security Infrastructure group to ensure that the SwapSmart reader supports the new open specifications for integrating smart cards with PCs. By supporting a wide range of smart cards and complying with the open standards set by the PC/SC Workgroup, SwapSmart provides maximum interoperability among smart cards and easy access to smart card applications for mobile or desktop PCs. For example, the SwapSmart reader is compliant with the B1 specification for smart card readers developed by Deutsche Telekom, as well as the Common Data Security Access specification developed by Intel and adopted by Netscape for use in Netscape Communicator. DVB-CAM MODULES By combining SCM Microsystems' SwapSmart reader technology with the proprietary descrambling code of a digital content provider, the Company's DVB-CAM provides a cost-effective means of controlling access to digital broadcasts through the use of a PC Card. The DVB-CAM is an all-in-one PC Card that utilizes a smart card to determine if a viewer has access to a given content provider's service. If the viewer is authorized, DVB-CAM descrambles the signal for viewing. The DVB-CAM is the world's first implementation of the DVB-CI standard established by the DVB Project. The DVB-CAM technology enables a variety of critical functions including video-on-demand, pay-per-view, interactive video, home shopping, home banking and games. Since the DVB-CAM can be used in any DVB-CI compliant "open" set-top box, the use of its proprietary technology will allow universal acceptance of a single solution for different set-top box systems. The Company believes that the use of smart card technology combined with the DVB-CI standard will eliminate the need for multiple set-top boxes in order for users to access a broad range of desired broadcast data. The Company's DVB-CAM has already been selected by certain of the major content providers in Europe, including France Telecom, Telenor (Norway Telecom) and The Kirch Group (BetaDigital), who plan to implement the DVB-CI standard through 1997 and 1998. The Company believes that similar standards may be adopted in certain Asian countries and the United States in the future. SMARTOS SMART CARD READER INTERFACES Based on a unique chip and firmware technology which makes it possible to easily integrate smart cards with a wide variety of PC and stand-alone devices, the SmartOS allows companies to integrate smart card support cost-effectively within desktop, notebook or network computers, USB or serial devices and keyboards as well as point of sale (POS) terminals and vending machines. The SmartOS solution allows integrators to utilize only essential components to control cost and maximize design. Many hardware designs may already incorporate a controller chip, such as a keyboard or network computer, but lack an interface unit and firmware for the completion of a smart card reader solution. Instead of being forced to purchase all components, the SmartOS solution offers just those components an integrator needs and those tools necessary for the quick implementation of smart card readers at a minimum cost. 36 38 CUSTOMERS AND APPLICATIONS The Company's security and access products are targeted at OEM computer, telecommunication and DVB component and system manufacturers. The following list sets forth the customers who have purchased in excess of $300,000 of the Company's products during the year ended December 31, 1996. --------------------------------------------------------------------------------- OEM PRODUCTS PURCHASED --------------------------------------------------------------------------------- Bull Smart Card Readers; DVB Modules Dell PC Card Adapters France Telecom Smart Card Readers; DVB Modules Gateway PC Card Adapters IBM PC Card Adapters Kirch Group (BetaDigital) DVB Modules Packard Bell PC Card Adapters Schlumberger Smart Card Readers Siemens/Nixdorf PC Card Adapters; Smart Card Readers Sun Microsystems PC Card Adapters ---------------------------------------------------------------------------------
Sales to a relatively small number of customers historically have accounted for a significant percentage of the Company's total sales. In 1996, sales to IBM accounted for 12% of total net sales, sales to BetaDigital, a division of the Kirch Group, accounted for 11% of total net sales and sales to the Company's top 10 customers accounted for 55% of total net sales. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of the Company's total sales for the foreseeable future. The loss or reduction of orders from a significant customer, including losses or reductions due to manufacturing, reliability or other difficulties associated with the Company's products, changes in customer buying patterns, or market, economic or competitive conditions in the digital information security business, could adversely affect the Company's business and operating results. See "Risk Factors -- Dependence on Sales to OEMs." Examples of applications of the Company's products include the following: Siemens-Nixdorf/Deutsche Telekom. SNI markets SCM Microsystems smart card readers under its own label and integrates them into its systems solutions for sale to major corporate users. For example, Deutsche Telekom is providing its employees with SNI's laptop computers equipped with smart cards and the Company's smart card readers. This enables Deutsche Telekom's remote sales force to gain secure access to the corporate intranet. In addition to controlling initial access to the intranet, the smart card also holds information as to the defined areas and information within the intranet to which the user is permitted access. When the information systems group wants to change a user's access or authorization, they simply download new instructions to the smart card during the session. The next time the user accesses the intranet, his or her updated access is already present on the smart card. This allows Deutsche Telekom to provide extensive information over its intranet, since it knows that the user's identity is verified before access is granted. Principal reasons for SNI's selection of the Company's products were their compliance with the B1 specification for smart card readers developed by Deutsche Telekom, their ability to offer a broad range of smart card support and their ability to offer a broad range of operating system support. The Kirch Group. SCM Microsystems has developed and provides DVB-CI compliant and proprietary DVB-CAM modules under contract to BetaDigital, the technology arm of the Kirch Group. These modules are installed in DVB compliant set-top boxes which Kirch distributes to consumers to allow them to access the Kirch digital entertainment services. These set-top boxes include a smart card, the Company's smart card readers and a generic receiver/tuner unit to provide secure access to its entertainment content and services. Customers can easily add and change the services they receive, and Kirch can easily enable and disable services. Also, individual customers can have different smart cards which permit different services. Although used in the same set-top box, a child's smart card could permit different programming from a parent's smart card. Kirch also can download completely new services to the modules, permitting new capabilities, such as pay-per-view and other electronic transaction-based services, to be added with no additional hardware cost. 37 39 SCM Microsystems' DVB-CAM is the world's first implementation of the DVB-CI standard established by the DVB Project. The principal reason for Kirch's selection of the Company's products was their ability to provide Kirch's customers with an open system that could be upgraded for new functions. SALES AND MARKETING The Company markets, sells and licenses its products primarily to OEMs, and also through distributors, VARs, system integrators and resellers, worldwide through a direct sales and marketing organization. As of March 31, 1997, the Company had 18 full-time employees and consultants engaged in sales and marketing activities. The Company's direct sales staff solicits prospective customers, provides technical advice and support with respect to the Company's products and works closely with customers, distributors and OEMs. In support of its sales efforts, the Company conducts sales training courses, comprehensive targeted marketing programs, including public relations, advertising, seminars, trade shows and ongoing customer and third-party communications programs. The Company also seeks to stimulate interest in digital information security through its public relations program, speaking engagements, white papers, technical notes and other publications. At March 31, 1997, the Company's backlog was approximately $5.6 million, as compared to approximately $6.1 million at December 31, 1996. The Company's backlog consists of all written purchase orders for products which have a scheduled shipment date within the next twelve months. Orders for the Company's products are usually placed by customers on an as-needed basis and the Company has typically been able to ship products within 30 days after the customer submits a firm purchase order. The Company's contracts with its customers generally do not require fixed long-term purchase commitments. In view of the Company's order and shipment patterns and because of the possibility of customer changes in delivery schedules or cancellation of orders, the Company's backlog as of any particular date may not be indicative of sales in any future period. COLLABORATIVE INDUSTRY RELATIONSHIPS SCM Microsystems is party to collaborative arrangements with a number of corporations and is a member of key industry consortia. The Company evaluates, on an ongoing basis, potential strategic alliances and intends to continue to pursue such relationships. The Company's future success will depend significantly on the success of its current arrangements and its ability to establish additional arrangements. There can be no assurance that these arrangements will result in commercially successful products. Matra Communications. In October 1995, the Company, Matra Communications SAS ("Matra SAS") and TEMIC entered into an agreement to submit a proposal to France Telecom, a major supporter of the open set-top box standard and a key player in the DVB-CI specification based on the PC Card standard, for their implementation of DVB-CAM products. In August 1996, France Telecom selected the companies' joint proposal. Pursuant to a 10-year joint development and licensing agreement effective February 1997, the Company and Matra SAS will collaborate in the design, manufacture and sale of DVB-CI compliant products including France Telecom's conditional access system called "Viaccess." In addition, Matra SAS will supply its proprietary transport stream interface, DVB descrambler, DVB demux and associated filtering and buffering for conditional access systems, SCM Microsystems will supply its proprietary smart card reader and PC Card interface and TEMIC will integrate these technologies at the silicon level into a one-chip solution. Initial commercial shipments began in March 1997. Each party will retain rights to the intellectual property it develops under the agreement, subject to the non-exclusive licensing rights of the other party relating to the manufacture of such products. Intel Corporation. In March 1997, the Company and Intel entered into a development and license agreement for cryptographic PC Card-based secure access modules for the PC platform. The Company has granted a non-exclusive license to Intel for certain Company designs and other intellectual property. Intel has agreed to support the Company's programs to design a PC Card token. In addition, Intel also made an equity investment of approximately $2.0 million in the Company. Intel and the Company will jointly promote various industry standards applicable to security products. 38 40 Telenor. In May 1997, the Company and Telenor entered into a development and supply agreement pursuant to which the Company will design, manufacture, test and supply DVB-CAM modules to Telenor. Pursuant to this agreement, Telenor may pay up to an aggregate of $1.2 million to the Company for development costs as the Company achieves certain development milestones. Once the prototype has been approved by Telenor, the Company will supply these modules pursuant to the terms of the agreement. As part of this arrangement, Telenor also made an equity investment of approximately $5.5 million in the Company. Furthermore, the Company has issued 34,965 shares of Preferred Stock to a Telenor affiliate, fifty percent (50%) of which will remain unvested until the Company achieves the mid-point milestone of the project and has been paid by Telenor for such milestone completion. Each party will retain rights to its preexisting intellectual property, and it is expected that any intellectual property that is jointly developed under the agreement will be jointly owned. PCMCIA. SCM Microsystems is an executive and founding member of PCMCIA, an international standards body and trade association with over 500 member companies that was founded in 1989 to establish standards for integrated circuit cards and to promote interchangeability among mobile PCs. Other executive members include Advanced Micro Devices, Apple Computer, Compaq, IBM, Intel, Motorola, Texas Instruments and U.S. Robotics. Since 1990, the Company has been a member of PCMCIA in Europe and currently holds the European Chair position. In 1996, the Company introduced to PCMCIA the DVB-CI standard which was adopted as an extension to its PC Card standard Release 2.0. DVB Project. The Company is a member of the DVB Project, an international standards body with over 200 members that was founded in 1993 to define platforms for the digital television industry. Other key members include France Telecom, Deutsche Telekom, Telenor, Nokia, Sony and Philips. In 1994, the Company was instrumental in the DVB Project's adoption of the PC Card standard as the common interface for digital set-top boxes. As the DVB Project's Compatibility Chair, the Company advances and oversees proposals to provide optimum interoperability between PC Cards and digital set-top boxes. Teletrust. The Company is a member of Teletrust, a German organization whose goal is to provide a legally accepted means to adopt digital signatures. Digital signatures are encrypted personal identifiers, typically stored on a secure smart card, which allow for a high level of security through internationally accepted authentication methods. The Company is actively working on the smart card terminal committee which defines the standards for connecting smart cards to computers for applications such as secure electronic commerce over the Internet. RESEARCH AND DEVELOPMENT To date, the Company has made substantial investments in research and development, particularly in the areas of physical, token-based access devices. The Company's engineering design teams work cross-functionally with marketing managers, applications engineers and customers to develop products and product enhancements. The Company also strives to develop and maintain close relationships with key suppliers of components and technologies which enables the Company to quickly introduce new products that incorporate the latest technological advances. The Company's future success will depend upon its ability to develop and to introduce new products on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. See "Risk Factors -- Dependence on New Products; Rapid Technological Change." The Company's expenses for research and development were approximately $1.2 million, $1.4 million and $2.4 million for the years ended December 31, 1994, 1995 and 1996, respectively. As of March 31, 1997, the Company had 24 full-time employees engaged in research and development activities, including software and hardware engineering, testing and quality assurance and technical documentation. All of the Company's research and development activities occur in France and Germany. The Company has in the past funded a portion of its research and development activities from technology development revenues received from OEM customers in connection with design and development of application specific products. The Company recognized $562,000, $543,000 and $1,579,000 in technology development revenues in 1994, 1995 and 1996, respectively. 39 41 MANUFACTURING AND SOURCES OF SUPPLY The Company sources its products through three contract manufacturers in Europe and Asia. The Company has implemented a global sourcing strategy that it believes will enable it to achieve greater economies of scale, improve gross margins and maintain uniform quality standards for its products. In the event any of the Company's contract manufacturers were unable or unwilling to continue to manufacture the Company's products, the Company may have to rely on other current manufacturing sources or identify and qualify new contract manufacturers. For example, one of the Company's contract manufacturers has recently been involved in bankruptcy proceedings and may be unable to continue manufacturing the Company's products. Although the Company believes it will be able to rely on other manufacturing sources in order to meet its near-term capacity requirements, there can be no assurance in the future that the Company would be able to identify or qualify new contract manufacturers in a timely manner or that such manufacturers would allocate sufficient capacity to the Company in order to meet its requirements. Any significant delay in the Company's ability to obtain adequate supplies of its products from its current or alternative sources would materially and adversely affect the Company's business and operating results. The Company believes that its success will depend in large part on its ability to provide quality products and services. As of March 31, 1997, the Company had 11 full-time employees engaged in manufacturing activities. The Company has a formal quality control program to satisfy its customers' requirements for high quality and reliable products. To ensure that products manufactured by others are consistent with its standards, the Company manages all key aspects of the production process, including establishing product specifications, selecting the components to be used to produce its products and the suppliers of such components and negotiating the prices for such components. In addition, the Company works with its suppliers to improve process control and product design. The Company's quality control specialists conduct on-site inspections throughout the production process. Finally, the Company's products are tested by the Company's contract manufacturers prior to shipment. The Company relies upon a limited number of suppliers of several key components of the Company's products. For example, the Company purchases ASICs for its DVB modules exclusively from TEMIC, PCBs for SwapBoxes exclusively from Vertek in Taiwan and Degussa in Singapore, smart card connectors exclusively from ITT Canon, SwapBox boards and completed products exclusively from Intellicard Systems and SwapSmart mechanical components exclusively from Stocko. The Company's reliance on its suppliers involves several risks, including a potential inability to obtain an adequate supply of required components, price increases, timely delivery and component quality. Although to date the Company has been able to purchase its requirements of such components, there can be no assurance that the Company will be able to obtain its full requirements of such components in the future or that prices of such components will not increase. In addition, there can be no assurance that problems with respect to yield and quality of such components and timeliness of deliveries will not occur. Disruption or termination of the supply of these components could delay shipments of the Company's products and could have a material adverse effect on the Company's business and operating results. Such delays could also damage relationships with current and prospective customers. In the past, due to the Company's quality requirements, the Company has experienced delays in the shipments of its new products principally due to an inability to qualify component parts from third-party manufacturers and other suppliers, resulting in delay or loss of product sales. These delays have not had a material adverse effect upon the Company's business and operating results. However, there can be no assurance that in the future any such delays would not have a material adverse effect upon the Company's business and operating results. COMPETITION The market for digital data security is intensely competitive and characterized by rapidly changing technology. The Company believes that competition in this market is likely to intensify as a result of increasing demand for security products. The Company currently experiences competition from a number of sources, including (i) ActionTec, Carry Computer Engineering, Greystone and Litronics in PC Card adapters, (ii) GemPlus, Hitachi and Toshiba in smart card readers and universal smart card reader interfaces, (iii) GemPlus, Hitachi and Toshiba in DVB-CAM modules. The Company also experiences indirect 40 42 competition from certain of its customers which currently offer alternative products or are expected to and may introduce competitive products in the future. The Company may in the future face competition from these and other parties that develop digital data security products based upon approaches similar to or different from those employed by the Company. In addition, there can be no assurance that the market for digital information security products will not ultimately be dominated by approaches other than the approach marketed by the Company. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources than the Company, and as a result, may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of products, or 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 the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market share, any of which could have a material adverse effect on the Company's business, operating results or financial condition. The Company believes that the principal competitive factors affecting the market for digital data security products include support standards and interoperability, technical features, ease of use, quality/reliability, level of security, distribution channels and price. While the Company believes that it competes favorably with respect to these factors, there can be no assurance that the Company will be able to successfully incorporate these factors into its products and to compete against current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results or financial condition. PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company generally enters into confidentiality and non-disclosure agreements with its employees and with key vendors and suppliers. The Company's SwapBox trademark is registered in the United States, and the SwapSmart trademark is the subject of an allowed, pending application. The Company will continue to evaluate the registration of additional trademarks as appropriate. The Company currently has one U.S. patent issued; six U.S., one French and one Japanese patent applications pending; and exclusive licenses under four other U.S. patents associated with its products. Furthermore, the Company intends to obtain an exclusive license from one of its employees to five other patents relating to its products. There can be no assurance that any new patents will be issued, that the Company will develop proprietary products or technologies that are patentable, that any issued patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's business. There has also been substantial litigation in the technology industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary technology. The Company has from time to time received claims that it is infringing upon third parties' intellectual property rights, and there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, patents, trademarks or other proprietary rights. On April 28, 1997, Gemplus served the Company with a complaint alleging that the Company's SwapSmart product infringes certain claims of a French patent held by Gemplus. See "Business -- Legal Proceedings." The Company expects that companies in the computer and digital information security market will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a 41 43 material adverse effect on the Company's business, operating results or financial condition. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information and software that the Company regards as proprietary. In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary and intellectual property rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company. EMPLOYEES As of March 31, 1997, SCM Microsystems had a total of 64 full-time employees, of which 24 were engaged in engineering, research and development; 18 in sales and marketing; 11 in manufacturing; and 11 in general management and administration. In addition, the Company had a total of 3 part-time employees as of March 31, 1997. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes that its employee relations are good. FACILITIES The Company's principal administrative, sales and marketing facilities are located in approximately 5,300 square feet of space in Los Gatos, California and in approximately 6,000 square feet of space in Pfaffenhofen, Germany. The California facility is leased through October 1998, and the Germany facility is leased through June 2000. The Company also leases its research and development facilities in La Ciotat, France and Erfurt, Germany. The Company believes that its existing facilities are adequate for its current needs. LEGAL PROCEEDINGS The Company is not party to any material legal proceedings at this time. However, on April 28, 1997, Gemplus served the Company with a complaint alleging that the Company's SwapSmart product infringes certain claims of a French patent held by Gemplus. In an unrelated context, Gemplus has indicated that it will offer licenses to the relevant patent on a non-exclusive, non-discriminatory basis for a royalty not to exceed 1% of the net selling price of products practicing the patent. While the outcome of any litigation is uncertain, management of the Company believes that, based upon the defenses available to the Company and Gemplus' stated licensing position, the matter can be resolved without a material adverse effect on the Company's business and operating results. 42 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of March 31, 1997, are as follows:
NAME AGE POSITION - ----------------------------------- ---- ---------------------------------------------------- Robert Schneider................... 47 Chairman of the Board Steven Humphreys................... 35 President, Chief Executive Officer and Director Bernd Meier........................ 47 Chief Operations Officer and Director Nicholas Efthymiou................. 34 Vice President, U.S. Sales and Business Development David Hale......................... 32 Vice President, Operations Jean-Yves Le Roux.................. 37 Vice President, Engineering Edward MacBeth..................... 38 Vice President, Marketing John Niedermaier................... 40 Vice President, Finance and Chief Financial Officer Friedrich Bornikoel(1)............. 47 Director Bruce Graham....................... 36 Director Randall Lunn(2).................... 47 Director Poh Chuan Ng(2).................... 35 Director Andrew Vought(1)(2)................ 42 Director
- --------------- (1) Member of Compensation Committee. (2) Member of Audit Committee Robert Schneider founded the Company in May 1990 as President, Chief Executive Officer, General Manager and Chairman of the Board. Mr. Schneider is currently Chairman of the Board. Mr. Schneider is a Managing Director of the Company's German subsidiary. Mr. Schneider holds a degree in engineering from HTBL Salzburg and a B.A. degree from the Akademie for Business Administration in Uberlinger. Steven Humphreys joined the Company in August 1996 as President and Chairman of the Board. Mr. Humphreys currently is President, Chief Executive Officer and a Director of the Company. From April 1994 until February 1996, Mr. Humphreys was President of Caere Corporation, an optical character recognition software and systems company. From November 1990 until March 1994, he was Vice President of General Electric Information Services, an electronic commerce services provider. Mr. Humphreys holds a B.S. degree from Yale University and a M.S. degree and a M.B.A. degree from Stanford University. Bernd Meier joined the Company in January 1992 as General Manager and as a Director of the Company. Mr. Meier is currently the Chief Operations Officer, a Director of the Company and a Managing Director of the Company's German subsidiary. Mr. Meier holds a degree in engineering from Fachhochschule Dieburg. Nicholas Efthymiou has held various sales and marketing positions since joining the Company as Vice President, Marketing in February 1992. Mr. Efthymiou is currently Vice President, U.S. Sales and Business Development. Mr. Efthymiou holds a B.S.E.E. degree from S.U.N.Y. at Buffalo and a M.B.A. degree from the University of Texas. David Hale has served as Vice President, Operations since October 1996. From October 1991 until September 1996, Mr. Hale held various management positions at a subsidiary of Solectron, an electronics manufacturing company, where he most recently served as operations manager. Mr. Hale holds a B.S.I.E. degree and a M.A. degree and a M.B.A. degree from Stanford University. Jean-Yves Le Roux joined the Company in May 1995 as Manager, Research and Development. Mr. Le Roux is currently Vice President, Engineering. From September 1991 until March 1995, Mr. Le Roux was Manager, PCMCIA Research and Development of Gemplus, a smart card products supplier. Mr. Le Roux holds an engineering degree from E.O.E.S. Angers France. 43 45 Edward MacBeth joined the Company in August 1996 as Vice President, Marketing. From September 1994 until August 1996, Mr. MacBeth was Director, Marketing and Business Development of Caere Corporation, and from September 1992 until September 1994, he was President of Fit Software, a software development company. Mr. MacBeth holds a B.S. degree from California Polytechnic State University, San Luis Obispo and a M.B.A. degree from San Jose State University. John Niedermaier joined the Company in April 1997 as Vice President, Finance and Chief Financial Officer. From November 1995 until March 1997, Mr. Niedermaier was Vice President, Finance and Chief Financial Officer of Voysys Corporation, a provider of telecommunications systems for small businesses, and from April 1994 until November 1995, he was Director, Business Planning at Octel Communications Corporation, a voice messaging company. From November 1989 until March 1994, Mr. Niedermaier was Vice President, Corporate Controller of VMX, Inc., a voice processing company, which merged with Octel in March 1994. Mr. Niedermaier holds a B.S. degree from Wayne State University. Friedrich Bornikoel has served as a Director of the Company since September 1993. Mr. Bornikoel joined TVM Techno Venture Management GmbH, a venture capital firm, in July 1987 and has been a Partner since 1990. Mr. Bornikoel is a director of several privately held companies. Mr. Bornikoel holds a Masters degree in Physics from the Technical University of Munich. Bruce Graham has served as a Director of the Company since July 1995. Mr. Graham has been a Partner of Bessemer Venture Partners, a venture capital firm, since December 1996. From 1991 until December 1996, Mr. Graham was an Associate and Vice President at Vertex Management, a venture capital firm. Mr. Graham is a director of several privately held companies. Mr. Graham holds a B.S. degree in Chemical Engineering from Princeton University and a M.B.A. degree from Stanford University. Randall Lunn has served as a Director of the Company since November 1993. Mr. Lunn has been a Partner of TVM Techno Venture Management, L.P., a venture capital firm, since May 1990. Mr. Lunn is a director of several privately held companies. Mr. Lunn holds a B.A. degree, a B.S. degree in Engineering and a M.B.A. degree from Dartmouth College. Poh Chuan Ng has served as a Director of the Company since June 1995. Mr. Ng is currently a Managing Director and Chairman of the Board of Global Team Technology Pte. Ltd., a venture investment subsidiary of Intellicard Systems Pte. Ltd., a contract manufacturing company ("Intellicard"). From September 1994 through May 1997, Mr. Ng served as Director, Business Development at Intellicard. Prior to joining Intellicard, Mr. Ng was a product engineering manager for Compaq Computer Corp. Mr. Ng is a director of several privately held companies. Mr. Ng holds a B.S.E. degree from the National University of Singapore. Andrew Vought has served as a Director of the Company since March 1996. Mr. Vought has been a Partner of Cheyenne Capital Corporation since January 1995 and has been Vice President, Chief Financial Officer and Secretary of Advanced Telecommunications Modules Ltd., an ATM networking equipment company, since May 1996. From May 1990 until April 1994, Mr. Vought was Vice President, Chief Financial Officer and Secretary of MicroPower Systems, Inc., an analog and mixed signal semiconductor company. Mr. Vought is a director of several privately held companies. Mr. Vought holds a B.S. degree and a B.A. degree from the University of Pennsylvania and a M.B.A. degree from Harvard University. TERM OF OFFICE OF DIRECTORS AND OFFICERS The Company's Bylaws and Certificate of Incorporation provide that effective as of the date of the first regularly scheduled meeting of the stockholders following the date on which the Company becomes subject to the periodic requirements of the Securities Exchange Act of 1934, as amended, the directors of the Company will be divided into three classes equal in size with each class elected to a staggered three-year term. Each director will hold office until the expiration of the term of his or her respective class and until his or her respective successor has been duly elected and qualified. 44 46 BOARD COMMITTEES In March 1997, the Board established an Audit Committee and a Compensation Committee. The Audit Committee, currently comprised of directors Randall Lunn, Poh Chuan Ng and Andrew Vought, recommends to the Board of Directors the engagement of the Company's independent accountants, reviews with the accountants the plan, scope and results of their examination of the consolidated financial statements. The Compensation Committee, currently comprised of directors Friedrich Bornikoel and Andrew Vought, reviews and makes recommendations to the Board of Directors regarding all forms of compensation to be provided to the executive officers, directors and consultants to the Company. DIRECTOR COMPENSATION Beginning April 1, 1997, nonemployee members of the Company's Board of Directors ("Outside Directors") receive an annual fee of $10,000 plus $1,000 for each board meeting attended in person for their services as directors. Prior to that time, directors did not receive compensation for services as directors. The Company's 1997 Director Option Plan (the "Director Plan") was adopted by the Board of Directors in March 1997. A total of 50,000 shares of Common Stock has been reserved for issuance under the Director Plan. However, an annual increase will be made to the Director Plan on each anniversary date of adoption of the Director Plan, in an amount equal to the number of shares underlying options granted in the immediately preceding year or a lesser amount determined by the Board. Each Outside Director of the Company will be granted an option to purchase up to 10,000 shares of Common Stock (5,000 shares for outside directors who are affiliated with entities holding 5% or more of the Company's voting stock) upon the effective date of the Director Plan and will be granted a subsequent annual option to purchase 5,000 additional shares of Common Stock under the Director Plan. Options granted under the Director Plan are not transferable unless approved by the Board. The Company's Director Plan will terminate in 2007. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No interlocking relationship exists between the Company's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation, as amended and restated, limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors except for liability arising out of (i) a breach of their duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (iv) any transaction from which the director derived an improper personal benefit. The Company's charter documents provide that the Company shall indemnify its officers, directors and agents to the fullest extent permitted by law, including those circumstances where indemnification would otherwise be discretionary. The Company believes that indemnification under its charter documents covers at least negligence and gross negligence on the part of indemnified parties. The Company has entered into indemnification agreements with each of its directors and officers which may, in some cases, be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify each director and officer against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature) and to advance such persons' expenses incurred as a result of any proceeding against him or her as to which such person could be indemnified. 45 47 At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding that could result in a claim for such indemnification. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth all compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the year ended December 31, 1996 for the Company's Chief Executive Officer and the Company's most highly compensated other executive officers whose salary and bonus for such year exceeded $100,000 (collectively, the "Named Executive Officers").
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(2) - ---------------------------------------- --------- -------- ------------ ------------------ Robert Schneider........................ 154,800 63,000 50,576 1,935 Managing Director of German subsidiary Steven Humphreys(1)..................... 76,064 -- 276,570 100 President and Chief Executive Officer Bernd Meier............................. 154,800 99,000 201,025 1,935 Chief Operations Officer and Managing Director of German subsidiary Nicholas Efthymiou...................... 100,001 24,625 75,544 240 Vice President, U.S. Sales and Business Development
- --------------- (1) Mr. Humphreys began working at the Company in August 1996. (2) Represents life insurance premiums. Option Grants During 1996. The following table sets forth for each of the Named Executive Officers certain information concerning stock options granted during 1996.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK ----------------------------------------------------- PRICE NUMBER OF PERCENT OF TOTAL APPRECIATION SECURITIES OPTIONS FOR OPTION UNDERLYING GRANTED TO EXERCISE TERM(2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------- NAME GRANTED 1996 PER SHARE DATE(1) 5%($) 10%($) - -------------------------------- ---------- ---------------- --------- --------- ------- ------- Robert Schneider................ 50,576 7% $0.10 7/7/2006 3,181 8,061 Steven Humphreys................ 276,570 38% 0.10 7/7/2006 17,393 44,078 Bernd Meier..................... 201,025 28% 0.10 7/7/2006 12,642 32,038 Nicholas Efthymiou.............. 75,544 10% 0.10 7/7/2006 4,751 12,040
- --------------- (1) Options generally vest as to 25% of the shares one year from the date of grant and monthly thereafter for the succeeding 36 months. Options may generally be exercised ahead of vesting, subject to a right of the Company to repurchase the unvested portion of the shares if the optionee's status as an employee or consultant is terminated or upon the optionee's death or disability prior to the shares vesting. (2) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the Company's future Common Stock prices. The actual value realized may be greater or less than the potential realizable values set forth in the table. 46 48 Year-End Option Values. The following table sets forth, for each of the Named Executive Officers, the year-end value of unexercised options as of December 31, 1996:
NUMBER OF SECURITIES UNDERLYING VALUE(1) OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY AT YEAR-END(#): OPTIONS AT YEAR-END: NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2) - ----------------------------------------------- ------------------------- ---------------------------- Robert Schneider............................... 88,988/ -- 185,095/ -- Steven Humphreys............................... -- /276,570 -- /575,266 Bernd Meier.................................... 239,437/ -- 498,029/ -- Nicholas Efthymiou............................. 88,348/ -- 183,734/ --
- --------------- (1) Market value of underlying securities at year-end minus the exercise price. Year-end market value of the Common Stock ($2.18 per share) was determined by the Board of Directors by reference to an independent appraisal. (2) Options are generally exercisable by the optionee ahead of vesting. Unvested shares purchased on exercise of an option are subject to a repurchase right of the Company, and may not be sold by an optionee until the shares vest. Options indicated as "Exercisable" are those options which were both vested and exercisable as of December 31, 1996. All other options are indicated as "Unexercisable." EMPLOYMENT CONTRACTS The Company's German subsidiary has entered into substantially similar employment agreements with each of Messrs. Schneider and Meier pursuant to which each serves as a Managing Director of the subsidiary. Each agreement continues for an indefinite term and each party may terminate the agreement at any time with six months notice. Each executive receives an annual base salary of $190,000 and an annual bonus of up to $75,000. Furthermore, each executive is subject to a non-compete provision for a period of one year after the termination of employment. In addition, the Company has entered into an employment agreement, dated June 2, 1995, with Mr. LeRoux. The initial salary under the agreement is FF 475,000 per year, including a bonus of FF 70,000. Either party may terminate the agreement at any time. EMPLOYEE STOCK PLANS 1997 Stock Plan The Company's 1997 Stock Plan (the "1997 Plan") provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for the granting to employees and consultants of nonstatutory stock options and stock purchase rights ("SPRs"). The 1997 Plan was approved by the Board of Directors in March 1997, and by the stockholders in April 1997. Unless terminated sooner, the 1997 Plan will terminate automatically in March 2007. A total of 1,000,000 shares of Common Stock are currently reserved for issuance and 314,400 have been issued pursuant to the 1997 Plan. An annual increase will be made to the 1997 Plan on each anniversary date of the adoption of the 1997 Plan, in an amount equal to the lesser of 500,000 shares, three percent of the outstanding shares on such date, or a lesser amount determined by the Board. The 1997 Plan may be administered by the Board of Directors or a committee of the Board (the "Committee"), which Committee shall, in the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, consist of two or more "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code. The Committee has the power to amend, suspend or terminate the 1997 Plan (provided that no such action may affect any share of Common Stock previously issued and sold or any option or SPR previously granted under the 1997 Plan), to determine the terms of the options and SPRs granted, including the exercise price, the number of shares subject to each or SPR option, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Committee has the authority to prescribe, amend and rescind rules and regulations 47 49 relating to the 1997 Plan. Pursuant to this authority, the Committee has approved the 1997 Stock Option Plan for French Employees (the "French Plan") in April 1997, pursuant to which stock options that qualify for preferential tax treatment under French tax law may be granted. The French Plan will be submitted to the Company's stockholders for their approval. Options and SPRs granted under the 1997 Plan are not generally transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1997 Plan must generally be exercised within three months of the end of optionee's status as an employee or consultant of the Company, or within twelve months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term. In case of SPRs, unless the Committee determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Committee. The exercise price of options granted under the 1997 Plan is determined by the Committee, but with respect to incentive stock options, and nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must at least be equal to the fair market value of the Common Stock on the date of grant. The term of options granted under the 1997 Plan generally may not exceed ten years. The 1997 Plan provides that in the event of a merger of the Company with or into another corporation, a sale of substantially all of the Company's assets or a like transaction involving the Company, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted for as described in the preceding sentence, the Optionee shall fully vest in and have the right to exercise the option or SPR as to all of the optioned stock, including shares as to which it would not otherwise be vested or exercisable. If the Administrator makes an option or SPR fully vested and exercisable in the event of a merger or sale of assets, the Administrator shall notify the optionee that the option or SPR shall be fully vested and exercisable for a specified period from the date of such notice, and the option or SPR will terminate upon the expiration of such period. 1997 Employee Stock Purchase Plan The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in March 1997 and by the stockholders in April 1997. A total of 175,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. However, an annual increase will be made to the Purchase Plan on each anniversary date of the adoption of the Purchase Plan, in an amount equal to the lesser of 150,000 shares, one percent of the outstanding shares on such date, or a lesser amount determined by the Board. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, is implemented by consecutive overlapping twenty-four month offering periods beginning on the first trading day on or after May 1 and November 1 each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or after April 30, 1999. Each offering period contains four purchase periods of approximately six months duration during which a participant may accumulate payroll deductions and purchase Common Stock. The Purchase Plan is administered by the Board of Directors or by a committee appointed by the Board. Employees are eligible to participate if they are customarily employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions of up to 10% of an employee's compensation (including commissions, overtime and other bonuses and incentive compensation), up to a maximum of $5,000 for each purchase period. The price of stock purchased under the Purchase Plan is 85% of the lower of the fair market value of the Common Stock at the beginning of the offering period or the end of the applicable purchase period. Employees may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. 48 50 Rights granted under the Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the Purchase Plan. The Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of all or substantially all of the Company's assets, each participant's right to purchase Common Stock will assumed or an equivalent right substituted by the successor corporation. If the successor corporation refuses to undertake such an assumption or substitution, the Board of Directors shall shorten the offering period then in progress (so that employees' rights to purchase stock under the Purchase Plan are exercised prior to the merger or sale of assets). The Purchase Plan will terminate in 2007. The Board of Directors has the authority to amend or terminate the Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock under the Purchase Plan. 1997 Employee Stock Purchase Plan for Non-U.S. Employees The 1997 Employee Stock Purchase Plan for Non-U.S. Employees (the "International Purchase Plan") was adopted by the Board of Directors in April 1997. The number of shares reserved for issuance under the International Purchase Plan equals the number of shares reserved for issuance under the Purchase Plan, but not yet issued. The terms of the International Purchase Plan are substantially similar to those of the Purchase Plan, except that employees need not be customarily employed by the Company or a participating subsidiary for at least 20 hours per week and more than five months per calendar year to participate. The International Purchase Plan is not intended to qualify under Section 423 of the Code. CERTAIN TRANSACTIONS From time to time, Robert Schneider loaned to the Company various amounts up to approximately DM 240,000. As of December 31, 1996, the amount outstanding under these loans was approximately DM 100,000. In March 1997, the Company and Intel entered into a three-year development and license agreement. As part of this arrangement, Intel has made an equity investment of $2.0 million in the Company and beneficially owns approximately 5.2% of the Company's Common Stock, assuming the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock. In May 1997, the Company and Telenor entered into a development and supply agreement. As part of this agreement, Telenor has purchased 640,000 shares of Preferred Stock for approximately $5.5 million, received 34,965 additional shares of Preferred Stock in exchange for certain technology rights and received a warrant to purchase an additional 194,930 shares of Preferred Stock for $5.72 per share. See "Business -- Collaborative Industry Relationships" and "Principal Stockholders." 49 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 31, 1997 and as adjusted to reflect the sale of the Common Stock offered hereby for (i) each person or entity who is known by the Company to beneficially own five percent or more of the outstanding Common Stock of the Company prior to this offering, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group.
PERCENT BENEFICIALLY OWNED(1) NUMBER OF SHARES ---------------------------------- NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PRIOR TO OFFERING AFTER OFFERING - ------------------------------------------------- --------------------- ----------------- -------------- Telenor Venture AS(2)............................ 869,895 12.7% 9.1% P.O. Box 6701, St. Olavs plass N-0130 Oslo, Norway (APM) AlpinvestInternational B.V.(3)............. 784,128 11.8 8.3 Gooimeer 3 P.O. Box 5073 1410 AB Naarden, The Netherlands Robert Schneider(4).............................. 686,944 10.3 7.3 c/o SCM Microsystems GmbH Luitpoldstrasse 6 D-85276 Pfaffenhofen Germany TVM Techno Venture Management GmbH(5)............ 667,857 10.0 7.1 c/o Friedrich Bornikoel Tolzerstrasse 12A 82031 Grunwald Germany Bernd Meier(6)................................... 621,002 9.3 6.6 c/o SCM Microsystems GmbH Luitpoldstrasse 6 D-85276 Pfaffenhofen Germany Vertex Investment (II) Ltd.(7)................... 580,187 8.7 6.2 83, Science Park Drive #01-01/02 Singapore 0511 Singapore Intel Corporation................................ 349,650 5.3 3.7 c/o Laila Partridge 2200 Mission College Boulevard Santa Clara, CA 95052 Steven Humphreys(8).............................. 276,570 4.0 2.9 Nicholas Efthymiou(9)............................ 219,591 3.3 2.3 Friedrich Bornikoel(10).......................... -- -- -- Bruce Graham..................................... -- -- -- Randall Lunn(11)................................. -- -- -- Poh Chuan Ng(12)................................. 172,856 2.6 1.8 Andrew Vought(13)................................ 98,627 1.5 1.0 All directors and executive officers as a group (13 persons)(14)............................... 2,165,857 32.5% 23.0%
- --------------- (1) Assumes conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable but not necessarily vested within 60 days of June 30, 1997 50 52 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. (2) Includes warrants to purchase 194,930 shares of Series F Preferred Stock exercisable before June 30, 1997. (3) Includes warrants to purchase 5,537 shares of Series D Preferred Stock exercisable before April 15, 2003. (4) Includes 32,010 shares held by Robert Schneider's wife, Ursula Schneider. (5) Includes (i) warrants to purchase 2,872 shares of Series D Preferred Stock exercisable before April 15, 2003, (ii) 259,315 shares held by TVM Eurotech Ltd. and (iii) warrants to purchase 1,845 shares of Series D Preferred Stock exercisable before April 15, 2003 held by TVM Eurotech Ltd. (6) Includes (i) 16,005 shares held by Bernd Meier's wife, Sonja Meier, (ii) 48,015 shares held in trust for Reiner Pohl and (iii) 131,243 shares held in trust for Nicholas Efthymiou. (7) Includes warrants to purchase 8,017 shares of Series D Preferred Stock exercisable before April 15, 2003. (8) Includes options to purchase 276,570 shares of Common Stock exercisable within 60 days of June 30, 1997, 74,904 of which will be vested as of such date and the remainder of which would be subject to repurchase by the Company until vested. (9) Includes 131,243 shares held by Bernd Meier in trust for the benefit of Mr. Efthymiou. (10) Mr. Bornikoel is a partner of TVM Techno Venture Management GmbH. Mr. Bornikoel disclaims beneficial ownership of shares beneficially owned by such entity except to the extent of his pecuniary interest therein. (11) Mr. Lunn is a partner of TVM Techno Venture Management L.P. Mr. Lunn disclaims beneficial ownership of shares beneficially owned by such entity except to the extent of his pecuniary interest therein. (12) Includes 172,856 shares beneficially owned by Intellicard Systems Pte. Ltd. Mr. Ng may be deemed to be an affiliate of such entity and thus may be deemed to beneficially own such shares. (13) Includes 24,327 shares held by Genevest Consulting Group and 74,300 shares held by Index Special Fund, venture capital funds with which Mr. Vought is affiliated. (14) Includes shares and exercisable options and warrants which may be deemed to be beneficially owned by certain directors and executive officers. See Notes 3, 5, 8, 9, 10, 11, 12 and 13 above. 51 53 DESCRIPTION OF CAPITAL STOCK At the consummation of this offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock, $0.001 par value, and 10,000,000 shares of Preferred Stock, $0.001 par value. COMMON STOCK As of March 31, 1997, there were 6,654,489 shares of Common Stock outstanding (after giving effect to the conversion of all Preferred Stock into Common Stock) held of record by approximately 80 stockholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock to be outstanding upon consummation of the offering will be fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, 10,000,000 shares of undesignated Preferred Stock will be authorized, and no shares will be outstanding. The Board of Directors has the authority to issue the shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders. Although it presently has no intention to do so, the Board of Directors, without stockholder approval, can issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company. WARRANTS Upon the closing of this offering, the Company will have outstanding warrants to purchase an aggregate of 384,121 shares of Common Stock at a weighted average exercise price of $7.17 per share. ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Amended and Restated Certificate of Incorporation, amended Bylaws, Delaware law and the Company's indemnification agreements with certain officers and directors of the Company may be deemed to have an anti-takeover effect. Such provisions may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in that stockholder's best interests, including attempts that might result in a premium over the market price for the shares held by stockholders. The Company's Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock, having the number of shares (up to 10,000,000), designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations as determined by the Board of Directors without stockholder approval. The Company's Certificate of Incorporation, as amended and restated, and Bylaws, as amended, also contain a number of provisions that could impede a takeover or change in control of the Company, including but not limited to the elimination of stockholders' ability to take action by written consent without a meeting and the elimination of cumulative voting in the election of directors. 52 54 In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Each of the foregoing provisions gives the Board of Directors, acting without stockholder approval, the ability to prevent, or render more difficult or costly, the completion of a takeover transaction that stockholders might view as being in their best interests. REGISTRATION RIGHTS Upon the closing of this offering, the holders or their permitted transferees ("Holders") of approximately 6,078,947 shares of Common Stock are entitled to certain rights with respect to the registration of such shares under the Securities Act. If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, the holders are entitled to notice of the registration and are entitled to include, at the Company's expense, shares therein. In addition, certain of the Holders may require the Company at its own expense, on not more than two occasions, to file a registration statement under the Securities Act, with respect to their shares of Common Stock, and the Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations. Further, the Holders may require the Company, at its expense, to register shares of Common Stock on a Registration Statement on Form S-3, when such form becomes available to the Company, subject to certain conditions and limitations. See "Shares Eligible For Future Sale." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is First National Bank of Boston. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 9,404,489 shares of Common Stock, assuming no exercise of options or warrants outstanding as of March 31, 1997. Of these shares, the 2,750,000 shares offered hereby (3,162,500 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144") described below. The remaining 6,654,489 shares of Common Stock outstanding upon completion of this offering are "restricted securities" as that term is defined in Rule 144. Of these shares, 57,618 will be eligible for immediate sale upon commencement of the offering, an additional 94,751 shares will become eligible for sale beginning 90 days after commencement of this offering. Upon expiration of the Lock-Up Agreements described below (which occurs 180 days after the commencement of this offering), an aggregate of 3,769,539 shares will become eligible for sale pursuant to Rule 144 or Rule 701 under the Securities Act ("Rule 701") and 2,732,581 additional shares will become eligible for sale thereafter under Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner except an affiliate from whom such shares were purchased) is entitled to sell in "broker's transactions" or to market makers, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 94,000 shares immediately after this offering) or (ii) generally, the average weekly trading volume in the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner other than an 53 55 affiliate from whom such shares were purchased), is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Under Rule 701, persons who purchase shares upon exercise of options granted prior to the effective date of this offering are entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice provisions of Rule 144. Pursuant to the Lock-Up Agreements, the Company and certain stockholders owning upon completion of this offering, in the aggregate, 6,338,065 shares of Common Stock and certain holders of stock options have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, grant of any option to purchase or other sale or disposition) of any shares of Common Stock (including shares issuable under options exercisable during the lock-up period described below) or any securities convertible into or exercisable or exchangeable therefor (except for shares of Common Stock they may acquire in the public market), until 180 days after the date of this Prospectus without the prior written consent of Cowen & Company, on behalf of the Underwriters. As soon as practicable after the date of this Prospectus, the Company intends to file registration statements on Form S-8 covering an aggregate of approximately 1.1 million shares of Common Stock that have been reserved for issuance under its employee stock option plans and purchase plans thus permitting the resale of such shares in the public market without restriction under the Securities Act. Prior to this offering, there has not been any public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect the prevailing market prices and impair the Company's ability to raise capital through the sale of equity securities. 54 56 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Cowen & Company and Hambrecht & Quist LLC are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite the name of such Underwriter below:
NUMBER UNDERWRITERS OF SHARES ------------------------------------------------------------------ --------- Cowen & Company................................................... Hambrecht & Quist LLC............................................. --------- Total................................................... 2,750,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the public initially offering price set forth on the cover page of this Prospectus and in part to certain securities dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted to the Underwriters an option exercisable for 30 days after the date of this Prospectus to purchase up to an aggregate of 412,500 additional shares of Common Stock to cover over-allotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them, as shown in the foregoing table, bears to the 2,750,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the Underwriters may be required to make in respect thereof. The Company, the Company's officers and directors and certain of the Company's shareholders have agreed subject to certain limited exceptions, not, directly or indirectly, to offer, sell, contract to sell, or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or any right to acquire Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent (which consent may be given without notice to the Company's shareholders or other public announcement) of Cowen & Company. Cowen & Company has advised the Company that it has no present intention of releasing any of the Company's shareholders from such lock-up agreements until the expiration of such 180-day period. The Representatives have advised the Company that, pursuant to rules promulgated by the Commission, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters 55 57 for the purpose of fixing or maintaining the price of Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Underwriters to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Underwriters in syndicate covering transactions, in stabilization transactions or otherwise. The Underwriters have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Representatives have advised the Company that the Underwriters do not intend to confirm sales in excess of 5% of the shares offered hereby to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price was determined by negotiations between the Company and the Representatives. Among the factors considered in such negotiations were prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. LEGAL MATTERS Certain legal matters with respect to the legality of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Rogers & Wells, London, England. Members of the firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, own an aggregate of 26,223 shares of Common Stock. EXPERTS The consolidated financial statements and schedule of the Company at December 31, 1995 and 1996 and for each of the years in the three-year period ended December 31, 1996 have been included herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 56 58 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the Registration Statement may be obtained from such offices upon the payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 57 59 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997....... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the three-month periods ended March 31, 1996 and 1997.................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 and for the three-month period ended March 31, 1997......... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the three-month periods ended March 31, 1996 and 1997.................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 60 INDEPENDENT AUDITORS' REPORT The Board of Directors SCM Microsystems, Inc.: We have audited the accompanying consolidated balance sheets of SCM Microsystems, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SCM Microsystems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP March 31, 1997, except as to Note 10, which is as of May 30, 1997 F-2 61 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
1995 1996 ------- -------- MARCH 31, 1997 ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................ $ 739 $ 2,593 $ 4,946 Accounts receivable, less allowance of $93, $210 and $203 in 1995, 1996 and 1997, respectively.................. 4,430 5,237 4,516 Inventories.............................................. 2,313 2,279 2,411 Prepaid expenses......................................... 113 519 673 ------- -------- -------- Total current assets.................................. 7,595 10,628 12,546 Property and equipment, net................................ 476 818 815 Other assets, net.......................................... 72 13 13 ------- -------- -------- $ 8,143 $ 11,459 $ 13,374 ======= ======== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable and current portion of long-term debt...... $ 1,973 $ 5,896 $ 2,463 Current portion of related party debt.................... 84 2,350 60 Accounts payable......................................... 3,184 3,351 2,023 Accrued expenses......................................... 734 818 1,024 ------- -------- -------- Total current liabilities............................. 5,975 12,415 5,570 Notes payable and long-term debt, less current portion..... 2,147 -- -- ------- -------- -------- Total liabilities..................................... 8,122 12,415 5,570 Redeemable convertible preferred stock; $0.001 par value; 6,000,000 shares authorized; 1,211,914 shares issued and outstanding in 1995 and 1996, and 3,094,705 shares issued and outstanding in 1997 (liquidation preference of $4,642 and $14,476 in 1996 and 1997)............................ 4,781 5,068 14,554 Stockholders' deficit: Convertible preferred stock, $0.001 par value; 854,038 shares authorized, issued and outstanding............. 1 1 1 Common stock, $0.001 par value; 19,000,000 shares authorized; 1,280,414 shares issued and outstanding in 1995 and 1996, and 1,855,956 shares issued and outstanding in 1997................................... 1 1 2 Additional paid-in capital............................... 2,010 2,387 2,444 Deferred stock compensation.............................. -- (224) (204) Accumulated deficit...................................... (6,618) (8,015) (8,649) Cumulative translation adjustment........................ (154) (174) (344) ------- -------- -------- Total stockholders' deficit........................... (4,760) (6,024) (6,750) ------- -------- -------- Commitments and contingencies $ 8,143 $ 11,459 $ 13,374 ======= ======== ========
See accompanying notes to consolidated financial statements. F-3 62 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------- ------------------------- 1994 1995 1996 1996 1997 ------- ------- --------- --------- --------- (UNAUDITED) Net sales.......................... $ 6,446 $18,066 $ 21,520 $ 4,257 $ 4,365 Cost of sales...................... 5,087 15,771 14,880 3,068 2,800 ------- -------- ------- ------- ------- Gross profit.................. 1,359 2,295 6,640 1,189 1,565 Operating expenses: Research and development......... 1,162 1,399 2,386 624 628 Sales and marketing.............. 1,224 2,057 3,230 631 895 General and administrative....... 580 1,439 2,004 441 518 ------- -------- ------- ------- ------- Loss from operations.......... (1,607) (2,600) (980) (507) (476) Interest expense................... (261) (337) (304) (25) (66) Other.............................. -- 11 174 35 67 ------- -------- ------- ------- ------- Net loss...................... $(1,868) $(2,926) $ (1,110) $ (497) $ (475) ======= ======== ======= ======= ======= Pro forma net loss per share....... $ (0.19) $ (0.08) ======= ======= Shares used to compute pro forma net loss per share............... 5,272 6,054 ======= =======
See accompanying notes to consolidated financial statements. F-4 63 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE PREFERRED STOCK- TOTAL SERIES A COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE STOCKHOLDERS' ---------------- ------------------ PAID-IN STOCK ACCUMULATED TRANSLATION EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENT (DEFICIT) ------- ------ --------- ------ ---------- ------------ ----------- ----------- ------------ Balances as of December 31, 1993............. 854,038 $1 1,280,414 $1 $1,761 $ -- $(1,685) $ (58) $ 20 Foreign currency translation adjustment....... -- -- -- -- -- -- -- (180) (180) Net loss........... -- -- -- -- -- -- (1,868) -- (1,868) -- -- ------- --------- ------ ----- ------- ----- ------- Balances as of December 31, 1994............. 854,038 1 1,280,414 1 1,761 -- (3,553) (238) (2,028) Redeemable convertible preferred stock, Series B additional paid-in capital.......... -- -- -- -- 249 -- -- -- 249 Foreign currency translation adjustment....... -- -- -- -- -- -- -- 84 84 Net loss........... -- -- -- -- -- -- (2,926) -- (2,926) Accretion on redeemable convertible preferred stock, Series B......... -- -- -- -- -- -- (139) -- (139) -- -- ------- --------- ------ ----- ------- ----- ------- Balance as of December 31, 1995............. 854,038 1 1,280,414 1 2,010 -- (6,618) (154) (4,760) Deferred compensation related to grants of stock options.......... -- -- -- -- 377 (377) -- -- -- Amortization of deferred employee compensation..... -- -- -- -- -- 153 -- -- 153 Foreign currency translation adjustment....... -- -- -- -- -- -- -- (20) (20) Net loss........... -- -- -- -- -- -- (1,110) -- (1,110) Accretion on redeemable convertible preferred stock, Series B......... -- -- -- -- -- -- (287) -- (287) -- -- ------- --------- ------ ----- ------- ----- ------- Balances as of December 31, 1996............. 854,038 1 1,280,414 1 2,387 (224) (8,015) (174) (6,024) Exercise of common stock options (unaudited)...... -- -- 575,542 1 57 -- -- -- 58 Amortization of deferred employee compensation (unaudited)...... -- -- -- -- -- 20 -- -- 20 Foreign currency translation adjustment (unaudited)...... -- -- -- -- -- -- -- (170) (170) Net loss (unaudited)...... -- -- -- -- -- -- (475) -- (475) Accretion on redeemable convertible preferred stock (unaudited)...... -- -- -- -- -- -- (159) -- (159) -- -- ------- --------- ------ ----- ------- ----- ------- Balances as of March 31, 1997 (unaudited)...... 854,038 $1 1,855,956 $2 $2,444 $ (204) $(8,649) $(344) $ (6,750) ======= == ========= == ====== ===== ======= ===== =======
See accompanying notes to consolidated financial statements. F-5 64 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- ------ ------- (UNAUDITED) Cash flows from operating activities: Net loss..................................... $(1,868) $(2,926) $(1,110) $ (497) $ (475) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 87 135 445 56 78 Interest on subordinated stockholder loans converted to equity..................... -- 242 -- -- -- Amortization of deferred employee compensation............................ -- -- 153 -- 20 Changes in operating assets and liabilities: Accounts receivable..................... (472) (2,816) (991) 1,102 495 Inventories............................. (1,020) (800) (75) (226) (250) Prepaid expenses........................ (10) (99) (582) 25 (141) Accounts payable........................ 882 1,983 370 (528) (931) Accrued expenses........................ 332 390 116 (184) 129 ------- ------- ------- ------ ------ Net cash used in operating activities......................... (2,069) (3,891) (1,674) (252) (1,075) ------- ------- ------- ------ ------ Cash flows used in investing activities -- capital expenditures......................... (194) (524) (643) (5) (114) ------- ------- ------- ------ ------ Cash flows from financing activities: Proceeds from notes payable.................. -- 1,253 5,011 -- -- Payments on notes payable.................... (17) -- (1,531) (169) (1,281) Proceeds from long-term debt................. 2,470 1,509 -- -- -- Principal payments on long-term debt......... (58) (59) -- -- (9) Proceeds from issuance of equity............. -- 2,441 -- -- 5,095 Proceeds from line of credit................. -- -- 1,000 -- -- ------- ------- ------- ------ ------ Net cash provided by (used in) financing activities............... 2,395 5,144 4,480 (169) 3,805 ------- ------- ------- ------ ------ Effect of exchange rates on cash............... (180) (60) (309) (2) (263) ------- ------- ------- ------ ------ Net (decrease) increase in cash and cash equivalents.................................. (48) 669 1,854 (428) 2,353 Cash and cash equivalents at beginning of period....................................... 118 70 739 739 2,593 ------- ------- ------- ------ ------ Cash and cash equivalents at end of period..... $ 70 $ 739 $ 2,593 $ 311 $ 4,946 ======= ======= ======= ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period -- interest...... $ 79 $ 191 $ 313 $ 25 $ 25 ======= ======= ======= ====== ====== Noncash financing activity -- conversion of notes payable and accrued interest to redeemable preferred stock................ $ -- $ 2,301 $ -- $ -- $ 4,240 ======= ======= ======= ====== ======
See accompanying notes to consolidated financial statements. F-6 65 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company SCM Microsystems, Inc. (the Company) designs, develops and manufactures hardware, firmware and software products for data security and access control applications. The Company offers products that address the needs of the enterprise data security market, digital video broadcasting market and PCMCIA peripheral products. The Company currently sells its products to a number of OEM customers. The Company is headquartered in California and maintains international headquarters in Germany. During 1994, the Company began emphasizing security and access products. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from this business. Reincorporation From inception in 1990 until December 1996, the Company was incorporated in Germany. During 1993, the Company formed a U.S. subsidiary which is incorporated in Delaware. In December 1996, the Company incorporated a holding company in the state of Delaware and entered into a stock exchange agreement with the stockholders of the German corporation. The Board of Directors approved an exchange of one share in the German corporation for 6.4021 shares in the new Delaware corporation which effected a 6.4021 for 1 stock split of common and preferred stock. The Certificate of Incorporation of the Delaware corporation authorizes 19,000,000 shares of common stock at $0.001 par value per share and 6,000,000 shares of preferred stock at $0.001 par value per share. The accompanying consolidated financial statements have been retroactively restated to give effect to the reincorporation and stock split. Registration Statement In December 1996, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of the Company's common stock in connection with a proposed initial public offering (IPO). If the offering is consummated under the terms presently anticipated, all the currently outstanding shares of preferred stock will automatically convert into 3,948,743 shares of common stock upon the effectiveness of the proposed IPO. The conversion of the preferred stock has been reflected in the unaudited pro forma stockholders' deficit as of March 31, 1997 (see Note 11). Principles of Consolidation The accompanying consolidated financial statements include those of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-7 66 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) Cash Equivalents The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of acquisition to be cash equivalents. Concentration of Credit Risk The Company sells its products to a diversified group of customers which are typically large OEM computer manufacturers located mainly in the United States and Europe. The Company extends credit based on an evaluation of each customer's financial condition and generally requires no collateral from its customers. Credit losses, if any, have been provided for in the consolidated financial statements and have been within management's expectation. Inventories Inventories are stated at the lower of cost or market, using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the useful lives of the respective assets or the lease term, generally three to seven years. During 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of. The adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial position or operating results. Fair Value of Financial Instruments The carrying amounts reflected in the consolidated balance sheets for cash, accounts receivable, and accounts payable approximate their respective fair values due to the short maturities of these instruments. The fair value of the Company's notes payable, notes payable to related parties, and long-term related party debt is not determinable as it is uncertain at what value the Company could settle such financing or obtain replacement financings. Revenue Recognition Revenue from product sales is recognized upon product shipment. Provisions for estimated warranty repairs and returns and allowances are provided for at the time products are shipped. Revenue recognition under nonrecurring engineering contracts generally is recognized upon the percentage of completion basis. Stock-Based Compensation The Company accounts for its stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the fair value of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires entities to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value-based method defined in SFAS No. 123 had been applied. F-8 67 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation The functional currency of the Company's foreign subsidiary is the local foreign currency. The Company translates the assets and liabilities of its foreign subsidiary to U.S. dollars at the rates of exchange in effect at the end of the year. Net sales and expenses are translated at the average rates of exchange for the year. Translation gains and losses are included in stockholders' deficit in the consolidated balance sheets. Gains and losses resulting from foreign currency transactions denominated in a currency other than the functional currency are included in income and have not been significant to the Company's consolidated operating results in any period. Pro Forma Net Loss Per Share Pro forma net loss per share data is based on the weighted-average number of shares of common stock and, when dilutive, common equivalent shares from stock options and warrants outstanding, using the treasury stock method, and convertible preferred stock and notes payable on an "as if converted" basis. Pursuant to certain SEC Staff Accounting Bulletins, common stock, convertible preferred stock and convertible notes payable issued for consideration below the assumed IPO price and stock options granted and warrants issued with exercise prices below the assumed IPO price during the 12-month period prior to the date of the initial filing of the registration statement, even when antidilutive, have been included in the calculation of pro forma net loss per share, using the treasury stock method based on the assumed IPO price, as if they were outstanding for all periods presented. The Financial Accounting Standards Board recently issued SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of basic earnings per share (EPS) and, for companies with complex capital structures, diluted EPS. SFAS No. 128 is effective for annual and interim periods ending after December 15, 1997. The Company expects that for profitable periods basic EPS will be higher than earnings per share as presented in the accompanying financial statements and diluted EPS will not differ materially from earnings per share as presented in the accompanying consolidated financial statements. Computations for loss periods should not change significantly. Unaudited Interim Consolidated Financial Statements The unaudited interim consolidated financial statements as of March 31, 1997, and for the three months ended March 31, 1996 and 1997, have been prepared on substantially the same basis as the audited consolidated financial statements, and in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. F-9 68 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) 2. BALANCE SHEET COMPONENTS A summary of balance sheet components is as follows (in thousands):
DECEMBER 31, ----------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Inventories: Raw materials............................... $ 945 $1,615 $ 1,234 Work in process............................. 241 -- -- Finished goods.............................. 1,127 664 1,177 ------ ------ ------ $2,313 $2,279 $ 2,411 ====== ====== ====== Property and equipment: Furniture, fixtures, and office equipment... $ 570 $1,070 $ 1,116 Purchased software.......................... 109 204 207 ------ ------ ------ 679 1,274 1,323 Less accumulated depreciation............... 203 456 508 ------ ------ ------ $ 476 $ 818 $ 815 ====== ====== ======
3. NOTES PAYABLE, LONG-TERM DEBT, AND RELATED PARTY DEBT Notes payable and long-term debt consisted of the following (in thousands):
DECEMBER 31, ----------------- MARCH 31, 1995 1996 1997 ------ ------ --------- Nonconvertible loans.......................... $2,070 $2,580 $ 2,410 Notes payable to banks........................ 2,050 357 53 Convertible notes payable, Series C........... -- 1,959 -- Line of credit................................ -- 1,000 -- ------ ------ --- 4,120 5,896 2,463 Less current portion.......................... 1,973 5,896 2,463 ------ ------ --- Notes payable and long-term debt, less current portion........................ $2,147 $ -- $ -- ====== ====== ===
Related party debt consisted of the following (in thousands):
DECEMBER 31, MARCH ----------------- 31, 1995 1996 1997 ------ ------ ------ Convertible notes payable Series C -- related party.......................................... $ -- $ 627 $ -- Convertible notes payable Series D -- related party.......................................... -- 1,654 -- Stockholder loans................................ 84 69 60 ------ ------ ------ 84 2,350 60 Less current portion............................. 84 2,350 60 ------ ------ ------ Long-term related party debt, less current portion................................... $ -- $ -- $ -- ====== ====== ======
F-10 69 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) Nonconvertible Loans In October 1993, the Company's German subsidiary entered into a Deutsche Mark (DM) 1,000,000 loan agreement, bearing interest at 5% per annum, expiring on December 31, 2003. In June 1995, the Company entered into an additional DM 3,000,000 loan agreement with the same party, bearing interest at 6% per annum, expiring on December 31, 2005. DM 2,000,000 was drawn under this second agreement in June 1995, and the remaining DM 1,000,000 was drawn on April 2, 1996. The terms of these agreements also provide the lender with the option to request an additional compensation of 25% of the then outstanding loan amount after the fifth year of each of the respective agreements or upon early termination of the loans by the Company. The Company may terminate this agreement at the end of each half year with three months notice. The outstanding balance on these loans was $2,070,000, $2,580,000, and $2,410,000 as of December 31, 1995 and 1996, and March 31, 1997, respectively. Notes Payable to Banks Notes payable to banks bear interest at 10% and are guaranteed by certain stockholders of the Company. Convertible Notes Payable, Series C In February 1996, the Company's German subsidiary entered into a loan agreement for DM 4,009,000. The loan bears interest at 4% per annum and is convertible into 653,642 shares of Series C preferred stock. The outstanding balance of this loan as of December 31, 1996, was $1,959,000 payable to third parties and $627,000 payable to stockholders. In accordance with the provisions of the loan agreement, the loan was converted into 653,642 shares of Series C preferred stock in March 1997. Line of Credit In April 1996, the Company entered into a $2,500,000 revolving line of credit agreement expiring in August 1997. The facility bears interest at the bank's prime rate plus 1.5%, reduced to 1.0% under certain profitability conditions contained in the agreement (9.25% as of December 31, 1996). The agreement contains certain financial covenants and is secured by all assets of the Company. As of December 31, 1996, the Company had outstanding borrowings of $1,000,000 under this agreement. The Company also has DM 4,500,000 in foreign lines of credit and other bank facilities. These facilities bear interest at 8.0% to 8.75% and expire on various dates through March 1998. As of December 31, 1996, there were no borrowings under these lines. Convertible Notes Payable, Series D In December 1996, the Company's German subsidiary entered into a loan agreement for a total of DM 3,179,000 with stockholders of which DM 2,564,000 was tendered at year-end. The loan agreement includes a conversion option which may be exercised after June 30, 1997, and expires on December 31, 1997. Under the terms of the agreement, the loan, if not converted, becomes payable on demand. Under the agreement, the debt automatically converts to common stock in the event of certain events including an IPO of equity securities. The loan bears no interest and is convertible into 377,580 shares of Series D preferred stock. Under the terms of this agreement, if the conversion option is not exercised by December 31, 1997, the loan will bear interest at 12% per annum from the date of issue. The outstanding balance of this loan as of December 31, 1996, was $1,654,000. In March 1997, the Company and the note holders agreed to convert the debt into 377,580 shares of Series D preferred stock and the accompanying consolidated financial statements F-11 70 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) have been retroactively restated to reflect the conversion as if the conversion had been completed as of March 31, 1997. In connection with this loan agreement, the Company issued 22,652 warrants to purchase Series D preferred stock at $5.72 per share. The fair value of these warrants was not significant. Stockholder Loans Loans from stockholders accrue interest at 8.5% per annum. These loans from stockholders are due on demand. Convertible Notes Payable In August 1994, certain stockholders advanced the Company loans totaling $2,059,000. In June 1995, these loans and accrued interest of approximately $242,000 were converted into Series B preferred stock. 4. STOCKHOLDERS' DEFICIT Convertible Preferred Stock As of December 31, 1996, the Company was authorized to issue 6,000,000 shares of convertible preferred stock, with a par value of $0.001. The Company has designated 854,038 shares as convertible Series A and 1,211,914 shares as convertible Series B. In March 1997, the Company issued 388,284 shares of Series D redeemable convertible preferred stock for proceeds of $2,221,000 and 463,285 shares of Series E redeemable convertible preferred stock for proceeds of $2,650,000. The rights and preferences of the holders of preferred stock are as follows: - Holders of preferred stock are entitled to noncumulative dividends when and as declared by the Company's Board of Directors. Dividends are distributable among all holders of preferred stock and common stock in proportion to the number of shares of common stock which would be held by each such holder if all shares of preferred stock were converted into common stock. - Holders of Series B, C, D, and E preferred stock have a liquidation preference of $3.83, $4.29, $5.72 and $5.72 per share, respectively, plus any declared but unpaid dividends. - Holders of Series A, B, C, D, and E preferred stock may convert all or part of their shares at any time after the date of issuance into such number of shares of common stock as is determined by dividing $1.75, $3.83, $4.29, $5.72 and $5.72, respectively, by the conversion price in effect at the time. - Holders of Series B, C, D, and E preferred stock have the right to require the Company to redeem the then outstanding shares if the Company has not made a public offering of its common stock pursuant to an effective registration statement under the Securities Act of 1933 on or before June 30, 1999, February 28, 2000, December 31, 2001 and February 28, 2002, respectively. An amount equal to the respective shares' liquidation preference plus 6% compounded interest per annum on such amount from the date of issuance shall be paid to the holders of such preferred stock subject to certain provisions of the stock purchase agreement. F-12 71 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) In connection with the issuance of Series D redeemable convertible preferred stock, the Company issued 28,539 warrants to purchase Series D preferred stock at $5.72 per share to a stockholder. The fair value of these warrants was not significant. Stock Options In October 1995, the Company authorized issuance of 376,443 options. The options generally vest over a 4-year period, 25% vesting on the first anniversary date of the employees' date of employment and 1/48th vesting each additional full month thereafter, and are exercisable for a term of 10 years after issuance. During July 1996, the number of shares authorized to be issued was increased to 1,030,097 shares. Stock option activity during the periods indicated is as follows:
OUTSTANDING OPTIONS SHARES ----------------------- AVAILABLE NUMBER OF PRICE FOR GRANT SHARES PER SHARE --------- --------- --------- Balance as of January 1, 1995............ -- -- $ -- Shares reserved........................ 376,443 -- -- Options granted........................ (283,073) 283,073 0.10 -------- -------- Balances as of December 31, 1995......... 93,370 283,073 0.10 Shares reserved........................ 653,654 -- Options granted........................ (732,270) 732,270 0.10 Options canceled....................... 81,627 (81,627) 0.10 -------- -------- Balances as of December 31, 1996......... 96,381 933,716 0.10 Options exercised...................... -- (575,542) 0.10 Shares assumed under 1997 Stock Plan... (96,381) -- -------- -------- Balances as of March 31, 1997............ -- 358,174 $0.10 ======== ========
As of December 31, 1996, 480,414 options were fully vested and exercisable. The Company accounts for stock-based compensation in accordance with APB Opinion No. 25 and, accordingly, no compensation cost has been recognized for its stock options in the accompanying consolidated financial statements because the fair value of the underlying common stock equals or exceeds the exercise price of the stock options at the date of grant, except with respect to the options and restricted stock granted in July and October 1996. The Company has recorded deferred stock compensation of $377,000 for the difference at the grant date between the exercise price and the fair value, as determined by an independent valuation, of the restricted stock and the common stock underlying the options. This amount is being amortized on the straight-line basis over the vesting period of the individual options and restricted stock, generally four years. For the year ended December 31, 1996, the Company expensed approximately $153,000 of the deferred stock compensation reflecting the commencement of vesting from the date of employment. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's compensation charge would have been $145,000, and the Company's net loss would have been changed to the pro forma amounts indicated below (in thousands):
1995 1996 ------- ------- Net loss: As reported.................................... $(2,926) $(1,110) Pro forma...................................... (2,926) (1,102)
F-13 72 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) The per share weighted-average fair value of stock options granted during 1995 and 1996 was $0.02 and $0.54, respectively, on the date of grant using the minimum value method with the following weighted-average assumptions: 1995 -- expected dividend yield 0.0%, risk-free interest rate of 5.79%, expected life of 4 years and remaining average contractual life of 9 years; 1996 -- expected dividend yield 0.0%, risk-free interest rate of 6.32%, expected life of 4 years and remaining average contractual life of 10 years. 5. GEOGRAPHIC INFORMATION Information regarding operations in different geographic regions is as follows (in thousands):
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, --------------------------- ----------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- Net sales to unaffiliated customers: Europe......................... $ 5,319 $ 8,848 $11,289 $ 2,459 $ 3,177 United States.................. 1,127 9,218 10,231 1,798 1,188 ------- ------- ------- ------ ------- $ 6,446 $18,066 $21,520 $ 4,257 $ 4,365 ======= ======= ======= ====== ======= Transfers between geographic areas (eliminated in consolidation): Europe......................... $ 1,207 $ 8,608 $ 6,241 $ 1,030 $ 1,012 United States.................. -- -- -- -- -- ------- ------- ------- ------ ------- $ 1,207 $ 8,608 $ 6,241 $ 1,030 $ 1,012 ======= ======= ======= ====== ======= Income (loss) from operations: Europe......................... $ (683) $ (907) $(1,144) $ (620) $ (49) United States.................. (924) (1,693) 164 113 (427) ------- ------- ------- ------ ------- $(1,607) $(2,600) $ (980) $ (507) $ (476) ======= ======= ======= ====== ======= Identifiable assets: Europe......................... $ 2,532 $ 4,168 $ 6,912 $ 6,009 United States.................. 920 3,975 4,547 7,365 ------- ------- ------- ------- $ 3,452 $ 8,143 $11,459 $13,374 ======= ======= ======= =======
The Company's European operations are in Germany and France. Intercompany transfers between geographic areas are accounted for using the transfer prices in effect for subsidiaries. 6. INCOME TAXES As of December 31, 1996, SCM Microsystems GmbH had German net operating loss carryforwards of approximately $4,600,000, which can be used to offset GmbH's income. The German net operating loss carryforwards can be carried forward indefinitely. SCM Microsystems, Inc. had net operating loss carryforwards of approximately $1,900,000 and $800,000 for federal and California income tax purposes, respectively. The federal net operating loss carryforwards will expire in the years 2008 through 2010. The California net operating loss carryforwards will expire in the years 1998 through 2000. Federal and California tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of a shift in the ownership of the Company, which constitutes an "ownership change" as defined by the Internal Revenue Code, Section 382. An ownership change occurred in 1996, F-14 73 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) resulting in the U.S. subsidiary's federal and California net operating loss carryforwards being subject to an annual limitation of approximately $340,000. Any unused annual limitations may be carried forward to increase the limitations in subsequent years. The domestic and foreign components of net income (loss) before income taxes are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Domestic.................................... $ (924) $(1,693) $ 133 Foreign..................................... (944) (1,233) (1,243) ------- ------- ------- Net loss.......................... $(1,868) $(2,926) $(1,110) ======= ======= =======
The Company has a deferred tax asset as of December 31, 1995 and 1996, of approximately $1,100,000 and $2,200,000, which is fully offset by a valuation allowance. The deferred tax asset principally results from the net operating loss carryforwards. The Company has provided a valuation allowance due to the uncertainty of generating future profits that would allow for the realization of such deferred tax assets. 7. COMMITMENTS The Company leases its facilities, certain equipment, and automobiles under noncancelable operating lease agreements. These lease agreements expire at various dates during the next four years. Rent expense was $251,000, $343,000, and $467,000 in 1994, 1995, 1996, respectively. Future minimum lease payments under noncancelable operating leases are as follows as of December 31, 1996 (in thousands):
YEARS ENDING DECEMBER 31, -------------------------------------------------- 1997........................................... $ 440 1998........................................... 399 1999........................................... 303 2000........................................... 54 ------ Total minimum lease payments............ $1,196 ======
8. RELATED PARTY TRANSACTIONS The Company purchased inventory under transactions negotiated on a basis comparable to an arm's length basis totaling $3,478,000 and $3,294,000 in 1995 and 1996, respectively, from a stockholder. Included in accounts payable are amounts owed this stockholder of $925,000 and $396,000 as of December 31, 1995 and 1996, respectively. F-15 74 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) 9. MAJOR CUSTOMERS AND SALES INFORMATION A summary of the net sales to major customers that exceeded 10% of total net sales during each of the years in the three-year period ended December 31, 1996, and the amount due from these customers as of December 31, 1996, follows (accounts receivable in thousands):
ACCOUNTS 1994 1995 1996 RECEIVABLE ---- ---- ---- ----------- Customer 1................................ -- -- 12% $ 346 Customer 2................................ -- -- 11% 1,326 Customer 3................................ -- 17% -- -- Customer 4................................ -- 16% -- -- Customer 5................................ 12% -- -- -- Customer 6................................ 11% -- -- 109
During 1994, 1995, and 1996, net sales of PCMCIA peripheral products amounted to 78%, 31%, and 23%, respectively, of sales. As discussed in Note 1, during 1996, the Company phased out of these products. 10. SUBSEQUENT EVENTS Series F Preferred Stock Financing In April 1997, the Company issued 849,790 shares of Series F redeemable convertible preferred stock for proceeds of $6,991,199, of which 34,965 shares are subject to repurchase rights. The rights and preferences of Series F preferred stock are substantially the same as the rights and preferences underlying the holders of Series B, C, D, and E preferred stock with the following exceptions: - The liquidation preference of Series F shall be $8.58. - Holders of Series F preferred stock may convert all or part of their shares at any time after the date of issuance into such number of shares of common stock as is determined by dividing $8.58 by the conversion price in effect at the time. - Holders of Series F preferred stock have the right to require the Company to redeem the then outstanding shares if the Company has not made a public offering of its common stock pursuant to an effective registration statement under the Securities Act of 1933 on or before March 28, 2002. Pursuant to the terms of the Series F Preferred Stock Purchase Agreement, the Company issued a warrant for the purchase of an additional 194,930 shares of Series F preferred stock at a price of $8.58 per share to one of the purchasers of Series F preferred stock ("the warrant holder"). This warrant was issued as partial consideration for the warrant holder entering into a Development and Supply Agreement with the Company, which was executed effective April 30, 1997. The fair value of these warrants was not significant. In conjunction with the designation of Series F preferred stock, the Company approved an increase to the authorized number of shares of common stock and preferred stock to 40,000,000 shares and 10,000,000 shares, respectively. Employee Stock Plans 1997 Stock Plan In April 1997, the Company's stockholders approved the 1997 Stock Plan (the 1997 Plan) under which employees and consultants may be granted incentive or nonqualified stock options for the purchase of the Company's common stock and stock purchase rights. Unless terminated sooner, the 1997 Plan will terminate F-16 75 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) automatically in 2007. A total of 1,000,000 shares of common stock are currently reserved for issuance pursuant to the 1997 Plan. 1997 Employee Stock Purchase Plan In April 1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan which authorizes the issuance of up to 175,000 shares of the Company's common stock. The plan permits eligible employees to purchase common stock through payroll deductions at a purchase price of 85% of the lower of fair market value of the common stock at the beginning or end of each offering period. 1997 Director Option Plan In April 1997, the Company's stockholders approved the 1997 Director Option Plan (the Director Plan). A total of 50,000 shares of common stock has been reserved for issuance under the Director Plan. Each outside director of the Company will automatically be granted an option to purchase up to 10,000 shares of common stock upon the effective date of the Director Plan and will automatically be granted annual subsequent options to purchase additional shares of common stock under the Director Plan. The price of stock purchased under the Director Plan is 100% of the fair market value of the common stock as of the grant date. Legal Proceedings On April 28, 1997, a third party served the Company with a complaint alleging that certain of the Company's products infringe certain claims of a French patent held by the third party. While the outcome of any litigation is uncertain, management of the Company believes that, based upon the defenses available to the Company and the third party's stated licensing position, the matter can be resolved without material adverse effect on the Company's results of operations. F-17 76 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED.) 11. PRO FORMA INFORMATION (UNAUDITED) The following table reflects the pro forma adjustments in the accompanying consolidated balance sheet (in thousands):
MARCH 31, 1997 -------------------------------------------- HISTORICAL ADJUSTMENTS PRO FORMA ---------- --------- -------------------------------------------- (UNAUDITED) Current assets: Cash................................................. $ 4,946 $ 6,991(c) $11,937 Other current assets................................. 7,600 -- 7,600 ------- -------- ------- Total current assets.............................. 12,546 6,991 19,537 Other noncurrent assets................................ 828 -- 828 ------- -------- ------- Total assets...................................... $ 13,374 $ 6,991 $20,365 ======= ======== ======= Total liabilities...................................... $ 5,570 $ -- $ 5,570 Redeemable convertible preferred stock................. 14,554 (14,554)(a) -- Stockholders' equity (deficit): Convertible preferred stock.......................... 1 (1)(b) -- Common stock......................................... 2 5(a)(b)(c) 7 Additional paid-in capital........................... 2,444 21,541(a)(b)(c) 23,985 Deferred stock compensation.......................... (204) -- (204) Accumulated deficit.................................. (8,649) -- (8,649) Cumulative translation adjustment.................... (344) -- (344) ------- -------- ------- Total stockholders' equity (deficit).............. (6,750) 21,545 14,795 ------- -------- ------- Total liabilities and stockholders' equity (deficit).................................. $ 13,374 $ 6,991 $20,365 ======= ======== =======
- --------------- (a) Gives effect to the conversion of the Company's Series B, C, D, and E redeemable convertible preferred stock into 1,211,914, 653,642, 765,864, and 463,285 shares, respectively, of common stock. (b) Gives effect to the conversion of the Company's convertible preferred Series A stock into 854,038 shares of common stock. (c) Gives effect to the subsequent offering and conversion into common of 849,790 shares of Series F convertible preferred stock (see Note 10). F-18 77 APPENDIX DESCRIPTION OF GRAPHICS 1 Inside Front Cover: Picture depicts the major products provided by the Company and its customers to implement security solutions using existing infrastructure, the Company's products and third party hardware, software and systems. 2 Gatefold: Picture depicts the market and product evolution of secured digital data access and delivery in the corporate and consumer marketplaces, and the convergence of these markets and products as facilitated by the Company's products, its OEM partners and standards-setting organizations in which the Company actively participates. 3 Inside Back Cover: Picture depicts the Company's products and the consumer and corporate digital systems (e.g., set-up boxes and network computers) utilizing these products. 4 Data Security "Patchwork": Picture on page 28 depicts the different methods of data security implemented by enterprise networks in order to accommodate the problems presented by different information sources and types of users. 5 Securing Digital Video Broadcasts: Picture on page 31 depicts the role of a Digital Video Broadcasting-Conditional Access Module in securing digital video broadcasts and the different services which such module enables. 78 ============================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, OF ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................... 3 Risk Factors............................... 6 Use of Proceeds............................ 15 Dividend Policy............................ 15 Capitalization............................. 16 Dilution................................... 17 Selected Consolidated Financial Data....... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 19 Business................................... 27 Management................................. 43 Certain Transactions....................... 49 Principal Stockholders..................... 50 Description of Capital Stock............... 52 Shares Eligible for Future Sale............ 53 Underwriting............................... 55 Legal Matters.............................. 56 Experts.................................... 56 Additional Available Information........... 57 Index to Consolidated Financial Statements............................... F-1
------------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ============================================================ ============================================================ 2,750,000 Shares LOGO Common Stock ------------------------------ PROSPECTUS ------------------------------ COWEN & COMPANY HAMBRECHT & QUIST , 1997 ============================================================ 79 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID -------- SEC registration fee.............................................. $ 9,583 NASD filing fee................................................... 3,663 Nasdaq National Market listing fee................................ 25,000 Printing and engraving expenses................................... 100,000 Legal fees and expenses........................................... 350,000 Accounting fees and expenses...................................... 225,000 Directors' and officers' liability insurance...................... 200,000 Blue Sky qualification fees and expenses.......................... 3,000 Transfer agent and registrar fees................................. 5,000 Miscellaneous..................................................... 53,754 -------- Total................................................... $975,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law, the Registrant's Amended and Restated Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach or alleged breach of their duty of care. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the Bylaws, as amended, of the Registrant provide that: (i) the Registrant is required to indemnify its directors and officers and persons serving in such capacities in other business enterprises (including, for example, subsidiaries of the Registrant) at the Registrant's request, to the fullest extent permitted by Delaware law, including in those circumstances in which indemnification would otherwise be discretionary; (ii) the Registrant may, in its discretion, indemnify employees and agents in those circumstances where indemnification is not required by law; (iii) the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with defending a proceeding (except that it is not required to advance expenses to a person against whom the Registrant brings a claim for breach of the duty of loyalty, failure to act in good faith, intentional misconduct, knowing violation of law or deriving an improper personal benefit); (iv) the rights conferred in the Bylaws, as amended, are not exclusive, and the Registrant is authorized to enter into indemnification agreements with its directors, officers and employees; and (v) the Registrant may not retroactively amend the Bylaw provisions in a way that is adverse to such directors, officers and employees. The Registrant's policy is to enter into indemnification agreements with each of its directors and officers that provide the maximum indemnity allowed to directors and officers by Section 145 of the Delaware General Corporation Law and the Bylaws, as amended, as well as certain additional procedural protections. The indemnification provisions in the Bylaws, as amended, and the indemnification agreements entered into between the Registrant and its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. II-1 80 Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER -------------------------------------------------------------------- ------ Form of Underwriting Agreement...................................... 1.1 Form of Amended and Restated Certificate of Incorporation prior to completion of this offering....................................... 3.1 Form of Amended and Restated Certificate of Incorporation to be effective upon completion of this offering........................ 3.2 Bylaws, as amended.................................................. 3.3 Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers................. 10.1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES From January 1, 1994 through May 31, 1997 the Registrant has issued and sold the following securities: (i) the Registrant issued and sold 3,944,495 shares of Preferred Stock at purchase prices ranging from $3.83 to $8.58 for aggregate consideration of approximately $21,382,000; and (ii) the Registrant issued and sold 549,934 shares of Common Stock to employees and consultants at an exercise price of $0.10 for aggregate consideration of approximately $55,000. The issuances referred to in paragraph (i) were deemed exempt from registration under the Securities Act in reliance upon Section 4(2) thereof. 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. The issuances of Common Stock described in paragraph (ii) above were deemed exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1 Third Amended and Restated Certificate of Incorporation of Registrant to be effective prior to the completion of this offering. 3.2 Form of Fourth Amended and Restated Certificate of Incorporation to be effective upon completion of this offering. 3.3 Bylaws, as amended, of Registrant. 4.1* Form of Registrant's Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding legality of the securities being issued. 9.1 Voting Trust Agreement with Nicholas Efthymiou. 9.2 Voting Trust Agreement with Reiner Pohl. 10.1 Form of Director and Officer Indemnification Agreement. 10.2 1997 Stock Plan. 10.3 1997 Employee Stock Purchase Plan. 10.4* 1997 Director Option Plan. 10.5 1997 Stock Option Plan for French Employees. 10.6 1997 Employee Stock Purchase Plan for Non-U.S. Employees. 10.7 Partnership Agreement, dated June 8, 1995, between Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank. 10.8 Continuing Guarantee, dated January 15, 1997, between Registrant and Imperial Bank. 10.9 Line of Credit, dated October 23, 1996, between Registrant and Deutsche Bank. 10.10 Line of Credit, dated December 3, 1996, between Registrant and BHF Bank. 10.11 Line of Credit, dated November 11, 1996, between Registrant and Stadtsparkasse Munchen.
II-2 81
EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------------------------- 10.12 Lease, dated September 29, 1994, between Registrant and Los Gatos Business Park. 10.13 Sublease Agreement, dated December 17, 1996, between Intermart Systems, Inc. and Registrant. 10.14 Lease, dated September 30, 1994, between Registrant and Olbrich Franz. 10.15 Amended and Restated Stockholders' Agreement, dated April 11, 1997, between Registrant and certain investors. 10.16 Form of Employment Agreement between SCM GmbH and Messrs. Schneider and Meier. 10.17 Employment Agreement, dated May 15, 1995, between Registrant and Jean-Yves Le Roux. 10.18+ Commitment Instrument, dated August 7, 1996, among France Telecom, Matra Communication, Registrant and Matra MHS. 10.19* Teaming Agreement, dated October 6, 1995, between Temic/Matra MHS, Matra Communication and Registrant. 10.20* Final Agreement, dated February 11, 1997, between SCM Microsystems GmbH and Matra Communications S.A.S. 10.21* Development Agreement, dated March 6, 1997, between Intel Corporation and Registrant. 10.22+ Technology Development and License Agreement, dated September 27, 1996, between Registrant and Sun Microsystems, Inc. 10.23 Cooperation Contract, dated March 25, 1996, between Registrant and Stocko Metallwarenfabriken Henkels and Sohn GmbH & Co. 10.24* Development and Supply Agreement, dated October 9, 1996, between BetaDigital Gesellschaft fur digitale Fernsehdienste mbH and Registrant. 10.25 Framework Contract, dated December 23, 1996, between Siemens Nixdorf Informationssysteme AG and Registrant. 10.26* Individual contract, dated December 23, 1996, between Siemens Nixdorf Informationssysteme AG and Registrant. 10.27+ B-1 License and Know-How Contract, dated September 4, 1996, between Deutsche Telekom AG and Registrant, as amended. 10.28* Technology license agreement, dated , 1997, between Wolfgang Neifer and Registrant. 10.29+ Patent License Agreement, dated November 15, 1995, between MIPS Dataline America, Inc. and Registrant. 10.30* Development and Supply Agreement, dated May 15, 1997, between Telenor Conax and Registrant. 10.31+ Manufacturer's Sales Representative Agreement, dated December 8, 1994, between Registrant and AGM. 11.1 Statement of computation of earnings per share. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants 23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-5) 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. + Certain information in these exhibits has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. sec.sec. 200.80(b)(4), 200.83 and 230.46. (b) FINANCIAL STATEMENT SCHEDULES Schedule II -- Valuation and Qualifying Accounts II-3 82 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the California Corporation Law, the Registrant's Certificate of Incorporation, as amended, the Registrant's Bylaws, as amended, the Registrant's indemnification agreements or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 83 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Gatos, State of California, on this 12th day of June 1997. SCM MICROSYSTEMS, INC. By: /s/ STEVEN HUMPHREYS ------------------------------------ Steven Humphreys President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven Humphreys and John Niedermaier, and each of them singly, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as full to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ----------------------------------------------- --------------------------- -------------- /s/ STEVEN HUMPHREYS President and Chief June 12, 1997 - ----------------------------------------------- Executive Officer Steven Humphreys (Principal Executive Officer) and Director /s/ JOHN NIEDERMAIER Vice President, Finance and June 12, 1997 - ----------------------------------------------- Chief Financial Officer John Niedermaier (Principal Financial and Accounting Officer) /s/ ROBERT SCHNEIDER Chairman of the Board June 12, 1997 - ----------------------------------------------- Robert Schneider /s/ BERND MEIER Chief Operations Officer June 12, 1997 - ----------------------------------------------- and Director Bernd Meier /s/ FRIEDRICH BORNIKOEL Director June 12, 1997 - ----------------------------------------------- Friedrich Bornikoel /s/ BRUCE GRAHAM Director June 12, 1997 - ----------------------------------------------- Bruce Graham /s/ RANDALL LUNN Director June 12, 1997 - ----------------------------------------------- Randall Lunn /s/ POH CHUAN NG Director June 12, 1997 - ----------------------------------------------- Poh Chuan Ng /s/ ANDREW VOUGHT Director June 12, 1997 - ----------------------------------------------- Andrew Vought
II-5 84 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT DEDUCTIONS: BEGINNING OF WRITE OFFS BALANCE AT CLASSIFICATION PERIOD ADDITIONS OF ACCOUNTS END OF PERIOD - --------------------------------------------------- ------------ --------- ----------- ------------- Allowance for returns and doubtful accounts Year ended December 31, 1994..................... -- 28 -- 28 Year ended December 31, 1995..................... 28 65 -- 93 Year ended December 31, 1996..................... 93 159 42 210 Quarter ended March 31, 1997..................... 210 -- 7 203 Warranty accrual Year ended December 31, 1994..................... -- -- -- -- Year ended December 31, 1995..................... -- 28 -- 28 Year ended December 31, 1996..................... 28 75 -- 103 Quarter ended March 31, 1997..................... 103 105 -- 208
II-6 85 INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED EXHIBIT NO. EXHIBIT PAGE NUMBER ----------- ----------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1 Third Amended and Restated Certificate of Incorporation of Registrant to be effective prior to the completion of this offering. 3.2 Form of Fourth Amended and Restated Certificate of Incorporation to be effective upon completion of this offering. 3.3 Bylaws, as amended, of Registrant. 4.1* Form of Registrant's Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding legality of the securities being issued. 9.1 Voting Trust Agreement with Nicholas Efthymiou. 9.2 Voting Trust Agreement with Reiner Pohl. 10.1 Form of Director and Officer Indemnification Agreement. 10.2 1997 Stock Plan. 10.3 1997 Employee Stock Purchase Plan. 10.4* 1997 Director Option Plan. 10.5 1997 Stock Option Plan for French Employees. 10.6 1997 Employee Stock Purchase Plan for Non-U.S. Employees. 10.7 Partnership Agreement, dated June 8, 1995, between Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank. 10.8 Continuing Guarantee, dated January 15, 1997, between Registrant and Imperial Bank. 10.9 Line of Credit, dated October 23, 1996, between Registrant and Deutsche Bank. 10.10 Line of Credit, dated December 3, 1996, between Registrant and BHF Bank. 10.11 Line of Credit, dated November 11, 1996, between Registrant and Stadtsparkasse Munchen. 10.12 Lease, dated September 29, 1994, between Registrant and Los Gatos Business Park. 10.13 Sublease Agreement, dated December 17, 1996, between Intermart Systems, Inc. and Registrant. 10.14 Lease, dated September 30, 1994, between Registrant and Olbrich Franz. 10.15 Amended and Restated Stockholders' Agreement, dated April 11, 1997, between Registrant and certain investors. 10.16 Form of Employment Agreement between SCM GmbH and Messrs. Schneider and Meier. 10.17 Employment Agreement, dated May 15, 1995, between Registrant and Jean-Yves Le Roux. 10.18+ Commitment Instrument, dated August 7, 1996, among France Telecom, Matra Communication, Registrant and Matra MHS. 10.19* Teaming Agreement, dated October 6, 1995, between Temic/Matra MHS, Matra Communication and Registrant.
86
SEQUENTIALLY NUMBERED EXHIBIT NO. EXHIBIT PAGE NUMBER ----------- ----------------------------------------------------------------- 10.20* Final Agreement, dated February 11, 1997, between SCM Microsystems GmbH and Matra Communications S.A.S. 10.21* Development Agreement, dated March 6, 1997, between Intel Corporation and Registrant. 10.22+ Technology Development and License Agreement, dated September 27, 1996, between Registrant and Sun Microsystems, Inc. 10.23 Cooperation Contract, dated March 25, 1996, between Registrant and Stocko Metallwarenfabriken Henkels and Sohn GmbH & Co. 10.24* Development and Supply Agreement, dated October 9, 1996, between BetaDigital Gesellschaft fur digitale Fernsehdienste mbH and Registrant. 10.25 Framework Contract, dated December 23, 1996, between Siemens Nixdorf Informationssysteme AG and Registrant. 10.26* Individual contract, dated December 23, 1996, between Siemens Nixdorf Informationssysteme AG and Registrant. 10.27+ B-1 License and Know-How Contract, dated September 4, 1996, between Deutsche Telekom AG and Registrant, as amended. 10.28* Technology license agreement, dated , 1997, between Wolfgang Neifer and Registrant. 10.29+ Patent License Agreement, dated November 15, 1995, between MIPS Dataline America, Inc. and Registrant. 10.30* Development and Supply Agreement, dated May 15, 1997, between Telenor Conax and Registrant. 10.31+ Manufacturer's Sales Representative Agreement, dated December 8, 1994, between Registrant and AGM. 11.1 Statement of computation of earnings per share. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants 23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-5) 27.1 Financial Data Schedule
- --------------- * To be filed by amendment. + Certain information in these exhibits has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. sec.sec. 200.80(b)(4), 200.83 and 230.46. EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SCM MICROSYSTEMS, INC. SCM Microsystems, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on December 13, 1996. SECOND: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. THIRD: This Amended and Restated Certificate of Incorporation was approved by the written consent of the stockholders of the Corporation in accordance with the provisions of Section 228 for the General Corporation Laws of the State of Delaware. FOURTH: The Certificate of Incorporation of this Corporation, as amended and restated, is hereby amended and restated in its entirety to read as follows: "I. The name of this corporation is SCM Microsystems, Inc. (hereinafter sometimes referred to as the "Corporation"). II. The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. 2 III. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. IV. The Corporation is authorized to issue two classes of shares, designated "Preferred Stock" and "Common Stock." The total number of shares which the Corporation shall have authority to issue is 50,000,000 of which 40,000,000 shares shall be Common Stock at $.001 par value and 10,000,000 shares shall be Preferred Stock at $.001 par value. Of the shares of Preferred Stock, 854,038 shall be designated "Series A Preferred Stock," 1,211,914 shall be designated "Series B Preferred Stock," 653,642 shall be designated "Series C Preferred Stock," 857,162 shall be designated "Series D Preferred Stock," 463,285 shall be designated "Series E Preferred Stock" and 1,600,000 shall be designated "Series F Preferred Stock." Undesignated shares of Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. For any wholly unissued series of Preferred Stock, the Board of Directors of the Corporation (the "Board of Directors") is authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them. For any series of Preferred Stock having issued and outstanding shares, the Board of Directors is also authorized to decrease the number of shares of any series of Preferred Stock prior or subsequent to the issuance of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status of undesignated Preferred Stock. Effective upon conversion of all shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, the authorized shares of such Preferred Stock shall be converted into undesignated Preferred Stock on a one-for-one basis, as set forth in Section 3(h) of this Article IV. A statement of the rights, preferences, privileges and restrictions granted to or imposed on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock and the holders thereof is as set forth below in this Article IV. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock are sometimes collectively referred to herein as the "Preferred Stock." 1. Dividends. Any dividends declared shall be distributed among all holders of Preferred Stock and all holders of Common Stock in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Preferred Stock were converted into Common Stock at the then effective Conversion Price (as defined in Section 3(a) below). In the event that the Corporation shall have declared but unpaid dividends outstanding immediately prior -2- 3 to, and in the event of, a conversion of Preferred Stock (as provided in Section 3 hereof), the Corporation shall, at the option of each holder, pay in cash to each holder of Preferred Stock subject to conversion the full amount of any such dividends or allow such dividends to be converted into Common Stock in accordance with, and pursuant to the terms specified in, Section 3 hereof. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series A Preferred Stock and the Common Stock by reason of their ownership thereof, the amounts of $3.83, $4.29, $5.72, $5.72 and $8.58 (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), respectively, plus all accrued or declared but unpaid dividends on such share, for each share of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock then held by them (the "Liquidation Preference"). If, upon occurrence of such event the assets and funds thus distributed among the holders of the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock in proportion to the full amount which they would be entitled to receive under this Section 2(a). (b) After payment has been made to the holders of the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock of the Liquidation Preference, the holders of the Series A Preferred Stock and the Common Stock shall be entitled to receive the remaining assets of the Corporation, if any, in proportion to the number of shares of Common Stock which would be held by each such holder if all shares of Series A Preferred Stock were converted into Common Stock at the then effective Conversion Price (as defined in Section 3(a) below). (c) For purposes of this Section 2, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, and to include, (i) the Corporation's sale of all or substantially all of its assets or (ii) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which will result in the holders of the outstanding voting equity securities of the Corporation immediately prior to such transaction holding less than 50% of the voting equity securities of the surviving entity immediately following such transaction. 3. Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert; Automatic Conversion. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time into such number of fully -3- 4 paid and nonassessable shares of Common Stock as is determined by dividing (i) in the case of Series A Preferred Stock, $1.75, (ii) in the case of Series B Preferred Stock, $3.83, (iii) in the case of the Series C Preferred Stock, $4.29, (iv) in the case of the Series D Preferred Stock, $5.72, (v) in the case of the Series E Preferred Stock, $5.72 and (vi) in the case of Series F Preferred Stock, $8.58, by the Conversion Price for such share of Preferred Stock, determined as hereinafter provided, in effect at the time of conversion. The initial conversion price per share is (i) in the case of Series A Preferred Stock, $1.75, (ii) in the case of Series B Preferred Stock, $3.83, (iii) in the case of the Series C Preferred Stock, $4.29, (iv) in the case of the Series D Preferred Stock, $5.72, (v) in the case of Series E Preferred Stock, $5.72 and (iv) in the case of the Series F Preferred Stock $8.58. The term "Conversion Price" as used herein shall refer to the respective conversion price of each series of Preferred Stock. Such initial Conversion Prices shall be subject to adjustment as provided in Section 3(c) below. Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective applicable Conversion Price (i) in the event of the effectiveness of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of Common Stock for the account of the Corporation to the public at an aggregate offering price to the public of not less than $20,000,000 and, in the case of the Series E Preferred Stock only, a price per share to the public of not less than $12.00 (adjusted to reflect stock dividends, stock splits, stock combinations, recapitalizations or the like). In the event of such an offering, the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such underwritten public offering. (b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional share to which a holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of the Common Stock as determined by the Board of Directors. Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same. Such notice shall also state whether the holder elects, pursuant to Section 1 hereof, to receive declared but unpaid dividends on the Preferred Stock proposed to be converted into cash, or to convert such dividends into shares of Common Stock at their fair market value as determined by the Board of Directors. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which it shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into a fractional share of Common Stock, and any declared but unpaid dividends on the converted Preferred Stock which the holder elected to receive in cash. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the conversion is in connection with an underwritten public offering of securities registered pursuant to the Securities Act, the -4- 5 conversion shall be conditioned upon the closing of such public offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to such closing. (c) Conversion Price Adjustments. The Conversion Price from time to time in effect shall be subject to adjustment from time to time as follows: (i) In the event the Corporation shall pay a stock dividend on the Common Stock, or the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by reclassification or otherwise, into a greater or lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision or combination shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted. (ii) If at any time after the date this Certificate of Incorporation is filed the Corporation shall issue or sell Equity Securities, as defined in below, at a consideration per share less than the Conversion Price for a share of Preferred Stock in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale, the Conversion Price of such share of Preferred Stock shall be adjusted to a price (calculated to the nearest cent) determined by dividing: (1) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then-existing Conversion Price, (y) the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any shares of stock of the Corporation outstanding immediately prior to such issue or sale multiplied by the then-existing Conversion Price, and (z) an amount equal to the aggregate "consideration actually received" by the Corporation upon such issue or sale, by (2) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately after such issue or sale, (y) the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any shares of stock of the Corporation outstanding immediately prior to such issue or sale and (z) the additional shares of Common Stock issued or issuable upon conversion or exchange of the Equity Securities issued in such issuance or sale. For purposes hereof the following provisions shall be applicable: (A) The term "Equity Securities" shall mean any shares of Common Stock, or any obligation, any share of stock or other security of the Corporation convertible into or exchangeable for Common Stock except for (1) Common Stock issued or issuable to officers, directors, employees or consultants of the Corporation pursuant to stock grant, stock purchase or stock option plans or any other stock incentive program, agreement or arrangement approved by the Board of Directors, (2) securities issued pursuant to the acquisition of all or part of another company by the Corporation by merger or other reorganization, or by the purchase of all or part of the assets of another company, pursuant to a plan, agreement or arrangement approved by the Board of Directors, (3) shares issued pursuant to Section 3(c)(i) of this Article IV, (4) Common Stock or Preferred Stock issuable upon exercise, conversion or exchange of warrants to purchase Common Stock or Preferred Stock issued in connection with a bank line, equipment financing or technology licensing or development -5- 6 agreement approved by the Board of Directors, (5) shares of Common Stock or Preferred Stock reissued by the Corporation following repurchase of such shares pursuant to any restricted stock purchase agreement, (6) shares of Preferred Stock or Common Stock issued on conversion of debt outstanding on the date this Certificate of Incorporation is filed with the Delaware Secretary of State and (7) shares of Common Stock issued upon conversion of the Preferred Stock. (B) In the case of an issue or sale for cash of shares of Common Stock, the "consideration actually received" by the Corporation therefor shall be deemed to be the amount of cash received, before deducting therefrom any commissions or expenses paid by the Corporation. (C) In case of the issuance (otherwise than upon conversion or exchange of obligations or shares of stock of the Corporation) of additional shares of Common Stock for a consideration other than cash or a consideration partly other than cash, the amount of the consideration other than cash received by the Corporation for such shares shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors. (D) In case of the issuance by the Corporation in any manner of any rights to subscribe for or to purchase shares of Common Stock, or any options for the purchase of shares of Common Stock or stock convertible into Common Stock, all shares of Common Stock or stock convertible into Common Stock to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed "outstanding" as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock or stock convertible into Common Stock covered thereby, plus the consideration, if any, received by the Corporation for such rights or options, shall be deemed to be the "consideration actually received" by the Corporation (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares. (E) In case of the issuance or issuances by the Corporation in any manner of any obligations or of any shares of stock of the Corporation that shall be convertible into or exchangeable for Common Stock, all shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the "consideration actually received" by the Corporation for such additional shares of Common Stock shall be deemed to be the total of (1) the amount of consideration received by the Corporation upon the issuance of such obligations or shares, as the case may be, plus (2) the minimum aggregate consideration, if any, other than such obligations or shares, receivable by the Corporation upon such conversion or exchange, except in adjustment of dividends. (F) The amount of the "consideration actually received" by the Corporation upon the issuance of any rights or options referred to in subsection (D) above or upon the issuance of any obligations or shares which are convertible or exchangeable as described in subsection (E) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by the Corporation upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subsections (B) and (C) above with respect to the consideration received by the Corporation in case of the issuance of additional shares of Common Stock; provided, however, that if such obligations or shares of stock so convertible or exchangeable -6- 7 are issued in payment or satisfaction of any dividend upon any stock of the Corporation other than Common Stock, the amount of the "consideration actually received" by the Corporation upon the original issuance of such obligations or shares of stock so convertible or exchangeable shall be deemed to be the fair value of such obligations or shares of stock, as of the date of the adoption of the resolution declaring such dividend, as determined by the Board of Directors at or as of that date. On the expiration of any rights or options referred to in subsection (D), or the termination of any right of conversion or exchange referred to in subsection (E), or any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or exchange of such convertible or exchangeable securities, the Conversion Price then in effect shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustments made upon the issuance of such option, right or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered or to be delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities. (d) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 3, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock. (f) Notices of Record Date. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or -7- 8 (iv) to merge with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in clauses (iii) and (iv) above; and (2) in the case of the matters referred to in clauses (iii) and (iv) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be given by first class mail, postage prepaid, addressed to the holders of Preferred Stock shares at the address for each such holder as shown on the books of the Corporation. (g) Recapitalization. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3 or Section 2) provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion of each share of such series would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (h) Status of Converted Stock. In the event any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be converted pursuant to Section 3 hereof, the shares so converted shall resume the status of authorized but undesignated Preferred Stock. Upon conversion of all of the currently outstanding shares of Preferred Stock pursuant to Section 4 of this Article IV, all of this Article IV, other than the first four paragraphs, shall be void and deemed to no longer be part of this Certificate of Incorporation. 4. Voting Rights. (a) Except as otherwise required by law or as otherwise set forth in this Section 4, the holders of Preferred Stock and the holders of Common Stock shall be entitled to notice of any stockholders' meeting and to vote as a single class upon any matter submitted to the stockholders for -8- 9 a vote, as follows: (i) each holder of Preferred Stock shall have one vote for each full share of Common Stock into which its respective shares of Preferred Stock would be convertible on the record date for the vote; and (ii) the holders of Common Stock have one vote per share of Common Stock. (b) From and after the first date on which shares of Series A Preferred Stock are issued and outstanding until such time as fewer than 200,000 shares of Series A Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Series A Preferred Stock, voting as a single series, shall have the right to elect two (2) directors. (c) From and after the first date on which shares of Series B Preferred Stock are issued and outstanding until such time as fewer than 200,000 shares of Series B Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Series B Preferred Stock, voting as a single series, shall have the right to elect one (1) director. (d) From and after the first date on which shares of Series C Preferred Stock or shares of Series D Preferred Stock are issued and outstanding until such time as fewer than 200,000 shares of Series C Preferred Stock and Series D Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Series C Preferred Stock and the holders of Series D Preferred Stock, voting together as a single series, shall have the right to elect one (1) director. (e) From and after the first date on which shares of Series E Preferred Stock are issued and outstanding until such time as fewer than 200,000 shares of Series E Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Series E Preferred Stock, voting as a single series, shall have the right to elect one (1) director. (f) From and after the first date on which shares of Series F Preferred Stock are issued and outstanding until such time as fewer than 300,000 shares of Series F Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Series F Preferred Stock, voting as a single series, shall have the right to elect one (1) director. (g) From and after the first date on which shares of Series A Preferred Stock , Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock are issued and outstanding until such time as fewer than 200,000 shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock are outstanding (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares), the holders of Common Stock, voting as a single series, shall have the right to elect two (2) directors. -9- 10 5. Redemption. Each Series of the Preferred Stock shall be redeemed in the following circumstances, provided that funds are legally available therefor: (a) Corporation's Right to Redeem. (i) At any time after the date on which this Certificate of Incorporation is filed with the Delaware Secretary of State, the Corporation shall have the right, which may only be exercised by a unanimous vote of the Board of Directors, to redeem shares of Preferred Stock other than the Series E Preferred Stock, to the extent permitted by law, without the consent of the affected stockholder(s), upon the occurrence of the following events: (1) the attachment by a creditor of the shares of Preferred Stock to be redeemed by a creditor of the holder of such shares, or performance of some other form of judicial execution on the shares of Preferred Stock to be redeemed, if such attachment or execution is not rescinded within two (2) weeks; or (2) the filing of a voluntary or involuntary petition of bankruptcy with respect to the holder of the shares of Preferred Stock to be redeemed; or (3) the termination by the Corporation for cause of the employment or the voluntary resignation from employment by the Corporation of the holder of the shares of Preferred Stock to be redeemed before December 31, 1998, provided that only the holders of shares of Preferred Stock who are full time employees of the Corporation or of a parent or subsidiary of the Corporation on the date that shares of Preferred Stock are first issued and outstanding shall be subject to the provisions of this Section 5(a)(i)(3). (ii) Upon redemption in accordance with this Section 5(a), the Corporation shall set aside for payment to the stockholder(s) whose shares are being redeemed an amount determined by dividing the greater of (a) the net consolidated assets of the Corporation (as determined in accordance with generally accepted accounting principles) and (b) four times the average annual consolidated net income of the Corporation (as determined in accordance with generally accepted accounting principles) for the four most recent fiscal years prior to the date set for redemption, by the number of shares of Preferred Stock and Common Stock outstanding on the date of such redemption, and multiplying the resulting number by the number of shares of Preferred Stock to be redeemed. (iii) The Corporation's right to redeem shares of Preferred Stock pursuant to this Section 5(a) may be assigned in whole or in part to any or all stockholders of the Corporation (other than the stockholder whose shares are to be redeemed) by a unanimous vote of the Board of Directors. (iv) Any redemption payments, and accrued interest thereon, made pursuant to this Section 5(a) shall be made in five equal installments. The first redemption payment for any redemption hereunder shall be due and payable six months after the date set for redemption in accordance with this Section 5. Each subsequent payment shall be due and payable six months after the date on which the previous payment became due and payable. Interest at the rate of 6% per -10- 11 annum, compounded annually, shall accrue on the whole amount of outstanding and unpaid redemption payments, whether or not due and payable, from the date set for redemption. (b) Series B Stockholders' Right of Redemption. (i) If the Corporation has not made a public offering of its Common Stock pursuant to an effective registration statement under the Securities Act or consummated a transaction described in Section 2(c) above, on or before June 30, 1999, then the holders of outstanding shares of Series B Preferred Stock shall have the right to require the Corporation to redeem then outstanding shares of Series B Preferred Stock in accordance with the following provisions: (1) Upon the written request of the holders of at least 15% of the then outstanding shares of Series B Preferred Stock (a "Series B Written Request"), the Corporation shall notify all other holders of Series B Preferred Stock, within fifteen (15) days of the receipt of such request, of their rights under this Section 5(b). (2) Each holder of Series B Preferred Stock who did not join in the Series B Written Request shall have four weeks from the date of mailing of the notice described in Section 5(b)(i)(1) to notify the Corporation of such holder's interest in participating in the redemption to be effected pursuant to the Series B Written Request. (3) Upon expiration of the period set forth in Section 5(b)(i)(2), the Corporation shall have thirty (30) days to deliver to each of the holders of Series B Preferred Stock who joined in the Series B Written Request and to each other holder of Series B Preferred Stock who responded to the notice described in Section 5(b)(i)(2) by indicating their interest in participating in the subject redemption cash in the amount of the full Redemption Price (as defined in Section 5(b)(ii) below) for each share of Series B Preferred Stock requested to be redeemed in accordance with this Section 5(b). (ii) The Redemption Price for each share of Series B Preferred Stock shall be equal to $3.83 for each share of Series B Preferred Stock (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares) plus 6% compounded interest per annum on such amount from the date on which the shares of Series B Preferred Stock to be redeemed were first issued and outstanding. (iii) The Corporation may assign its obligation to redeem shares of Series B Preferred Stock pursuant to this Section 5(b), in whole or in part, to any stockholder or stockholders of the Corporation not otherwise participating in the subject redemption upon request of such stockholder or stockholders and the unanimous approval of the Board of Directors. -11- 12 (c) Series C Stockholders' Right of Redemption. (i) If the Corporation has not made a public offering of its Common Stock pursuant to an effective registration statement under the Securities Act, or consummated a transaction described in Section 2(c) above, on or before February 28, 2000, then the holders of outstanding shares of Series C Preferred Stock shall have the right to require the Corporation to redeem then outstanding shares of Series C Preferred Stock in accordance with the following provisions: (1) Upon the written request of the holders of at least 15% of the then outstanding shares of Series C Preferred Stock (a "Series C Written Request"), the Corporation shall notify all other holders of Series C Preferred Stock, within fifteen (15) days of the receipt of such request, of their rights under this Section 5(c). (2) Each holder of Series C Preferred Stock who did not join in the Series C Written Request shall have four weeks from the date of mailing of the notice described in Section 5(c)(i)(1) to notify the Corporation of such holder's interest in participating in the redemption to be effected pursuant to the Series C Written Request. (3) Upon expiration of the period set forth in Section 5(c)(i)(2), the Corporation shall have thirty (30) days to deliver to each of the holders of Series C Preferred Stock who joined in the Series C Written Request and to each other holder of Series C Preferred Stock who responded to the notice described in Section 5(c)(i)(2) by indicating their interest in participating in the subject redemption cash in the amount of the full Redemption Price (as defined in Section 5(c)(ii) below) for each share of Series C Preferred Stock requested to be redeemed in accordance with this Section 5(c). (ii) The Redemption Price for each share of Series C Preferred Stock shall be equal to $4.29 for each share of Series C Preferred Stock (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares) plus 6% compounded interest per annum on such amount from the date on which the shares of Series C Preferred Stock to be redeemed were first issued and outstanding. (iii) The Corporation may assign its obligation to redeem shares of Series C Preferred Stock pursuant to this Section 5(c), in whole or in part, to any stockholder or stockholders of the Corporation not otherwise participating in the subject redemption upon request of such stockholder or stockholders and the unanimous approval of the Board of Directors. (d) Series D Stockholders' Right of Redemption. (i) If the Corporation has not made a public offering of its Common Stock pursuant to an effective registration statement under the Securities Act or consummated a transaction described in Section 2(c) above, on or before December 31, 2001, then the holders of outstanding shares of Series D Preferred Stock shall have the right to require the Corporation to redeem then outstanding shares of Series D Preferred Stock in accordance with the following provisions: -12- 13 (1) Upon the written request of the holders of at least 15% of the then outstanding shares of Series D Preferred Stock (a "Series D Written Request"), the Corporation shall notify all other holders of Series D Preferred Stock, within fifteen (15) days of the receipt of such request, of their rights under this Section 5(d). (2) Each holder of Series D Preferred Stock who did not join in the Series D Written Request shall have four weeks from the date of mailing of the notice described in Section 5(d)(i)(1) to notify the Corporation of such holder's interest in participating in the redemption to be effected pursuant to the Series D Written Request. (3) Upon expiration of the period set forth in Section 5(d)(i)(2), the Corporation shall have thirty (30) days to deliver to each of the holders of Series D Preferred Stock who joined in the Series D Written Request and to each other holder of Series D Preferred Stock who responded to the notice described in Section 5(d)(i)(2) by indicating their interest in participating in the subject redemption cash in the amount of the full Redemption Price (as defined in Section 5(d)(ii) below) for each share of Series D Preferred Stock requested to be redeemed in accordance with this Section 5(d). (ii) The Redemption Price for each share of Series D Preferred Stock shall be equal to $5.72 for each share of Series D Preferred Stock (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares) plus 6% compounded interest per annum on such amount from the date on which the shares of Series D Preferred Stock to be redeemed were first issued and outstanding. (iii) The Corporation may assign its obligation to redeem shares of Series D Preferred Stock pursuant to this Section 5(d), in whole or in part, to any stockholder or stockholders of the Corporation not otherwise participating in the subject redemption upon request of such stockholder or stockholders and the unanimous approval of the Board of Directors. (e) Series E Stockholders' Right of Redemption. (i) If the Corporation has not made a public offering of its Common Stock pursuant to an effective registration statement under the Securities Act or consummated a transaction described in Section 2(c) above, on or before February 28, 2002 then the holders of outstanding shares of Series E Preferred Stock shall have the right to require the Corporation to redeem then outstanding shares of Series E Preferred Stock in accordance with the following provisions: (1) Upon the written request of the holders of at least 15% of the then outstanding shares of Series E Preferred Stock (a "Series E Written Request"), the Corporation shall notify all other holders of Series E Preferred Stock, within fifteen (15) days of the receipt of such request, of their rights under this Section 5(e). (2) Each holder of Series E Preferred Stock who did not join in the Series E Written Request shall have four weeks from the date of mailing of the notice described in Section 5(e)(i)(1) to notify the Corporation of such holder's interest in participating in the redemption to be effected pursuant to the Series E Written Request. -13- 14 (3) Upon expiration of the period set forth in Section 5(e)(i)(2), the Corporation shall have thirty (30) days to deliver to each of the holders of Series E Preferred Stock who joined in the Series E Written Request and to each other holder of Series E Preferred Stock who responded to the notice described in Section 5(e)(i)(2) by indicating their interest in participating in the subject redemption cash in the amount of the full Redemption Price (as defined in Section 5(e)(ii) below) for each share of Series E Preferred Stock requested to be redeemed in accordance with this Section 5(e). (ii) The Redemption Price for each share of Series E Preferred Stock shall be calculated as the greater of the amounts resulting from the application of the following paragraphs: (1) An amount equal to $5.72 for each share of Series E Preferred Stock (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares) plus 6% compounded interest per annum on such amount from the date on which the shares of Series E Preferred Stock to be redeemed were first issued and outstanding; or (2) An amount determined by dividing the Corporation's average annual consolidated net income (determined in accordance with generally accepted accounting principles) for the four most recent fiscal years prior to the date on which the redemption occurs by the total number of shares of Common Stock and Preferred Stock then outstanding and multiplying the resulting number by six (6). (iii) The Corporation may assign its obligation to redeem shares of Series E Preferred Stock pursuant to this Section 5(e), in whole or in part, to any stockholder or stockholders of the Corporation not otherwise participating in the subject redemption upon request of such stockholder or stockholders and the unanimous approval of the Board of Directors. (f) Series F Stockholders' Right of Redemption. (i) If the Corporation has not made a public offering of its Common Stock pursuant to an effective registration statement under the Securities Act or consummated a transaction described in Section 2(c) above, on or before March 28, 2002 then the holders of outstanding shares of Series F Preferred Stock shall have the right to require the Corporation to redeem then outstanding shares of Series F Preferred Stock in accordance with the following provisions: (1) Upon the written request of the holders of at least 15% of the then outstanding shares of Series F Preferred Stock (a "Series F Written Request"), the Corporation shall notify all other holders of Series F Preferred Stock, within fifteen (15) days of the receipt of such request, of their rights under this Section 5(f). (2) Each holder of Series F Preferred Stock who did not join in the Series F Written Request shall have four weeks from the date of mailing of the notice described in Section 5(f)(i)(1) to notify the Corporation of such holder's interest in participating in the redemption to be effected pursuant to the Series F Written Request. -14- 15 (3) Upon expiration of the period set forth in Section 5(f)(i)(2), the Corporation shall have thirty (30) days to deliver to each of the holders of Series F Preferred Stock who joined in the Series F Written Request and to each other holder of Series F Preferred Stock who responded to the notice described in Section 5(f)(i)(2) by indicating their interest in participating in the subject redemption cash in the amount of the full Redemption Price (as defined in Section 5(f)(ii) below) for each share of Series F Preferred Stock requested to be redeemed in accordance with this Section 5(f). (ii) The Redemption Price for each share of Series F Preferred Stock shall be equal to $8.58 for each share of Series F Preferred Stock (as adjusted for any stock dividends, stock splits, stock combinations, recapitalizations or the like with respect to such shares) plus 6% compounded interest per annum on such amount from the date on which the shares of Series F Preferred Stock to be redeemed were first issued and outstanding. (iii) The Corporation may assign its obligation to redeem shares of Series F Preferred Stock pursuant to this Section 5(f), in whole or in part, to any stockholder or stockholders of the Corporation not otherwise participating in the subject redemption upon request of such stockholder or stockholders and the unanimous approval of the Board of Directors. (g) If no funds or insufficient funds are legally available at the time of any redemption pursuant to this Section 5 to redeem all shares of Preferred Stock set for redemption at such time, then the Corporation shall redeem all shares of Preferred Stock then due for redemption to the extent legally permissible, pro rata based on the full amount which the holder of such shares would be entitled to receive upon redemption of those shares under this Section 5. Any shares due to be redeemed which are not redeemed pursuant to the foregoing sentence shall be carried forward and redeemed on the first date on which the Corporation has funds legally available to effect such redemption to the full extent of legally available funds of the Corporation at such time. (h) Immediately upon the occurrence of the date and time set for redemption by the Board of Directors and the compliance by the Corporation of its obligations under this Section 5 required to be complied with on such date, the shares of Preferred Stock to be redeemed shall be canceled and deemed to be part of the authorized but unissued capital stock of the Corporation. 6. Protective Provisions. In addition to any other rights provided by law, so long as any Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of (i) the holders of not less than a majority of the then outstanding shares of the Preferred Stock voting as a single class and (ii) the holders of not less than a majority of the then outstanding shares of Series E Preferred Stock voting as a single class: (a) amend or repeal any provision of, or add any provision to, the Corporation's Certificate of Incorporation or Bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Preferred Stock; -15- 16 (b) authorize or issue shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred Stock, or authorize or issue shares of stock of any class or any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having option rights to purchase, any shares of stock of the Corporation having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred Stock; or (c) reclassify any Common Stock into shares having any preference or priority as to dividends or assets superior to or on a parity with any such preference or priority of the Preferred Stock. (d) pay any cash dividends on the Common Stock; (e) redeem or purchase any of the Common Stock, provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Corporation upon the termination of the employment, consulting or other relationship between the Corporation and such persons; (f) authorize, approve or consummate a sale of all or substantially all of the Corporation's assets or any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which would result in the holders of the outstanding voting equity securities of the Corporation immediately prior to such transaction holding less than 50% of the voting equity securities of the surviving entity immediately following such transaction; or (g) increase the total number of authorized shares of Preferred Stock. 7. Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. 8. Consent for Certain Repurchases of Common Stock Deemed to be Distributions. Each holder of Preferred Stock shall be deemed to have consented, for purposes of Section 170 of the Delaware Corporations Code, to distributions made by the Corporation in connection with the repurchase of shares of Common Stock issued to or held by employees or consultants upon termination of their employment or services pursuant to agreements providing for such right of repurchase between the Corporation and such persons. V. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the bylaws of the Corporation, the Board of Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot unless the bylaws so provide. -16- 17 VI. The Board of Directors is authorized to make, adopt, amend, alter or repeal the bylaws of the Corporation. The stockholders shall also have power to make, adopt, amend, alter or repeal the bylaws of the Corporation. VII. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any action from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of a director of the Corporation, without any further corporate action on the part of the Corporation, shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article VII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. VIII. Effective as of the date (the "Effective Date") on which the Corporation becomes subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any such action at a duly called annual or special meeting. IX. The number of directors which constitute the entire Board of Directors shall be as specified in the bylaws of the Corporation. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term of which they are elected and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the General Corporation Law of Delaware. -17- 18 Effective as of the date of the first regularly-scheduled annual meeting of the stockholders following the Effective Date, the directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the second annual meeting of the stockholders following the Effective Date, the term of office of the initial Class II directors shall expire at the third annual meeting of the stockholders following the Effective Date and the term of office of the initial Class III directors shall expire at the fourth annual meeting of the stockholders following the Effective Date. At each annual meeting of stockholders, commencing with the second regularly-scheduled annual meeting of stockholders following the Effective Date, each of the successors elected to replace the directors of a Class whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election and until his or her respective successor shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any director may be removed from office by the stockholders of the Corporation only for cause. Vacancies occurring on the Board of Directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled only by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy or newly created directorship shall hold office until the next election of the Class for which such director shall have been chosen and until his or her successor shall have been duly elected and qualified. X. Effective as of the Effective Date, (i) any merger or combination between the Corporation and an entity or person owning, directly or indirectly, 10% of the Corporation's shares (an "Interested Purchaser"), and (ii) any sale of the Corporation or sale of all or substantially all of the assets of the Corporation to an Interested Purchaser (a transaction of the type described in clauses (i) and (ii) is referred to as a "Transaction") will require the affirmative vote of at least two-thirds (2/3) of the combined voting power of all of the then-outstanding shares of the Corporation entitled to vote, unless either: (i) the Transaction is approved by a two-thirds (2/3) of the members of the Board of Directors; or (ii) as a result of the Transaction, all holders of then-outstanding shares of the Corporation (other than the Interested Purchaser) receive cash in an amount at least equal to the greatest of (a) the highest price paid by the Interested Purchaser for any shares of the Corporation during the offer; or (b) an amount reflecting the same or a greater percentage relationship to the then market price of the Corporation's stock as the highest price -18- 19 per share paid by the Interested Purchaser during the tender offer bears to the market price of the stock immediately prior to the commencement of the tender offer; or (c) an amount equal to the earnings per share of the Corporation for the four full consecutive fiscal quarters immediately preceding the proposed Transaction multiplied by the then current price/earnings ratio of the Interested Purchaser." -19- 20 IN WITNESS WHEREOF, the undersigned, Steven Humphreys and John Niedermaier have signed this Third Amended and Restated Certificate of Incorporation as President and Secretary, respectively, of said SCM Microsystems, Inc. this 8th day of April, 1997. s/Steven Humphreys ----------------------------- Steven Humphreys, President s/John Niedermaier ----------------------------- John Niedermaier, Secretary -20- EX-3.2 3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SCM MICROSYSTEMS, INC. SCM Microsystems, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of Delaware (the "Corporation"), does hereby certify as follows: FIRST: The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on December 13, 1996, amended and restated on December 20, 1996, amended and restated on March 24, 1997, and amended and restated on April 9, 1997. SECOND: This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Section 242 and 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the Corporation. THIRD: This Amended and Restated Certificate of Incorporation was approved by the written consent of the stockholders of the Corporation in accordance with the provisions of Section 228 for the General Corporation Laws of the State of Delaware. FOURTH: The Certificate of Incorporation of this Corporation, as amended and restated, is hereby amended and restated in its entirety to read as follows: "I. The name of this corporation is SCM Microsystems, Inc. (hereinafter sometimes referred to as the "Corporation"). II. The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. III. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. 2 IV. The Corporation is authorized to issue two classes of shares, designated "Preferred Stock" and "Common Stock." The total number of shares which the Corporation shall have authority to issue is 50,000,000 of which 40,000,000 shares shall be Common Stock at $.001 par value and 10,000,000 shares shall be Preferred Stock at $.001 par value. Shares of Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. For any wholly unissued series of Preferred Stock, the Board of Directors of the Corporation (the "Board of Directors") is authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them. For any series of Preferred Stock having issued and outstanding shares, the Board of Directors is also authorized to decrease the number of shares of any series of Preferred Stock prior or subsequent to the issuance of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status of undesignated Preferred Stock. V. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the bylaws of the Corporation, the Board of Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot unless the bylaws so provide. VI. The Board of Directors is authorized to make, adopt, amend, alter or repeal the bylaws of the Corporation. The stockholders shall also have power to make, adopt, amend, alter or repeal the bylaws of the Corporation. VII. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any action from which the director derived an improper personal benefit. -2- 3 If the Delaware General Corporation Law is hereafter amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of a director of the Corporation, without any further corporate action on the part of the Corporation, shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article VII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. VIII. The stockholders of the Corporation may not take action by written consent in lieu of a meeting but must take any such action at a duly called annual or special meeting. IX. The number of directors which constitute the entire Board of Directors shall be as specified in the bylaws of the Corporation. At each annual meeting of stockholders, directors of the Corporation shall be elected to hold office until the expiration of the term of which they are elected and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the General Corporation Law of Delaware. Effective as of the date of the first regularly-scheduled annual meeting of the stockholders following the date (the "Effective Date") on which the Corporation became subject to the periodic requirements of the Securities Exchange Act of 1934, as amended, the directors of the Corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the second annual meeting of the stockholders following the Effective Date, the term of office of the initial Class II directors shall expire at the third annual meeting of the stockholders following the Effective Date and the term of office of the initial Class III directors shall expire at the fourth annual meeting of the stockholders following the Effective Date. At each annual meeting of stockholders, commencing with the second regularly-scheduled annual meeting of stockholders following the Effective Date, each of the successors elected to replace the directors of a Class whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election and until his or her respective successor shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any director may be removed from office by the stockholders of the Corporation only for cause. -3- 4 Vacancies occurring on the Board of Directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled only by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy or newly created directorship shall hold office until the next election of the Class for which such director shall have been chosen and until his or her successor shall have been duly elected and qualified. X. (i) Any merger or combination between the Corporation and an entity or person owning, directly or indirectly, 10% of the Corporation's shares (an "Interested Purchaser"), and (ii) any sale of the Corporation or sale of all or substantially all of the assets of the Corporation to an Interested Purchaser (a transaction of the type described in clauses (i) and (ii) is referred to as a "Transaction") will require the affirmative vote of at least two-thirds (2/3) of the combined voting power of all of the then-outstanding shares of the Corporation entitled to vote, unless either: (i) the Transaction is approved by a two-thirds (2/3) of the members of the Board of Directors; or (ii) as a result of the Transaction, all holders of then-outstanding shares of the Corporation (other than the Interested Purchaser) receive cash in an amount at least equal to the greatest of (a) the highest price paid by the Interested Purchaser for any shares of the Corporation during the offer; or (b) an amount reflecting the same or a greater percentage relationship to the then market price of the Corporation's stock as the highest price per share paid by the Interested Purchaser during the tender offer bears to the market price of the stock immediately prior to the commencement of the tender offer; or (c) an amount equal to the earnings per share of the Corporation for the four full consecutive fiscal quarters immediately preceding the proposed Transaction multiplied by the then current price/earnings ratio of the Interested Purchaser. XI. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and all rights conferred upon stockholders herein are granted subject to this reservation." IN WITNESS WHEREOF, the undersigned, Steven Humphreys and John Niedermaier have signed this Fourth Amended and Restated Certificate of Incorporation as President and Secretary, respectively, of said SCM Microsystems, Inc. this _____ day of June, 1997. ----------------------------- Steven Humphreys, President ----------------------------- John Niedermaier, Secretary -4- EX-3.3 4 BYLAWS, AS AMENDED, OF REGISTRANT 1 EXHIBIT 3.3 SCM Microsystems, Inc. A DELAWARE CORPORATION BY-LAWS ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 1.2 Special Meetings. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (ii) by the holders of not less than 10% of all shares entitled to cast votes at the meeting, voting together as a single class and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3 Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4 Quorum. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall 2 constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of the stockholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence the Vice President designated by the President, or in the absence of such designation any Vice President, or in the absence of the President or any Vice President, a chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 8 of these Bylaws to act by proxy, and officers of the Corporation. Section 1.6 Conduct of Business. The Chairman shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 1.6 and Section 1.7, below. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6 and Section 1.7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.7 Notice of Stockholder Business. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of -2- 3 meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a stockholder, or (d) properly brought before a special meeting by a stockholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by stockholders. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessors) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Section 1.8 Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. No stockholder may authorize more than one proxy for his shares. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast. Section 1.9 Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the -3- 4 examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office. The number of directors shall initially be nine (9) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). A vacancy resulting from the removal of a director by the stockholders as provided in Article II, Section 2.3 below may be filled at special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of the death, resignation or removal of any director. Section 2.2 Vacancies and Newly Created Directorships. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3 Removal. Subject to the rights of holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum, or by the stockholders as provided in Article II, Section 2.1 above. Directors so chosen shall hold office until the new annual meeting of stockholders. -4- 5 Section 2.4 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established. by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not fewer than five (5) days before the meeting or by telegraphing or personally delivering the same not fewer than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6 Quorum. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof . Section 2.7 Participation in Meetings by Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8 Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or requited by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, mailing and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; -5- 6 (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the Corporation's business and affairs. Section 2.10 Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.11 Nomination of Director Candidates. Subject to the rights of holders of any class or series of Preferred Stock then outstanding, nominations for the election of Directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally. However, any stockholder entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a stockholder nomination for a director to be elected at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's Proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a nomination for director to be elected at a special meeting, notice by the stockholders to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of Directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding -6- 7 each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. In the event that a person is validly designated as a nominee in accordance with this Section 2.11 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee upon delivery, not fewer than five days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Section 2.11 had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. If the chairman of the meeting for the election of Directors determines that a nomination of any candidate for election as a Director at such meeting was not made in accordance with the applicable provisions of this Section 2.1 1, such nomination shall be void. ARTICLE III COMMITTEES Section 3.1 Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2 Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any -7- 8 committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV OFFICERS Section 4.1 Generally. The officers of the Corporation shall consist of a President, a Chief Executive Officer, a Chief Operating Officer, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chairman of the Board, if there shall be such an officer, and the President shall each be members of the Board of Directors. Any number of offices may be held by the same person. Section 4.2 Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. Section 4.3 President. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the President shall have, in coordination with the Chief Executive Officer and the Chief Operating Officer, the responsibility for the general management and control of the business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the Chief Executive Officer and Chief Operating Officer), employees and agents of the Corporation. Section 4.4 Chief Executive Officer. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the Chief Executive Officer shall have, in coordination with the President and the Chief Operating Officer, the responsibility for the general management and control of the business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the President and Chief Operating Officer), employees and agents of the Corporation. Section 4.5 Chief Operating Officer. Subject to the provisions of these bylaws and to the direction of the Board of Directors, the Chief Operating Officer shall have, in coordination with the -8- 9 Chief Executive Officer and the President, the responsibility for the general management and control of the business and affairs of the Corporation, and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers (except for the Chief Executive Officer and President), employees and agents of the Corporation. Section 4.6 Vice President. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. Section 4.7 Treasurer. Unless otherwise designated by the Board of Directors, the Chief Financial Officer of the Corporation shall be the Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation and shall have custody of all monies and securities of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Section 4.8 Secretary. Secretary shall issue all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders, the Board of Directors, and all committees of the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. Section 4.9 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.10 Removal. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 4.11 Action With Respect to Securities of Other Corporations. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. -9- 10 ARTICLE V STOCK Section 5.1 Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. Section 5.2 Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 5.4 of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3 Record Date. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.5 Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 6.1 Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any -10- 11 person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or be telegram or mailgram. Section 6.2 Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 7.1 Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2 Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 7.3 Reliance Upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 7.5 Time Periods. In applying any provision of these bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a -11- 12 person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a Partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnifi cation granted to such person under applicable law, this bylaw or any agreement with the Corpora tion) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2 of this Article VII, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or pro ceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposi tion; provided, however, that, unless the Delaware General Corporation Law then so prohibits, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation. service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay an amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 8.2 Right of Claimant to Bring Suit. If a claim under Section 1 of this Article VII is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The burden of proving such claim shall be on the claimant. It shall be a defense to any such action (other then an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. Neither the -12- 13 failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 8.3 Non-Exclusivity of Rights. The rights conferred on any person in Sections 1 and 2 of this Article VII shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.4 Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VII. Section 8.5 Insurance. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 8.6 Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VII by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENT Section 9.1 Amendment of Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least -13- 14 sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. -14- 15 BY-LAWS OF SCM MICROSYSTEMS, INC. -15- 16
INDEX SECTION PAGE ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting.............................................................1 Section 1.2 Special Meetings...........................................................1 Section 1.3 Notice of Meetings.........................................................1 Section 1.4 Quorum.....................................................................1 Section 1.5 Conduct of the Stockholders' Meeting.......................................2 Section 1.6 Conduct of Business........................................................2 Section 1.7 Notice of Stockholder Business.............................................2 Section 1.8 Proxies and Voting.........................................................3 Section 1.9 Stock List.................................................................3 ARTICLE II BOARD OF DIRECTORS Section 2.1 Number and Term of Office..................................................4 Section 2.2 Vacancies and Newly Created Directorships..................................4 Section 2.3 Removal....................................................................4 Section 2.4 Regular Meetings...........................................................5 Section 2.5 Special Meetings...........................................................5 Section 2.6 Quorum.....................................................................5 Section 2.7 Participation in Meetings by Conference Telephone..........................5 Section 2.8 Conduct of Business........................................................5 Section 2.9 Powers.....................................................................5 Section 2.10 Compensation of Directors..................................................6 Section 2.11 Nomination of Director Candidates..........................................6 ARTICLE III COMMITTEES Section 3.1 Committees of the Board of Directors.......................................7 Section 3.2 Conduct of Business........................................................7 ARTICLE IV OFFICERS Section 4.1 Generally..................................................................8 Section 4.2 Chairman of the Board......................................................8 Section 4.3 President..................................................................8 Section 4.4 Chief Executive Officer....................................................8 Section 4.5 Chief Operating Officer....................................................8 Section 4.6 Vice President.............................................................9
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INDEX SECTION PAGE Section 4.7 Treasurer..................................................................9 Section 4.8 Secretary..................................................................9 Section 4.9 Delegation of Authority....................................................9 Section 4.10 Removal....................................................................9 Section 4.11 Action With Respect to Securities of Other Corporations....................9 ARTICLE V STOCK Section 5.1 Certificates of Stock.....................................................10 Section 5.2 Transfers of Stock........................................................10 Section 5.3 Record Date...............................................................10 Section 5.4 Lost, Stolen or Destroyed Certificates....................................10 Section 5.5 Regulations...............................................................10 ARTICLE VI NOTICES Section 6.1 Notices...................................................................10 Section 6.2 Waivers...................................................................11 ARTICLE VII MISCELLANEOUS Section 7.1 Facsimile Signatures......................................................11 Section 7.2 Corporate Seal............................................................11 Section 7.3 Reliance Upon Books, Reports and Records..................................11 Section 7.4 Fiscal Year...............................................................11 Section 7.5 Time Periods..............................................................11 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 Right to Indemnification..................................................11 Section 8.2 Right of Claimant to Bring Suit...........................................12 Section 8.3 Non-Exclusivity of Rights.................................................13 Section 8.4 Indemnification Contracts.................................................13 Section 8.5 Insurance.................................................................13 Section 8.6 Effect of Amendment.......................................................13
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INDEX SECTION PAGE ARTICLE IX AMENDMENT Section 9.1 Amendment of Bylaws.......................................................13
-iii- EX-9.1 5 VOTING TRUST AGREEMENT I WITH N. EFTHYMIOU 1 EXHIBIT 9.1 DUPLICATE ORIGINAL [emblem] New postal code 85049 DR. NORBERT KUNTZ, NOTARY Theresienstrasse 11 o 8070 Ingolstadt Phone (08 41) 3 31 88 o Fax (08 41) 3 38 30 DR. HANS SCHMALZL, NOTARY It is hereby confirmed that the attached document represents a duplicate original of the original document and matches it in its entirety. It is given to the recipient designated below upon request. Ingolstadt, July 27, 1993 se [signature] Notary [illegible seal] Mr. Bernd Meier Ahornallee 39 85283 Wolnzach 2 Doc. roll no. 1781/93/S dated 7/19/93 Doc. roll no. 1781/93/S Trust contract and obligation to transfer a share Today, July nineteenth, nineteen hundred ninety-three, - July 19, 1993 -, the following persons are present before me, Dr. Hans Schmalzl, notary, in Ingolstadt in my office at Theresienstrasse 11/I: 1. Mr. Nicholas Efthymiou, born 10/13/62, graduate engineer, residing at 85354 Freising, Untere Domberggasse 2; according to information provided, married and living under the statutory matrimonial property regime according to Greek law, Correct: Luneburgerstrasse 8, 80809 Munich. 2. Mr. Bernd Meier, born 10/15/49, graduate engineer, residing at 85283 Wolnzach, Ahornalle 39; according to information provided, married and living under the statutory matrimonial property regime. At the request of the persons appearing, who are known to me personally, I recorded the declarations which they submitted in my presence: Dr.S./HM 3 - 2 - I. Mr. Bernd Meier - - hereinafter referred to as Trustee - has acquired from Mr. Nicolas Efthymiou. - - hereinafter referred to as Trustor - a capital contribution in the amount of DM 28,000.00 in the firm of SCM Vertriebs-GmbH Systeme, Componenten, Mikrocomputer [Systems, Components, Microcomputers], which is registered with the Neuburg/Donau Municipal Court under no. HRB 90 270. II. The Trustor shall be obligated to hold the Trustee harmless against any claim arising from the assumption of the trust. He guarantees that the latter shall not be called upon to make any payment toward the share or shall not be subject to liability to further call or other payments or liabilities for the Corporation, including any tax obligations. Specifically, the Trustor shall bear all costs, taxes and expenses in connection with the fiduciary holding of the equity interest and its retransfer to the Trustor or transfer to third parties designated by the Trustor. 4 - 3 - III. Externally, the Trustee shall be a fully entitled and fully obligated shareholder, but inter se he shall be a fiduciary shareholder for the account of the Trustor. He shall be obligated to hold and manage the equity investment and the rights and duties associated therewith according to the best of his knowledge and conscience for the account, and pursuant to the instructions, of the Trustor and the rights arising from the equity interest(1) He shall further be obligated to the Trustor not to raise any pecuniary claims arising from the equity interests and not to enter into any obligations or dispositions with regard to the equity interest without the written consent of the Trustor; specifically, he shall not sell the share or encumber it with rights of third parties. To the extent permissible, he assigns, at this point in time, all claims arising from the equity interest, specifically the claims to the distribution of profits and liquidation proceeds, to the Trustor, who hereby accepts said assignment. The Trustee shall promptly transfer to the Trustor the profit allocable to the equity interests promptly following receipt or credit thereof. From a tax standpoint, it is intended that the profit allocable to the equity interest be classified as the income of the Trustor and not to that of the Trustee. The contracting parties shall be obligated to submit all declarations to the tax authority which are necessary to produce this legal effect. - -------- (1) The italicized clause is a grammatically incorrect insertion in the original--Trans. 5 - 4 - Otherwise, the contracting parties shall treat the contents of this document confidentially vis a vis third parties. IV. The Trustee is hereby obligated to the Trustor to transfer the capital contribution to the Trustor, or to a third party to be named by the Trustor, at any time at the Trustor's request at the purchase price of the nominal amount of the capital contribution. Accordingly, he shall submit all declarations and make all petitions which are necessary for the legally effective transfer. V. If, according to the articles of incorporation, the consent of the Corporation or the shareholders is necessary for the transfer of shares, the contracting parties to today's trust contract shall personally obtain such consent. VI. The Trustor may terminate the trust relationship at any time; the Trustee may terminate the trust relationship upon notice of three months effective at the end of a calendar month, but not earlier than the registration of the Corporation in the commercial register. 6 - 5 - At the end of the trust relationship, the Trustee shall be obligated to promptly assign the share to the Trustor or a third party to be named by the Trustor at the nominal amount. The trust relationship shall also end a) upon the transfer of the share at the request of the Trustor, b) upon the death of the Trustee. VII. Inter se, the Trustee shall be obligated at the request of the Trustor to submit the agenda to the Trustor prior to each general meeting of shareholders and obtain his instructions concerning the ballot. VIII. No compensation shall be paid for the Trustee, except in the case of transfer. IX. The Trustor shall bear the expense of this document and the execution thereof. The contracting parties shall each receive a duplicate original of this document. 7 - 6 - [stamp] Read aloud by the notary, approved by the participants and personally signed: [signature] [signature] [signature] [signature] [handwritten:] Notary [seal] DR. HANS SCHMALZL - NOTARY IN INGOLSTADT EX-9.2 6 VOTING TRUST AGREEMENT II WITH N. EFTHYMIOU 1 EXHIBIT 9.2 DUPLICATE ORIGINAL [emblem] DR. NORBERT KUNTZ, NOTARY Theresienstrasse 11 o 85049 Ingolstadt Phone (08 41) 3 31 88 o Fax (08 41) 3 38 30 DR. HANS SCHMALZL, NOTARY It is hereby confirmed that the attached document represents a duplicate original of the original document and matches it in its entirety. It is given to the recipient designated below upon request. Ingolstadt, May 8, 1995/Schn [signature] Notary [illegible seal] Mr. Reiner Pohl Albert-Einstein-Strasse 26 85646 Neufahrn 2 Doc. roll no. 985/95/S dated 5/2/95 Doc. roll no. 985/95/S Trust contract and obligation to transfer a share Today, May second, nineteen hundred ninety-five, - May 2, 1995 -, the following persons are present before me, Dr. Hans Schmalzl, notary, in Ingolstadt in my office at Theresienstrasse 11/I: 1. Mr. Reiner Pohl, graduate engineer, born 7/17/41, residing at Albert- Einstein-Strasse 26, 85646 Neufarn, 2. Mr. Bernd Meier, born 10/15/49, graduate engineer, residing at Ahornalle 39, 85283 Wolnzach. At the request of the persons appearing, who are known to me personally, I recorded the declarations which they submitted in my presence: Dr.S./Schn 3 - 2 - I. Mr. Bernd Meier - - hereinafter referred to as Trustee - has subscribed to a capital contribution in the amount of DM 7,500.00 in the firm of SCM Schneider Microsysteme Entwicklungs- und Vertriebs GmbH, which is registered with the Commercial Register of the Munich Municipal Court under no. HRB 91372. The purchase was made by Mr. Pohl - - hereinafter referred to as Trustor - on a fiduciary basis. II. Externally, the Trustee shall be a fully entitled and fully obligated shareholder, but inter se he shall be a fiduciary shareholder for the account of the Trustor. He shall be obligated to hold and manage the equity investment and the rights and duties associated therewith according to the best of his knowledge and conscience for the account, and pursuant to the instructions, of the Trustor and exercise the rights arising from the equity interest, particularly the voting right, only at the instruction of the Trustor. He shall further be obligated to the Trustor not to raise any pecuniary claims arising from the equity interests and not to enter into any obligations or dispositions with regard to the equity interest without the written consent of the Trustor; specifically, he shall not sell the share or encumber it with rights of third parties. 4 - 3 - To the extent permissible, he assigns, at this point in time, all claims arising from the equity interest, specifically the claims to the distribution of profits and liquidation proceeds, to the Trustor, who hereby accepts said assignment. The Trustee shall promptly transfer to the Trustor the profit allocable to the equity interests promptly following receipt or credit thereof. From a tax standpoint, it is intended that the profit allocable to the equity interest be classified as the income of the Trustor and not to that of the Trustee. The contracting parties shall be obligated to submit all declarations to the tax authority which are necessary to produce this legal effect. Otherwise, the contracting parties shall treat the contents of this document confidentially vis a vis third parties. III. The Trustee is hereby obligated, at the Trustor's request, to the Trustor to transfer the capital contribution to the Trustor, or to a third party to be named by the Trustor, at any time and at no charge. Accordingly, he shall submit all declarations and make all petitions which are necessary for the legally effective transfer. 5 - 4 - IV. If, according to the articles of incorporation, the consent of the Corporation or the shareholders is necessary for the transfer of shares, the contracting parties to today's trust contract shall personally obtain such consent. V. The Trustee hereby grants the Trustor the power of attorney to represent him in the transfer of his share to the Trustor or a third party to be named by the Trustor. This power of attorney shall be irrevocable and shall not lapse upon the death of the Trustee. VI. The Trustor may terminate the trust relationship at any time; the Trustee may terminate the trust relationship upon notice of three months effective at the end of a calendar month. At the end of the trust relationship, the Trustee shall be obligated to promptly assign the share to the Trustor or a third party to be named by the Trustor at the nominal amount. The trust relationship shall also end a) upon the transfer of the share at the request of the Trustor, 6 - 5 - b) upon the death of the Trustee. VII. No compensation shall be paid for the trusteeship. VIII. The Trustor shall bear the expense of this document and the execution thereof. The contracting parties shall each receive a duplicate original of this document. [stamp] Read aloud by the notary, approved by the participants and personally signed: [signature] [signature] [signature] [handwritten:] Notary [seal] DR. HANS SCHMALZL - NOTARY IN INGOLSTADT 7 DUPLICATE ORIGINAL [emblem] DR. NORBERT KUNTZ, NOTARY Theresienstrasse 11 o 85049 Ingolstadt Phone (08 41) 3 31 88 o Fax (08 41) 3 38 30 DR. HANS SCHMALZL, NOTARY It is hereby confirmed that the attached document represents a duplicate original of the original document and matches it in its entirety. It is given to the recipient designated below upon request. Ingolstadt, May 5, 1995/Schn [signature] Notary [illegible seal] Mr. Reiner Pohl Albert-Einstein-Strasse 26 85646 Neufahrn 8 Doc. roll no. 984/95/S dated 5/2/95 Doc. roll no. 984/95/S Assignment of a share Today, May second, nineteen hundred ninety-five, - May 2, 1995 -, the following persons are present before me, Dr. Hans Schmalzl, notary, in Ingolstadt in my office at Theresienstrasse 11/I: 1. Mr. Reiner Pohl, graduate engineer, born 7/17/41, residing at Albert- Einstein-Strasse 26, 85646 Neufahrn, 2. Mr. Bernd Meier, born 10/15/49, graduate engineer, residing at Ahornallee 39, 85283 Wolnzach. At the request of the persons appearing, who are known to me personally, I recorded the declarations which they submitted in my presence: I. According to information provided, Mr. Reiner Pohl has a share in the amount of DM 12,500.00 of the capital stock of DM 333,400.00 Dr.S./Schn 9 - 2 - in the firm of SCM Schneider Microsysteme Entwicklungs- und Vertriebs GmbH which is registered with the Commercial Register of the Munich Municipal Court under no. HRB 91 372. The capital contribution is paid-in in full. II. From the share described in section I, with all rights and duties appurtenant thereto, specifically the right to receive profits starting today, Mr. Reiner Pohl hereby sells and transfers a share amount in the amount of DM 7,500.00 to Mr. Bernd Meier, who accepts said transfer. III. No consideration shall be given, since the transfer is carried out on a fiduciary basis. IV. (1) The seller guarantees only the legal validity of the share, the amount of the deposit thereto and unimpeded conveyance of title. 10 - 3 - Further liability, specifically for the quality of the enterprise of the Corporation, shall be barred. (2) The notary has made reference to Section 16 GmbHG [German Limited Liability Corporation Act] (succession of the purchaser to capital contribution liabilities) and Section 24 GmbHG (liability of the shareholders inter se for shortfalls in capital contributions). He also pointed out that he cannot examine the information set forth in section I to determine its correctness. (3) The transfer and partition shall require the consent of the Corporation. The contracting parties shall obtain such consent themselves. (4) The Corporation has no real property. VI. Mr. Pohl shall bear the costs of the creation of this document. Duplicate originals of this document shall be received by the seller and the purchaser, as well as the Corporation for notice purposes pursuant to Section 16 GmbHG. 11 - 4 - [stamp] Read aloud by the notary, approved by the participants and personally signed: [signature] [signature] [signature] [signature] [handwritten:] Notary [seal] DR. HANS SCHMALZL - NOTARY IN INGOLSTADT EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 SCM MICROSYSTEMS, INC. INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT (the "Agreement") is made as of March __, 1997, by and between SCM Microsystems, Inc., a Delaware corporation (the "Company"), and _______________ ("Indemnitee"). RECITALS A. The Company desires to attract and retain qualified directors, officers, employees and other agents, and to provide them with protection against liability and expenses incurred while acting in that capacity; B. The Certificate of Incorporation and Bylaws of the Company contain provisions for indemnifying directors and officers of the Company, and the Bylaws and Delaware law contemplate that separate contracts may be entered into between the Company and its directors and officers, employees and other agents with respect to their indemnification by the Company, which contracts may provide greater protection than is afforded by the Certificate of Incorporation and Bylaws; C. The Company understands that Indemnitee has reservations about serving or continuing to serve the Company without adequate protection against personal liability arising from such service, and that it is also of critical importance to Indemnitee that adequate provision be made for advancing costs and expenses of legal defense; and D. The Board of Directors and the stockholders of the Company have approved as being in the best interests of the Company indemnity contracts substantially in the form of this Agreement for directors and officers of the Company and its subsidiaries and for certain other employees and agents of the Company designated by the Board of Directors. NOW, THEREFORE, in order to induce Indemnitee to serve or to continue to serve as a director and/or officer of the Company, and in consideration of Indemnitee's service to the Company, the parties agree as follows: 1. Contractual Indemnity. In addition to the indemnification provisions of the Bylaws of the Company, the Company hereby agrees, subject to the limitations of Sections 2 and 5 hereof: (a) To indemnify, defend and hold Indemnitee harmless to the greatest extent possible under applicable law from and against any and all judgments, fines, penalties, amounts paid in settlement and any other amounts reasonably incurred or suffered by Indemnitee (including attorneys' fees) in 2 connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Company, to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or agent of the Company or is or was serving or at any time serves at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (collectively referred to hereafter as a "Claim"), whether or not arising prior to the date of this Agreement. (b) To pay any and all expenses reasonably incurred by Indemnitee in defending any Claim or Claims (including reasonable attorneys' fees and other reasonable costs of investigation and defense), as the same are incurred and in advance of the final disposition of any such Claim or Claims, upon receipt of an undertaking by or on behalf of Indemnitee to reimburse such amounts if it shall be ultimately determined that Indemnitee (i) is not entitled to be indemnified by the Company under this Agreement, and (ii) is not entitled to be indemnified by the Company under the Certificate of Incorporation or the Bylaws of the Company. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. 2. Limitations on Contractual Indemnity. Indemnitee shall not be entitled to indemnification or advancement of expenses under Section 1: (a) if a court of competent jurisdiction, by final judgment or decree, shall determine that (i) the Claim or Claims in respect of which indemnity is sought arise from Indemnitee's fraudulent, dishonest or willful misconduct, or (ii) such indemnity is not permitted under applicable law; or (b) on account of any suit in which judgment is rendered for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (c) for any acts or omissions or transactions from which a director may not be relieved of liability under the Delaware General Corporation Law; or (d) with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to proceedings brought in good faith to establish or enforce a right to indemnification under this Agreement or any other statute or law, or (ii) at the Company's discretion, in specific cases if the Board of Directors of the Company has approved the initiation or bringing of such suit; or -2- 3 (e) for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Company; or (f) on account of any suit brought against Indemnitee for misuse or misappropriation of non-public information, or otherwise involving Indemnitee's status as an "insider" of the Company, in connection with any purchase or sale by Indemnitee of securities of the Company. 3. Continuation of Contractual Indemnity. Subject to the termination provisions of Section 11, all agreements and obligations of the Company contained herein shall continue for so long as Indemnitee shall be subject to any possible action, suit, proceeding or other assertion of a Claim or Claims. 4. Expenses; Indemnification Procedure. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1 hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. 5. Notification and Defense of Claim. If any action, suit, proceeding or other Claim is brought against Indemnitee in respect of which indemnity may be sought under this Agreement: (a) Indemnitee will promptly notify the Company in writing of the commencement thereof, and the Company and any other indemnifying party similarly notified will be entitled to participate therein at its own expense or to assume the defense thereof and to employ counsel reasonably satisfactory to Indemnitee. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three (3) business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. Indemnitee shall have the right to employ its own counsel in connection with any such Claim and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of Indemnitee unless (i) the Company shall not have assumed the defense of the Claim and employed counsel for such defense, or (ii) the named parties to any such action (including any impleaded parties) include both Indemnitee and the Company, and Indemnitee shall have reasonably concluded that joint representation is inappropriate under applicable standards of professional conduct due to a material conflict of interest between Indemnitee and the Company, in either of which events the reasonable fees and expenses of such counsel to the Indemnitee shall be borne by the Company upon delivery to the Company of the undertaking referred to in subparagraph (b) of Section 1. However, in no event will the Company be obligated to pay the fees or expenses of more than one firm of attorneys representing Indemnitee and any other agents of -3- 4 the Company in connection with any one Claim or separate but substantially similar or related Claims in the same jurisdiction arising out of the same general allegations or circumstances. (b) The Company shall not be liable to indemnify Indemnitee for any amounts paid in settlement of any Claim effected without the Company's written consent, and the Company shall not settle any Claim in a manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; provided, however, that neither the Company nor Indemnitee will unreasonably withhold its consent to any proposed settlement and, provided further, that if a claim is settled by the Indemnitee with the Company's written consent, or if there be a final judgment or decree for the plaintiff in connection with the Claim by a court of competent jurisdiction, the Company shall indemnify and hold harmless Indemnitee from and against any and all losses, costs, expenses and liabilities incurred by reason of such settlement or judgment. (c) Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (d) Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a Claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be reimbursed for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 4 unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (e) If, at the time of the receipt of a notice of a Claim, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf -4- 5 of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. 6. Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee against any Claim to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors, an officer or other corporate agent, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute, or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors, an officer, or other corporate agent, such changes, to the extent not otherwise required by applicable law to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 8. Public Policy. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Insurance. Although the Company may from time to time maintain insurance for the purpose of indemnifying Indemnitee and other agents of the Company against personal liability, including costs of legal defense, nothing in this Agreement shall obligate the Company to do so. 10. No Restrictions. The rights and remedies of Indemnitee under this Agreement shall not be deemed to exclude or impair any other rights or remedies to which Indemnitee may be entitled under the Certificate of Incorporation or Bylaws of the Company, or under any other agreement, provision of law or otherwise, nor shall anything contained herein restrict the right of the Company to indemnify Indemnitee in any proper case even though not specifically provided for in this Agreement, nor shall anything contained herein restrict Indemnitee's right to contribution as may be available under applicable law. -5- 6 11. Termination. The Company may terminate this Agreement at any time upon 90 days written notice, but any such termination will not affect Claims relating to events occurring prior to the effective date of termination. 12. Severability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. 13. Attorneys' Fees. In the event of any litigation or other action or proceeding to enforce or interpret this Agreement, the prevailing party as determined by the court shall be entitled to an award of its reasonable attorneys' fees and other costs, in addition to such relief as may be awarded by a court or other tribunal. 14. Further Assurances. The parties will do, execute and deliver, or will cause to be done, executed and delivered, all such further acts, documents and things as may be reasonably required for the purpose of giving effect to this Agreement and the transactions contemplated hereby. 15. Acknowledgment. The Company expressly acknowledges that it has entered into this Agreement and assumed the obligations imposed on the Company hereunder in order to induce Indemnitee to serve or to continue to serve as an agent of the Company, and acknowledges that Indemnitee is relying on this Agreement in serving or continuing to serve in such capacity. 16. Construction of Certain Phrases. (a) "Company": For purposes of this Agreement, references to the "Company" shall also include, in addition to the resulting corporation in any consolidation or merger to which Aspec Technology, Inc. is a party, any constituent corporation (including any constituent of a constituent) absorbed in consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) Benefit Plans: References to "fines" contained in this Agreement shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. 17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. -6- 7 18. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 19. Governing Law; Binding Effect; Amendment. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware applicable to contracts entered into in Delaware. (b) This Agreement shall be binding upon Indemnitee and the Company, their successors and assigns, and shall inure to the benefit of Indemnitee, his heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. -7- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "Company" SCM MICROSYSTEMS, INC. a Delaware corporation 131 Albright Way Los Gatos, CA 95030 By: -------------------------- Title: ----------------------- "Indemnitee" ----------------------------- (Signature of Indemnitee) Address: --------------------- --------------------- -8- EX-10.2 8 1997 STOCK PLAN 1 EXHIBIT 10.2 SCM MICROSYSTEMS, INC. 1997 STOCK PLAN 1. Purposes of the Plan. The purposes of this Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means SCM Microsystems, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. 2 (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. -2- 3 (p) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (q) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "Option" means a stock option granted pursuant to the Plan. (s) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (u) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (v) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (w) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "Plan" means this 1997 Stock Plan. (y) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (z) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (bb) "Section 16(b)" means Section 16(b) of the Exchange Act. (cc) "Service Provider" means an Employee, Director or Consultant. -3- 4 (dd) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 1,000,000 Shares, plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i) 500,000 Shares, (ii) 3% of the outstanding Shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. -4- 5 (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right of the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii)to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; -5- 6 (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii)to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 100,000 Shares. -6- 7 (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 100,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. -7- 8 (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii)such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. -8- 9 (a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option -9- 10 shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. -10- 11 (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. -11- 12 (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the -12- 13 Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -13- 14 1997 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number _________________________ Date of Grant _________________________ Vesting Commencement Date _________________________ Exercise Price per Share $________________________ Total Number of Shares Granted _________________________ Total Exercise Price $_________________________ Type of Option: ___ Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date: _________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. 15 Termination Period: This Option may be exercised for ninety days after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to Chief Financial Officer of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 16 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; or (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the -3- 17 Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, -4- 18 AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: SCM MICROSYSTEMS, INC. - ----------------------------------- ----------------------------- Signature By - ------------------------------------ ----------------------------- Print Name Title - ------------------------------------ Residence Address - ------------------------------------ -5- 19 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. --------------------------------------- Spouse of Optionee -6- 20 EXHIBIT A 1997 STOCK PLAN EXERCISE NOTICE SCM Microsystems, Inc. 131 Albright Way Los Gatos, CA 95030 Attention: Chief Financial Officer 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of SCM Microsystems, Inc. (the "Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement dated, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $ __________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Stockholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing 21 signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER: SCM MICROSYSTEMS, INC. - ---------------------------------- ----------------------------- Signature By - ---------------------------------- ----------------------------- Print Name Its Address: Address: - --------------------------------- SCM Microsystems, Inc. 131 Albright Way - --------------------------------- Los Gatos, CA 95030 ----------------------------- Date Received -2- EX-10.3 9 1997 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.3 SCM MICROSYSTEMS 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1997 Employee Stock Purchase Plan of SCM Microsystems, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the Common Stock of the Company. (d) "Company" shall mean SCM Microsystems, Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings, but exclusive of payments for commission, overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first day of each Offering Period. 2 (i) "Exercise Date" shall mean the last day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board, or; (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twenty-four (24) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four (24) months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or after April 30, 1999. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this Employee Stock Purchase Plan. (m) "Purchase Price" shall mean an amount equal to 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (n) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. -2- 3 (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or after April 30, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. -3- 4 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. (c) Notwithstanding anything to the contrary contained herein, an Employee's enrollment in the Plan shall also constitute enrollment in the Company's 1997 Employee Stock Purchase Plan for Non-U.S. Employees (the "International ESPP") as of the Enrollment Date of the current Offering Period under the International ESPP. Such Employee's payroll deductions with respect to the International ESPP prior to the effective date of a transfer of the Employee to the Company or a Designated Subsidiary that results in the Employee ceasing to be an Employee for U.S. tax purposes shall be zero percent (0%), and such Employee's payroll deductions with respect to the International ESPP following the effective date of the Employee's transfer may be at the same rate as the Employee's rate of payroll deductions with respect to this Plan prior to such transfer, or may be adjusted by the Employee pursuant to Section 6 of the International ESPP. Such Employee's payroll deductions with respect to this Plan shall be zero percent (0%) as of the effective date of such transfer. 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period; provided, however, that no participant shall have more than $5,000 in payroll deductions made each Purchase Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. -4- 5 (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 30,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sec tions 3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall, in its discretion, either (i) arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option or, (ii) -5- 6 credit the shares purchased to an account in the participant's name with a brokerage firm selected by the Board to hold the shares in street name. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to Section 19, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be (175,000) shares, plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i)150,00 shares, (ii) 1% of the outstanding shares on such date or (iii) a lesser amount determined by the Board, less the number of shares issued under the International ESPP. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. -6- 7 (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. -7- 8 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, -8- 9 unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the -9- 10 opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -10- 11 EXHIBIT A SCM MICROSYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________ hereby elects to participate in the SCM Microsystems, Inc. 1997 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (from 0 to 10%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my par ticipation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to stockholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only):_______ _______________________________________________________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or 12 other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)___________________________________________________________ (First) (Middle) (Last) _________________________________ ___________________________________ Relationship ___________________________________ (Address) -2- 13 Employee's Social Security Number: ____________________________________ Employee's Address: ____________________________________ ____________________________________ ____________________________________ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated:_________________________ _________________________________________ Signature of Employee _________________________________________ Spouse's Signature (If beneficiary other than spouse) -3- 14 EXHIBIT B SCM MICROSYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the SCM Microsystems, Inc. 1997 Employee Stock Purchase Plan which began on ____________, 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: -------------------------------- -------------------------------- -------------------------------- Signature: -------------------------------- Date: --------------------------- EX-10.5 10 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES 1 EXHIBIT 10.5 SCM MICROSYSTEMS, INC. 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES 1. Purposes of the Plan. The purposes of this Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to French Employees, and - to promote the success of the Company's business and the business of its French subsidiary. This Plan is a sub-plan created under and pursuant to the U.S. Plan. Options shall be granted under the Plan at the discretion of the Administrator from the pool of available shares under the U.S. Plan, and are intended to qualify for preferred treatment under French tax laws. Unless otherwise defined herein, the terms defined in the U.S. Plan shall have the same defined meanings in this Plan, and, except as otherwise provided herein, Options granted under this Plan shall be subject to the terms and conditions of the U.S. Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Disability" means total and permanent disability, as defined under Applicable Laws. (b) "Employee" means any person employed by a Subsidiary in a salaried position, who does not own more than 10% of the voting power of all classes of stock of the Company, or any Parent or Subsidiary, and who is a resident of the Republic of France. (c) "Fair Market Value" means, as of any date, the dollar value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the Nasdaq Stock Market, its Fair Market Value shall be the average quotation price for the last 20 days preceding the date of determination for such stock (or the average closing bid for such 20 day period, if no sales were reported) as quoted on such exchange or system and reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the Nasdaq Stock Market (but not on the Nasdaq National Market thereof) or regularly quoted by a recognized securities dealer but 2 selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the last 20 days preceding the date of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (d) "Option Price" means the per share price for exercising an Option, determined in accordance with subsection 8(a) of the Plan. (e) "Plan" means this SCM Microsystems, Inc. 1997 Stock Plan for French Employees. (f) "U.S. Plan" means the SCM Microsystems, Inc. 1997 Stock Plan. 3. Stock Subject to the Plan. The maximum aggregate number of Shares that may be optioned and sold under the Plan is the available pool of Shares under the U.S. Plan. However, at no time shall the total number of Options outstanding which may be exercised for newly issued Shares of Common Stock exceed that number equal to one-third of the Company's voting stock, whether preferred stock of the Company or Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If any Optioned Stock is to consist of reacquired Shares, such Optioned Stock must be purchased by the Company prior to the date of grant of the corresponding Option and must be reserved and set aside for such purpose. If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant under the Plan (unless the Plan has terminated) or the U.S. Plan. 4. Reporting to the Shareholders' Meeting. In its annual proxy statement to the shareholders, the Board shall inform the shareholders as to the number and price of the Options granted hereunder, and as to the Shares purchased upon exercise of such Options. 5. Eligibility. Options may be granted only to Employees; provided, however, that the President Directoire General, the Directoire General and other directors who are also Employees of a Subsidiary may be granted Options. 6. Term of Plan. The Plan shall become effective as of the date of its adoption by the Board. It shall continue in effect until the termination of the U.S. Plan or the date five (5) years from the date of its adoption, whichever is sooner, unless terminated earlier under Section 10 of the Plan. 7. Term of Option. The term of each Option shall be as stated in the Option Agreement; provided, however, that subject to Section 9(d) hereof, the maximum term of an Option shall not exceed ten (10) years from the date of grant of the Option. -2- 3 8. Option Price and Consideration. (a) Option Price. The Option Price for the Shares to be issued pursuant to exercise of an Option shall be one hundred percent (100%) of the Fair Market Value on the date the Option is granted. The Option Price shall not be modified while the Option is outstanding. (b) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist of: (i) cash or check (denominated in U.S. Dollars); (ii) wire transfer (denominated in U.S. Dollars); (iii) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (iv) any combination of the foregoing methods of payment. 9. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Subsidiary receives: (i) written notice of exercise (in accordance with the Option Agreement and in the form attached hereto as Exhibit A) from the person entitled to exercise the Option; (ii) full payment for the Shares with respect to which the Option is exercised; and (iii) a written subscription agreement to the Shares (in accordance with the Option Agreement and in the form attached hereto as Exhibit B) from the person entitled to exercise the Option. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan, and shall be deemed to be definitively made upon receipt of the payment by the Subsidiary. (b) Termination of Employment Relationship. In the event that an Optionee's status as an Employee terminates (other than upon the Optionee's death or Disability), the Optionee may exercise his or her Option, but only within thirty (30) days (or such other period of time not -3- 4 exceeding three (3) months as is determined by the Administrator), and only to the extent that the Optionee was entitled to exercise it at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. In the event that an Optionee's status as an Employee terminates as a result of the Optionee's Disability, the Optionee may exercise his or her Option at any time within six (6) months from the date of such termination, but only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. In the event of the death of an Optionee while an Employee, the Option may be exercised at any time within six (6) months following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent that the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the Shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance does not exercise the Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall immediately revert to the Plan. 10. Amendment and Termination of the Plan. (a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and a representative of the Administrator. -4- 5 SCM MICROSYSTEMS, INC. 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the U.S. Plan and the 1997 Plan for French Employees shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT Optionee's Name and Address: ___________________________________ ___________________________________ ___________________________________ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: Date of Grant ___________________________________ Vesting Commencement Date ___________________________________ Exercise Price per Share $__________________________________ Total Number of Shares Granted ___________________________________ Total Exercise Price $__________________________________ Term/Expiration Date: ___________________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the shares subject to the option shall vest twelve (12) months after the vesting commencement date and 1/48 of the shares subject to the option shall vest each month thereafter. Termination Period: This Option may be exercised for thirty (30) days after termination of the employment relationship, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan. 6 II. AGREEMENT 1. Grant of Option. The Board of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price (the "Exercise Price"), per share set forth in the Notice of Grant subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 10(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. In the event of Optionee's death, Disability or other termination of Optionee's employment relationship, the exercisability of the Option is governed by the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice to the Subsidiary, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), by delivery of a subscription agreement to the Subsidiary, in the form attached as Exhibit B (the "Subscription Agreement") and such other representations and agreements as may be required by the Company or the Subsidiary. Until such Shares are issued, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue to the Optionee (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the U.S. Plan. The Exercise Notice and Subscription Agreement shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Subsidiary. The Exercise Notice and Subscription Agreement shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Subsidiary of such fully executed Exercise Notice and Subscription Agreement accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with all relevant provisions of law and the requirements of any stock exchange upon which the Shares are then listed. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: -2- 7 (a) cash or check (denominated in U.S. Dollars); (b) wire transfer (denominated in U.S. Dollars); (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. OPTIONEE ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN, WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY OR THE SUBSIDIARY. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. OPTIONEE: SCM MICROSYSTEMS, INC. _____________________________ ________________________________ Signature By _____________________________ ________________________________ Print Name Title -3- 8 EXHIBIT A SCM MICROSYSTEMS, INC. 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES EXERCISE NOTICE SCM Microsystems, Inc. __________________________________ __________________________________ __________________________________ Attention: General Secretary 1. Exercise of Option. Effective as of today, ___________, 199__, the undersigned ("Optionee") hereby elects to purchase _________ shares (the "Shares") of the Common Stock of SCM Microsystems, Inc. (the "Company") under and pursuant to the 1997 Stock Plan for French Employees (the "Plan") and the Stock Option Agreement dated ___________ (the "Option Agreement"). The purchase price for the Shares shall be $__________, as required by the Option Agreement. 2. Delivery of Payment. Optionee herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until issuance of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. 5. Tax Consultation. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Subscription Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, 9 and such agreement is governed by the laws of California and the United States of America except for that body of laws pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: SCM MICROSYSTEMS, INC. _________________________________ ___________________________________ Signature By _________________________________ ___________________________________ Print Name Title Address: ________________________________ ________________________________ -2- 10 EXHIBIT B SCM MICROSYSTEMS, INC. 1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES SUBSCRIPTION AGREEMENT SCM Microsystems, Inc. ______________________ ______________________ ______________________ Attention: General Secretary 1. Amount and Terms of the Subscription In conformity with the Stock Plan promulgated for the French employees (the "Plan") of SCM Microsystems, Inc. (the "Company"), Options to subscribe to Shares of Common Stock (the "Shares") were granted according to the Stock Option Agreement dated _________________ (the "Option Agreement"). _______ Shares shall be issued for the benefit of the undersigned (the "Subscriber") in accordance with the applicable laws of the United States of America and the State of California. The Shares subscribed to may be paid up by: (a) cash or check (denominated in U.S. Dollars); (b) wire transfer (denominated in U.S. Dollars); (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or 2. Transfer of the funds The funds coming from the subscription of Shares under the Plan shall be paid over to the Subsidiary by the participating Employees. Full payment shall be deemed to be definitively made upon the date of receipt of the payment in the bank accounts in France of the Subsidiary. 11 3. Subscription Agreement I, the undersigned, Last name ______________________________ First name ______________________________ Residence ______________________________ subscribe to ________ Shares. Supporting my subscription I shall pay the total amount of the Purchase Price of the Shares following one or more of the methods described in Section 1 above. The Subscriber SCM MICROSYSTEMS, INC. _____________________________ ________________________________ Signature By _____________________________ ________________________________ Name Title Address ___________________ ___________________ ___________________ -2- EX-10.6 11 1997 STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES 1 EXHIBIT 10.6 SCM MICROSYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. 2. Definitions. (a) "Applicable Law" shall mean legal requirements relating to the administration of stock option plans under the applicable laws of any country or jurisdiction to which the Plan is extended. (b) "Board" shall mean the Board of Directors of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Common Stock" shall mean the Common Stock of the Company. (e) "Company" shall mean SCM Microsystems, Inc. and any Designated Subsidiary. (f) "Compensation" shall mean all base straight time gross earnings and commissions, but exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (g) "Designated Subsidiaries" shall mean the Subsidiaries which have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (h) "Employee" shall mean any individual who is an Employee of the Company for tax purposes. For purposes of the Plan, the employment relationship may, pursuant to regulations established by the Board and as permitted or required by Applicable Law, be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. (i) "Enrollment Date" shall mean the first day of each Offering Period. (j) "Exercise Date" shall mean the last day of each Purchase Period. (k) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the 2 last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable, or; (2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable, or; (3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (4) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (l) "Offering Period" shall mean a period of approximately twenty-four (24) months, commencing on the first Trading Day on or after May 1 and November 1 of each year and terminating on the last Trading Day in the periods ending twenty-four (24) months later; provided, however, that the first Offering Period under the Plan shall commence with the First Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or after April 30, 1999. The duration of Offering Periods may be changed pursuant to Section 4 of this Plan. (m) "Plan" shall mean this Employee Stock Purchase Plan for Non-U.S. Employees. (n) "Purchase Price" shall mean an amount equal to eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (o) "Purchase Period" shall mean the approximately six-month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (p) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (q) "Subsidiary" shall mean a corporation of which not less than fifty percent (50%) of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (r) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. -2- 3 3. Eligibility. (a) Any Employee, who has been employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive Offering Periods with a new Offering Period commencing on the first Trading Day on or after May 1 and November 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 19 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or after April 30, 1999. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without stockholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a Participation Agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. (c) Notwithstanding anything to the contrary contained herein, an Employee's enrollment in the Plan shall also constitute enrollment in the Company's 1997 Employee Stock Purchase Plan (the "U.S. ESPP") as of the Enrollment Date of the current Offering Period under the U.S. ESPP. Such Employee's payroll deductions with respect to the U.S. ESPP prior to the effective date of a transfer of the Employee to the Company or a Designated Subsidiary that results in the Employee becoming an Employee for U.S. tax purposes shall be zero percent (0%), and such Employee's payroll deductions with respect to the U.S. ESPP following the effective date of the Employee's transfer may be at the same rate as the Employee's rate of payroll deductions with respect to this Plan prior to such transfer, or may be -3- 4 adjusted by the Employee pursuant to Section 6 of the U.S. ESPP. Such Employee's payroll deductions with respect to this Plan shall be zero percent (0%) as of the effective date of such transfer. 6. Payroll Deductions. (a) At the time a participant files his or her Participation Agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding ten percent (10%) of the Compensation which he or she receives on each pay day during the Offering Period; provided, however, that no participant shall have more than $5,000 in payroll deductions made each Purchase Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new Participation Agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new Participation Agreement unless the Company elects to process a given change in participation more quickly. A participant's Participation Agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's Participation Agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date of such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; -4- 5 provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 30,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b), and 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. 8. Exercise of Option. Unless a participant withdraws from the Plan as provided in Section 10 hereof, notice of exercise of his or her option shall be deemed to have been given by the participant and his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall, in its discretion, either (i) arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option or, (ii) credit the shares purchased to an account in the participant's name with a brokerage firm selected by the Board to hold the shares in street name. 10. Withdrawal; Termination of Employment. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new Participation Agreement. (b) Upon a participant's ceasing to be an Employee (as defined in Section 2(g) hereof) for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 14 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. -5- 6 (c) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 12. Stock. (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be the available pool of shares under the U.S. ESPP, subject to adjustment upon changes in capitalization of the Company as provided in Section 18 hereof. If, on a given Exercise Date, the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Company shall make a pro rata allo cation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 13. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility, to adjudicate all disputed claims filed under the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan, in the form of addendums hereto or otherwise, including rules and regulations necessary to conform the Plan to Applicable Law. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 14. Designation of Beneficiary. (a) Subject to Applicable Law, a participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly -6- 7 designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 16. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization, Liquidation, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each -7- 8 participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 19. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the best interests of the Company and its stockholders. Except as provided in Section 18 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall -8- 9 comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 22. Term of Plan. The Plan shall become effective upon April 1, 1997, subject to approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19 hereof. 23. Automatic Transfer to Low Price Offering Period. To the extent permitted by Applicable Law, if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. -9- 10 EXHIBIT A SCM MICROSYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES PARTICIPATION AGREEMENT _____ Original Application Enrollment Date: __________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. _____________________________________ hereby elects to participate in the SCM Microsystems, Inc. 1997 Employee Stock Purchase Plan for Non-U.S. Employees (the "Employee Stock Purchase Plan for Non-U.S. Employees") and subscribes to purchase shares of the Company's Common Stock in accordance with this Participation Agreement and the Employee Stock Purchase Plan for Non-U.S. Employees. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (not to exceed 10%, including amounts deferred under other employee stock purchase plans of the Company) during the Offering Period in accordance with the Employee Stock Purchase Plan for Non-U.S. Employees. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated in order to exercise the option(s) granted to me pursuant to the Employee Stock Purchase Plan and to purchase shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan for Non-U.S. Employees. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan for Non-U.S. Employees. I understand that my participation in the Employee Stock Purchase Plan for Non-U.S. Employees is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Participation Agreement is subject to stockholder approval of the Employee Stock Purchase Plan for Non-U.S. Employees. 5. Shares purchased for me under the Employee Stock Purchase Plan for Non- U.S. Employees should be issued in the name(s) of (Employee or Employee and Spouse only): ____________________________________________________. 11 6. I understand and acknowledge that notwithstanding any other provision of this Participation Agreement or the Employee Stock Purchase Plan: (a) neither the Employee Stock Purchase Plan nor this Participation Agreement shall form any part of any contract of employment between me and the Company or any Designated Subsidiary, and it shall not confer on me any legal or equitable rights (other than those constituting the options granted under the Employee Stock Purchase Plan themselves) against the Company or any Designated Subsidiary, directly or indirectly, or give rise to any cause of action in law or in equity against the Company or any subsidiary; (b) my benefits under the Employee Stock Purchase Plan shall not form any part of my wages, pay or remuneration or count as wages, pay or remuneration for pension fund or other purposes; (c) in no circumstances shall I, upon ceasing to hold my office or employment by virtue of which I am eligible to participate in the Employee Stock Purchase Plan, be entitled to any compensation for any loss of any right or benefit or prospective right or benefit under the Plan, which I might otherwise have enjoyed, whether such compensation is claimed by way of damages for wrongful dismissal or other breach of contract or by way of compensation for loss of office or otherwise. (d) that the Company expressly retains the right to terminate the Employee Stock Purchase Plan at any time and that I will have no right to continued option grants under the Employee Stock Purchase Plan in such event. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan for Non-U.S. Employees. The effectiveness of this Participation Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan for Non-U.S. Employees. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan for Non-U.S. Employees: NAME: (Please print) ----------------------------------------------------------- (First) (Middle) (Last) - ------------------------------ --------------------------------------- Relationship --------------------------------------- (Address) -2- 12 Employee's Social Security Number (or equivalent): ___________________________________ Employee's Address: ___________________________________ ___________________________________ ___________________________________ I UNDERSTAND THAT THIS PARTICIPATION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ___________________ ____________________________________________ Signature of Employee ____________________________________________ Spouse's Signature (If beneficiary other than spouse) -3- 13 EXHIBIT B SCM MICROSYSTEMS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN FOR NON-U.S. EMPLOYEES NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the SCM Microsystems, Inc. 1997 Employee Stock Purchase Plan for Non-U.S. Employees which began on ___________ 19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Participation Agreement. Name and Address of Participant: ___________________________________ ___________________________________ ___________________________________ Signature: ___________________________________ Date:______________________________ EX-10.7 12 TBG LOAN 1 EXHIBIT 10.7 TBG Technologie-Beteiligungs-Gesellschaft m.b.H. of Deutsche Ausgleichsbank Version 01.95 PARTNERSHIP AGREEMENT Agreement concerning the establishment of an undisclosed Partnership between SCM Microsystems GmbH, Pettenkoferstrasse 7, 85276 Pfaffenhofen -hereinafter: Technologieunternehmen (TU) [Technology Enterprise]- and Technologie-Beteiligungs-Gesellschaft m.b.H. [Technology Holding Company] of Deutsche Ausgleichsbank, Wielandstrasse 4, 53170 Bonn - dormant partner, hereinafter: TBG - SECTION 1 PURPOSE OF THE COMPANY, PARTNERS 1. Within the scope of the program "Investment Capital for Small Technology Enterprises" carried through with the Federal Ministry for Education, Science, Research and Technology (BMBF) and the Deutsche Ausgleichsbank, TBG is supporting technology enterprises of the business sector, provided they are not more than 10 years old and satisfy the EU definition of small and medium-sized enterprises (KMU) in the new Federal States and Berlin (East) or of small enterprises in the rest of the Federal Territory, respectively, to wit: - - they do not employ more than 250 (50) employees and - - either - have annual sales of not more than DM 40 million (DM 10 million) or - show a balance sheet total of not more than DM 20 million (DM 4 million), and - - are at a maximum 25% owned by one or more enterprises which do not satisfy this definition (exception: public holding companies, risk capital companies and - provided no control is exercised - institutional investors). All three conditions must be satisfied simultaneously, i.e., an enterprise is considered to be a KMU only when it demonstrates the required independence, meets the preset number of employees and does not exceed at least one of the limits for annual sales or balance sheet total, respectively. 2 TBG effects investments for the financing of innovation projects within the meaning of the investment principles of TBG, which constitute a component of this agreement and which TU recognizes, to wit: - for applied research and development until a logical point in time prior to starting commercial production according to the EU-definition, with the following delimitations: Applied research includes research or experimental work with the aim of gaining new findings, in order to facilitate the achievement of specific, practical goals such as the creation of new products, production processes or services. Normally, it can be said that it ends with the creation of a first prototype. 3 Development includes work on the basis of applied research with the aim of introducing new or substantially improved products, production processes or services up to - but not including - industrial application and commercial utilization. To this level belong, normally, planning and demonstration projects, as well as the additionally required development work, which finally ends in a bundle of information which permits starting production. - for investments for launching products on the market. 2. a) TU, recorded in the Commercial Register of the Munich Amtsgericht [District Court] under No. HRB 91372, operates pursuant to the articles of association in the valid version of March 29, 1990, addendum of May 29, 1990, a commercial business with the purpose of: Development, production and marketing of electronic components for microsystems, electronic and electrical devices, data terminals and processing installations, as well as trade with all the articles connected with these. b) Within the scope of this business purpose, TU is engaged in 1. development of the GSM-PCMCIA Card, 2. development of the hermetic Duraflash Card, 3. development of the PCMCIA smart card reader "PSR." 3. TBG acquires an interest in TU in the legal form of the undisclosed partnership, in order to support the project described in paragraph 2b. SECTION 2 CONTRIBUTION TO CAPITAL 1. Exclusively for the promotion of the innovation project described in Section 1 para. 2b and on the basis of the data of TU in the partnership application of January 30, 1995, TBG effects a contribution to capital in the amount of DM 3,000,000 on condition that the cooperation partners - - Zweite Beteiligungs KG [Second Limited Partnership] of TVM Techno Venture Management GmbH & Co. KG, Leopoldstrasse 28 A, 80802 Munich, - - TVM Eurotech Limited Partnership, 101 Arch Street, Suite 1950, Boston, MA 02110, U.S.A., - - KBL Founders Ventures S.C.A., 43, Boulevard Royal, 1-2955 Luxembourg, LUXEMBOURG, 4 - - APM International B.V, Gooimeer 3, NL-1411 DC Naarden, Netherlands, - - Vertex Investment (II) Pte. Ltd., 83 Science Park Drive, # 01-01/02, The Lune, Singapore Science Park, Singapore 0511, - - IntelliCard Systems Pte. Ltd., Block 171 Kallang Way # 04-03/04, Singapore 1334, Singapore, and - - Jean Yves LeRoux, Chemin des Cotes, F-13600 Ceyreste, France as investors (hereinafter jointly: BG) have concluded with TBG a cooperation agreement for the commitment to TU. The BG will be advised regarding the servicing of the commitment to TU by TVM Techno Venture Management GmbH & Co. KG, Leopoldstrasse 28 A, 80802 Munich, as servicing company. 5 The conditions for TBG entering the partnership are created, moreover, by the fact that the BG will effect additional contributions to the capital of JTU in the total amount of DM 189,300 with additional payment of a premium totaling DM 3,592,800 and subject to additionally making the commitment to bring in by waiver a loan repayment claim existing against the company plus a claim for interest in the amount of DM 3,222,000. 2. The contribution of TBG is to be used for co-financing the project-related planning listed in the appendix. The appendix shall constitute a component of this Partnership Agreement. To the extent that the costs of the project should decline as compared to the above data, or if subsequently additional public funds are solicited, TBG shall have the right to curtail its contribution in a ratio corresponding to the reduction of the investment volume. The reduction amount must be retransferred to TBG without delay. 3. TU may call in the contribution after the start of the company (cf. Section 4 para. 1 ), subject to the condition its immediate use as provided, and a proportionate use of funds together with the other financing means provided in para. 2, and the total financing of the investment project are ensured. The call must be accompanied by a confirmation of the call conditions by the BG. 4. If the contribution is not called, at least partially by December 31, 1995 at the latest, this agreement is terminated. 5. On the occasion of the first partial call, TBG shall have the right to retain a processing fee in the amount of 1% of the total contribution agreed in this agreement. 6. TBG contribution must be kept by TU in a separate contribution account. Withdrawals by TBG from this account are not allowed. SECTION 3 PROOF OF USE TU must confirm the use of the contribution funds as provided within 3 months after expiration of a project schedule set forth in the appendix to this agreement, subject to an extension of this time period by TBG to be confirmed on the form also attached as an appendix. The proof of use must be submitted to TBG by way of the BG. The use as provided must be substantiated to the BG and to TBG upon request. SECTION 4 START AND DURATION OF THE COMPANY 1. The undisclosed partnership shall begin as soon as this agreement is signed by both parties. 6 2. The undisclosed partnership is fixed for a term ending December 31, 2005. 3. Upon termination of the corporate relationship, the contribution of TBG and the unpaid dividends are due for payment to TBG. 7 4. Insofar as the funds kept by the BG are repaid before December 31, 2005, the contribution of TBG shall be due for repayment at the same time and in the same extent. SECTION 5 MANAGEMENT 1. TBG does not participate in the management of TU, if nothing different is provided hereinbelow. 2. TU shall require the consent of TBG for a) any amendment of the articles of association, in particular any amendment of the purpose of the enterprise, or the acceptance of new partners or the agreement of new participations; b) the appointment and dismissal of managers of TU; c) conclusion, amendment and termination of the agreement on the granting or the acquisition of licenses, patents, design patents, trademarks or know-how, to the extent these concern the innovation project supported with the participation of TBG; d) conclusion, amendment and termination of essential marketing agreements; e) partial or total move, lease or sale of the operation; f) conclusion and termination of control contracts and profit and loss transfer agreements. 3. Consent pursuant toSection5 para. 2 must be obtained from TBG without delay. If within a period of 14 days after receipt of the notice on the measure requiring consent TBG has not stated in writing its refusal to consent, such consent shall be deemed to have been given. SECTION 6 INFORMATION AND CONTROL RIGHTS 1. TU has to report to TBG semi-annually, namely by March 31 and September 30 of each year on the financial situation of TU and on the status of the innovation project described in Section 1 para. 2b, so long as TBG does not waive its right to these reports, because the BG simultaneously exercises control of TU also on behalf of TBG. In addition, TBG receives from TU a brief, monthly status report as per the attached appendix. 2. Irrespective of whether the BG exercises the control of TU simultaneously also for TBG, TU 8 has to inform TBG directly and without delay about all measures going beyond the scope of the usual business operation. Besides the measures mentioned under Section 5 para. 2, particularly the following go beyond the scope of usual business operations: a) Partial or total shutdown of operations; b) Discontinuance or substantial change of the innovation project described in Section 1 para. 2b; 9 c) Any assumption of commitments, also for investments, which exceed the amount of DM 250,000 per month, or if they result from leasing, rental or tenancy agreements, if they exceed the amount of DM 100,000 per month. 3. In addition, TBG shall have the right of verification pursuant to Section 716 BGB [Civil Code]. This applies also to the period after the termination of the partnership, to the extent necessary for verification of the aseets to which a partner is entitled upon his retirement from the partnership. TBG, furthermore has the right to examine at any time the records of TU referring to the innovation project described in Section 1 para. 2b. To exercise its verification right TBG may retain the services of third parties. 4. TU grants the BMBF [Federal Ministry of Science and Research], and a representative appointed by it, rights to receive presentations, information and to effect examinations in the same extent as that granted to TBG. TU declares its consent to the effect that TBG can transmit to the BMBF or to an institute assigned by it to this effect, the data on the scientific evaluation of the program mentioned inSection1 para. 1 of this agreement which are obtained through its enterprise and the supported innovation project. It declares itself prepared, furthermore, to provide directly to the BMBF and an institute assigned by it the information necessary for the scientific evaluation of the program, and to do so also after the termination of the undisclosed partnership. The BMBF has the right to pass on the data provided to it to the EU Commission for the exercise of supervisory and control powers. In the preparation and, if applicable, in the publication of data about the program it shall be ensured that no harm be caused to TU. 5. The Bundesrechnungshof [Federal Audit Office] has an examination right regarding TU under Section 91 BHO [Federal Audit Office Regulations], and all records which the Bundesrechnungshof deems necessary shall be made available and appropriate information given. SECTION 7 ADVISORY BOARD TBG may at any time demand the formation of an advisory board. TBG participates in this advisory board under reasonable consideration of the amount of its contribution. The advisory board shall advise TU in financial and technical matters, particularly with regard to the project described in Section 1 para. 2b. It has the same information and verification rights as those to which TBG is entitled under this agreement. SECTION 8 FINANCIAL YEAR, ANNUAL STATEMENT OF ACCOUNTS 10 1. The financial year of the undisclosed partnership is the same as that of TU. The financial year of TU ends on each December 31. 2. TU has to draw up its annual statement of accounts (balance sheet, profit and loss account, appendix) in observance of SectionSection 238 - 289 HGB [Handelsgesetzbuch] [Commercial Code] within six months after expiration of the financial year, and to forward it to TBG in an original, signed copy and with the certificate of an auditor or of a certified public accountant. 3. The annual statement of accounts must respect, insofar as permissible under commercial law, the profit determination provisions of the Income Tax Law. If, within the scope of the taxable profit determination or based on a external tax audit, other data than those contained in the original annual statement of account are deemed binding, such shall also be determining in the relation of TU to TBG. 11 SECTION 9 PROFIT AND LOSS SHARING 1. TBG receives on its paid contribution a minimum compensation of 6% p.a., irrespective of the annual result of TU. This compensation is payable semi-annually in retrospect by March 31 and September 30 of each year. 2. From the achieved annual surplus after the drawn contribution, TBG shall receive 11% of the profit (amount conditional on profit) in a post-money valuation of DM 21 million. If before the listing of TU on the stock exchange additional capital is attracted, the compensation will be adjusted accordingly. If the amount conditional on profit is small or equal to the minimum compensation paid for the financial year pursuant to No. 1, no compensation depending on profit will be due. Otherwise the amount of the difference must be paid. This profit sharing is payable within 2 weeks after adoption of the annual statement of account (Section 8 para. 2). 3. Determining the calculation according to Para. 2 are the year's net earnings, which are shown in the annual statement of account drawn up according to Section 8 para. 3 prior to taking into account TBG share of the profit pursuant to No. 2 above. a) To the annual statement of account must be added - paid income taxes, insofar as they have reduced the year's net earnings as shown; - interest charged to the partners in TU, provided the latter is a partnership, without having flowed into the year's net earnings of the co-entrepreneurs; - extraordinary expenditures, insofar as they result from business occasions which took place before the start of the undisclosed partnership; - losses from the sale or destruction of fixed assets, insofar as the latter were already present at the time of the start of the company. b) To be deducted from the year's net earnings are - amounts from writing back of tax-free reserves, which were formed prior to the start of the undisclosed partnership; - compensations for activities or interest credited to the partners in TU, provided the latter is a partnership, without having reduced the year's net earnings of the co-entrepreneurs; - extraordinary income, insofar as it is based on business occasions which took place 12 before the start of the undisclosed partnership; - income from the sale of fixed assets, insofar as the latter were already present at the time of the start of the company. c) In the year the partnership is called off, the year's net earnings for the calculation of the profit sharing pursuant to para. 2 shall be deemed to have accrued evenly over the year. 4. TBG shall have the right to demand, as of the end of the partnership period, a one-time compensation of 25% of the investment amount plus 6% of the investment amount for each year after expiration of the fifth full partnership year, in which TBG has received in minimum and profit-dependent amounts less than 12% of its contribution. 13 TBG shall make use of this right only when in its opinion it appears to be justified on the basis of the overall financial situation of TU, in particular on the basis of its profits attained during the last three years before the termination of the partnership and the undisclosed reserves formed during the time of the partnership. 5. TBG does not share in the losses of TU. SECTION 10 TAXES TU shall be responsible for remitting the legally prescribed Capital Yield Tax plus the solidarity surcharge in regard to the compensation for the undisclosed contribution, and will deduct from the payments to TBG the Capital Yield Tax and the solidarity surcharge and remit these directly to the appropriate tax office. After the remittance, TU will issue to TBG confirmations according to Section 45a para. 2 EStG [Income Tax Law] on the forms made available by TBG. SECTION 11 DISSOLUTION OF THE UNDISCLOSED PARTNERSHIP 1. In the event of the dissolution of TU, the undisclosed partnership shall be dissolved. In this case, the undisclosed investment must be repaid. 2. Section 9 para. 4 shall also apply in this case. SECTION 12 TERMINATION 1. TU has the right to redeem entirely or partially the participation of TBG, subject to observing a notice period of 3 months as of June 30 or December 31 of any year. If this redemption takes place at of the end of the fifth partnership year, the contribution of TBG has to be repaid with a premium in the amount of 25%. Beginning in the sixth partnership year, the arrangements set forth in Section 9 para. 4 will apply. TBG can waive the paymeNt of the premium, if the termination is effected because of the suspension of the supported innovation project. 2. Moreover, the undisclosed partnership can be terminated with immediate effect, by any of its partners upon existence of a weighty ground by means of a written statement. To the extent that the contribution has not or not yet been made in full, TBG shall by the notice of termination be released from its contribution obligation. TBG has the right to termination on weighty grounds, particularly, when a) TU has made false statements in the partnership application; 14 b) it is determined that the conditions for granting or leaving intact the partnership did not exist already originally or ceased to exist subsequently, particularly if the innovation project described in Section 1 para. 2b, proves to be impracticable or is abandoned or substantially changed by TU. Should the innovation project described in Section 1 para. 2 prove to be technically impossible or financially unattainable, TBG can waive repayment of the investment in full or in part, if the continued existence of TU is thereby made possible; 15 c) TU fails to submit the proof of use pursuant to Section 3 not later than 3 months after it was due, a reminder to this effect notwithstanding; d) notes accepted by TU go to protest, TU suspends its payments, files for bankruptcy or a petition is filed for institutional court settlement proceedings or insolvency is ascertained in some other way; e) the managerial know-how bearer(s) who was(were) active in such a position at TU at the time the agreement on the undisclosed partnership was concluded is(are) no longer active is his or their main occupation in the management of TU; f) one of the measures listed in Section 5 para. 2 has been carried through without the prior consent of TBG. SECTION 13 MATURING PAYMENTS Payments due shall bear interest after occurrence of the delay and until receipt by TBG at the rate of 3% above the discount rate of the Deutsche Bundesbank. SECTION 14 GENERAL PROVISIONS 1. Amendments or supplements to this agreement must be in written form. There exist no oral subsidiary understandings to this agreement. 2. Should one provision of this agreement be invalid, the remaining provisions shall remain unaffected by this. TU and TBG are committed to replace invalid provisions of the agreement by regulations that are legally valid and correspond as far as possible to the meaning and purpose of the invalid provisions. 3. Bonn has been agreed upon as venue for all legal disputes that may arise from this agreement or its performance. Bonn, June 8, 1995 Pfaffenhoven, Technologie-Beteiligungs- SCM Microsystems GmbH Gesellschaft m.b.H. of the Deutsche Ausgleichsbank [signature] [two signatures] TBG 16 Technologie-Beteiligungs-Gesellschaft m.b.H. of the Deutsche Ausgleichsbank PARTNERSHIP AGREEMENT APPENDIX I PROJECT-RELATED PLANNING PLANNING PERIOD: April 1, 1995 to April 1, 1996
PROJECT-SPECIFIC EXPENDITURES - ----------------------------- AMOUNT IN DM (WITHOUT V.A.T.) ----------------------------- I. FOR APPLIED RESEARCH AND DEVELOPMENT 1. INVESTMENTS SHOWN AS FIXED ASSETS ON THE BALANCE SHEET 1.1 Laboratory equipment and installations 450,000 1.2 Machines and installations for prototype production 1,240,000 1.3 Miscellaneous 2,025,000 2. NON-INVESTMENT R & D EXPENDITURES 2.1 Personnel 710,000 2.2 Materials 1,100,000 2.3 Third-party services (Order placement/Consulting) 300,000 2.4 Patents and permits 200,000 2.5 Travel expenses 165,000 2.6 Miscellaneous 585,000 II. FOR INVESTMENTS IN MARKET INTRODUCTION TOTAL 6,775,000 PRODUCT-SPECIFIC FINANCING - -------------------------- AMOUNT IN DM (WITHOUT V.A.T.) ----------------------------- 1. CAPITAL RESOURCES 1.1 Retained earnings 775,000 1.2 2. EQUITY CAPITAL 2.1 of TBG 3,000,000 2.2 of the lead investor 3,000,000 2.3 of other investors 3. PUBLIC FUNDS 3.1 Subsidies, allowances, supports 3.2 Others 4. BORROWINGS 4.1 from the bank 4.2 Others TOTAL 6,775,000
17 Fax No. 0228/831 24 93 TU: SCM Microsystems GmbH Pettenkoferstrasse 7 85276 Pfaffenhoven TBG 00107/01001 Brief statement for the month of* ........ 199.. ACTUAL AMOUNT in DM '000 Sales proceeds Expenditures on materials Expenditures on personnel Preliminary result Order backlog Current account limit of which used Distinctive features of the preceding month: Expectations of the management regarding future development: Much better better same worse much worse Date: -------------------------------- (Signature of the management and company stamp) - --------------------- * TO BE DELIVERED NOT LATER THAN BY THE END OF THE FOLLOWING MONTH. 18 PARTNERSHIP PRINCIPLES OF TBG Technologie Beteiligungs- TECHNOLOGIE-BETEILIGUNGS-GESELLSCHAFT M.B.H. Gesellschaft m.b.H. OF DEUTSCHE AUSGLEICHSBANK of Deutsche Ausgleichsbank 1. TBG AS GRANTOR OF PARTNERSHIPS Technologie-Beteiligungs-Gesellschaft m.b.H. (TBG) is a subsidiary of the Deutsche Ausgleichsbank. Within the scope of the program "Investment Capital for Small Technology Enterprises" it enters into undisclosed partnerships in technology enterprises (TU), as a rule without participating in the management of TU. An essential condition for entering a partnership is that an additional partner (Lead Investor) invests in TU in at least an equal amount as TBG and co-services the investment on the basis of a cooperation agreement. 2. PURPOSE OF THE INVESTMENT The investments serve to finance innovation projects (cf. No. 3.1), namely - for applied research and development until a logical point in time prior to the start of commercial production - for investments for market introduction. 3. PRECONDITIONS FOR INVESTMENT 3.1 INNOVATION PROJECTS - New techniques not yet in use in the enterprise are to be introduced by means of the innovation project. - The development shares which constitute the innovative core, are contributed within the enterprise itself. When services are used for development phases, the specifications have to be developed within the enterprise itself. - The new product (process/service) differs also in its essential functions from the former products (process/service) of the enterprise. - Linked to the new product (process/service) are competitive advantages (functions, quality, price) and marketing chances in the market relevant to the enterprise (regional, national, European, worldwide). 3.2 INVESTMENT RECIPIENTS 19 Investments from TBG can be obtained by enterprises of the commercial industry provided they meet the following characteristics: SMALL ENTERPRISES - business located in the Federal territory and - not more than 50 employees and - either annual sales of maximum DM 10 million or a balance sheet total of maximum DM 4 million. MEDIUM-SIZE ENTERPRISES - business located in the new Federal States and Berlin (East) and - not more than 250 employees and - either annual sales of maximum DM 40 million or a balance sheet total of maximum DM 20 million. FINANCIAL INDEPENDENCE Maximum 25% of the corporate capital may be held by enterprises which do not meet the criteria for small or medium-size enterprises. (Exception: public investment companies risk capital companies and - provided that no control is exercised institutional investors.) AGE Maximum 10 years. TECHNICAL AND BUSINESS EXPERTISE TU must be able to prove that it has the technical expertise necessary to carry through the development work and production, as well as the necessary sales expertise. Business expertise can also be contributed by the use of external parties - e.g., of the Lead Investor - provided that TU has not yet reached a considerable volume of sales prior to filing the application. 3.3 COOPERATING PARTNER (LEAD INVESTOR) Investment companies as well as individuals and legal entities which make available equity 20 capital to enterprises can be Lead Investors cooperating with TBG. The Lead Investor must participate with at least the same amount as TBG. He has to advise and support the technology enterprise in all business and financial matters and, if necessary, also be able to offer management and marketing support. In principle, he should be ready and in a position to make available additional financial resources. Before making an investment the Lead Investor must examine the investment conditions and comprehensibly document them, doing this at the same time also for TBG. During the life of the partnership, he has to supervise the management of TU and the development of the innovation project and to inform TBG about the financial situation of TU and about the innovation project. In addition, he will cooperate in drawing up the proof of use (cf. No. 3.4). A cooperation agreement between the Lead Investor and TBG settles the details. 3.4 FULL FINANCING The full financing of the innovation project must be assured. The investment funds may be used only for financing the innovation project or projects for which the investment has been promised. The Lead Investor must be informed without delay when the innovation project or its financing is changed. If the costs of the innovation project should subsequently be reduced or if subsequently additional public funds are obtained for the financing of the innovation project, so that financing in excess of 100% is available, the investment funds may be called back. The investment recipient is obligated to substantiate the correct use of the funds immediately after the innovation project is completed. The proof of use has to be submitted through the Lead Investor and be provided with his audit certification. 21 3.5 BAN ON ACCUMULATION The simultaneous investment in an innovation project within the scope of this program by TBG and the KfW [Kreditanstalt fur Wiederaufbau = Reconstruction Loan Corporation] is not permitted. In the event that for the investment of the Lead-Investor financing funds supported by public authorities are used, the Assistance Regulations of the European Community must be observed. 4. INVESTMENT CONDITIONS 4.1 FORM OF INVESTMENT TBG effects investments in TU as an undisclosed partner. Securities do not have to be posted. 4.2 MAXIMUM AMOUNT The investment of TBG serves as subsidiary financing of innovation projects. It is limited to DM 3,000,000 to one TU. Several innovation projects can be supported within the scope of this maximum amount. 4.3 PAYOUT The investment is in principle made available in accordance with the progress of the innovation project. 4.4 TERM The term of the investment of TBG is up to 10 full calendar years and is guided in principle by the term of the investment of the Lead-Investor. 4.5 TERMINATION TBG may terminate investments on weighty grounds. TU may be granted the right to terminate its investment prematurely under observance of 3 months advance notice as at June 30 and December 31 of each year. In case of a notice as of the expiration of the fifth investment year, the contribution of TBG must be repaid with a premium currently amounting to 25%, provided the termination is not effected due to the discontinuance of the supported innovation project. 4.6 PROCESSING FEE Upon payout of its investment, TBG shall receive from the investment recipient a one-time 22 processing fee currently in the amount of 1% of the amount of its investment. 4.7 INVESTMENT CHARGE TBG charges as a rule a compensation for its contribution currently amounting to 6% p.a., which is independent of the investment recipient's profit for the year, as well as a profit dependent investment compensation to be guided by the condition of TU. At the end of the investment period, TBG may demand a one-time compensation to satisfy the reserves of TU formed during the investment period. Details are specified in the contract between TBG and TU. 4.8 ASSUMPTION OF RISK In the cooperation agreement the cooperating Lead Investor may be granted the right to claim from TBG, until the expiration of 5 years from the start of the investment of TBG in TU, a partial reimbursement of a loss from its investment made in TU. In such a case, the sum reimbursed may amount to maximum 50%, in the new Federal States and Berlin (East) up to maximum 70% of the contribution it had itself effected. TBG may then demand the full or partial transfer of the Lead Investor's investment to it or to a third party. The precondition for claiming the risk sharing is that - bankruptcy proceedings or a total execution have been instituted against the assets of TU or that the institution of proceedings has been denied due to lack of an estate, - a statutory declaration has been filed for TU, or - the continued insolvency of TU is substantiated in another way, - the claims of the Lead Investor from his investment in TU have partially come to an end by virtue of a court composition or a waiver. The remaining risk of loss of the Lead Investor has to be borne by the latter himself. 5. APPLICATION PROCEDURE Applications by TU for investments must be addressed to Technologie-Beteiligungs-Gesellschaft m.b.H. der Deutschen Ausgleichsbank Wielandstrasse 4, Bonn-Bad Godesberg Mail address: 53170 Bonn on forms of TBG together with a statement of the cooperating Lead Investors on effecting his own investment. 23 The examination of the application conditions is initially effected by the Lead Investor (if needed, with the inclusion of outside experts, e.g., technology consulting offices). TBG reserves the right to demand additional documents, including expert opinion, if deemed necessary. Before concluding an investment agreement between the Lead Investor and TU, an investment application has to be submitted to TBG. A legal claim for effecting an investment by TBG does not exist. If the Lead Investor has not yet cooperated with TBG in any other case, the documents necessary for the examination of his solvency must also be submitted. Additional information is available from TBG at telephone No. (0228) 831-2290. Bonn, January 1, 1995 24 [Handwritten:] typ. undisclosed partnership Version 02.93 PARTNERSHIP AGREEMENT Agreement concerning the establishment of an undisclosed Partnership between SCM Schneider Microsysteme Entwicklungs- und Vertriebs GmbH, Fraunhoferstrasse 11A, 82152 Planegg -hereinafter: Junges Technologie-Unternehmen (JTU) [Young Technology Enterprise]- and Technologie-Beteiligungs-Gesellschaft m.b.H. [Technology Holding Company] of Deutsche Ausgleichsbank, Wielandstrasse 4, 5300 Bonn 2 - dormant partner, hereinafter: TBG - SECTION 1 PURPOSE OF THE COMPANY, PARTNERS 1. Within the scope of the program "Investment Capital for Young Technology Enterprises" carried through with the Federal Ministry for Education, Science, Research and Technology (BMFT) and the Deutsche Ausgleichsbank, TBG is supporting young technology enterprises by entering into partnerships to finance investments and operating funds - for research and development work through production and testing of prototypes (core phase) and - for adjustment developments and the preparations of products, including market introduction of new technical products, processes or technical services (buildup phase). 2) a) JTU, recorded in the Commercial Register of the Munich Amtsgericht [District Court] under No. HRB 91372, operates pursuant to the articles of association in the valid version of March 29, 1990, addendum of May 29, 1990, a commercial business with the purpose of: Development, production and marketing of electronic components for microsystems, electronic and electrical devices, data terminals and processing installations, as well as trade with all the articles connected with these. b) Within the scope of this business purpose, JTU is engaged in the development of systems and software according to the PCMCIA standard. 25 3. TBG acquires an interest in JTU in the legal form of the undisclosed partnership, in order to support the project described in paragraph 2b. SECTION 2 CONTRIBUTION TO CAPITAL 1. Exclusively for the promotion of the innovation project described in Section 1 para. 2b and on the basis of the data of JTU in the partnership application of May 26, 1993, TBG effects a contribution to capital in the amount of DM 1,000,000 on condition that the cooperation partners 26 Zweite Beteiligungs KG [Second Limited Partnership] of TVM Techno Venture Management GmbH & Co. KG, Leopoldstrasse 28 A, 80802 Munich TVM Eurotech Limited Partnership, 101 Arch Street, Suite 1950, Boston, MA 02110, U.S.A. APM International B.V., Gooimeer 3, NL-1411 DC Naarden, Netherlands KBL Founders Ventures SCA, 43, Boulevard Royal, L-2955 Luxembourg, LUXEMBOURG Oscar Gruss & Sons Inc., 74 Broad Street, New York, N.Y. 10004, U.S.A. as investors (hereinafter jointly: BG) have concluded with TBG a cooperation agreement for the commitment to JTU. BG will be advised regarding the servicing of the commitment to JTU by TVM Techno Venture Management GmbH & Co. KG, Leopoldstrasse 28 A, 80802 Munich, (hereinafter: TVM) as servicing company. The conditions for TBG entering the partnership are created, moreover, by the fact that BG will effect additional contributions to the capital of JTU in the total amount of DM 133,400 with additional payment of a premium totaling DM 2,121,060. The contribution of TBG is to be used for co-financing the project-related planning listed in the appendix. The appendix shall constitute a component of this Partnership Agreement. To the extent that the costs of the project should decline as compared to the above data, or if subsequently additional public funds are solicited, TBG shall have the right to curtail its contribution in a ratio corresponding to the reduction of the investment volume. The reduction amount must be retransferred to TBG without delay. 3. JTU may call in the contribution after the start of the company (cf. Section 3 para. 1 ), subject to the condition that its immediate use as provided, and a proportionate contribution together with the other financing means provided in para. 2 of the investment project are ensured. The call must be accompanied by a confirmation of the call conditions by BG. 4. If the contribution is not called, at least partially by March 31, 1994 at the latest, this agreement is terminated. 5. On the occasion of the first partial call, TBG shall have the right to retain a processing fee in the amount of 1.00% of the total contribution agreed in this agreement. 6. The TBG contribution must be kept by JTU in a separate contribution account. Withdrawals by TBG from this account are not allowed. 27 SECTION 3 START AND DURATION OF THE COMPANY 1. The undisclosed partnership shall begin as soon as this agreement is signed by both parties. 2. The undisclosed partnership is fixed for a term ending December 31, 2003. 3. Upon termination of the corporate relationship, the contribution of TBG and the unpaid dividends are due for payment to TBG. 28 SECTION 4 MANAGEMENT 1. TBG does not participate in the management of JTU, if nothing different is provided hereinbelow. 2. JTU shall require the consent of TBG for a) any amendment of the articles of association, in particular any amendment of the purpose of the enterprise, or the acceptance of new partners or the agreement of new participations; b) the appointment and dismissal of managers of JTU; c) conclusion, amendment and termination of the agreement on the granting or the acquisition of licenses, patents, design patents, trademarks or know-how, to the extent these concern the innovation project supported with the participation of TBG; d) conclusion, amendment and termination of essential marketing agreements; e) partial or total move, lease or sale of the operation; f) conclusion and termination of control contracts and profit and loss transfer agreements. 3. Consents pursuant toSection4 para. 2 must be obtained from TBG without delay. If within a period of 14 days after receipt of the notice on the measure requiring consent TBG has not stated in writing its refusal to consent, such consent shall be deemed to have been given. SECTION 5 INFORMATION AND CONTROL RIGHTS 1. JTU has to report to TBG semi-annually, namely by March 31 and September 30 of each year on the financial situation of JTU and on the status of the innovation project described in Section 1 para. 2b, so long as TBG does not waive its right to these reports, because BG simultaneously exercises control of JTU also on behalf of TBG. In addition, TBG receives from JTU a brief, monthly status report as per the attached appendix. 2. Irrespective of whether BG exercises the control of JTU simultaneously also for TBG, JTU has to inform TBG directly and without delay about all measures going beyond the scope of the usual business operation. Besides the measures mentioned under Section 4 para. 2, particularly the 29 following go beyond the scope of usual business operations: a) Partial or total shutdown of operations; b) Discontinuance or substantial change of the innovation project described in Section 1 para. 2 b; c) Any assumption of commitments, also for investments, which exceed the amount of DM 250,000 per month, or if they result from leasing, rental or tenancy agreements, if they exceed the amount of DM 100,000 per month. 3. In addition, TBG shall have the right of verification pursuant to Section 716 BGB [Civil Code]. This applies also to the period after the termination of the partnership, to the extent necessary for verification of the assets to which a partner is entitled upon his retirement from the partnership. 30 TBG has furthermore the right to examine at any time the records of JTU referring to the innovation project described in Section 1 para. 2b. To exercise its verification right TBG may retain the services of a third party. 4. TBG is authorized to forward the information provided to it on the innovation project of JTU exclusively to its parent company, the Deutsche Ausgleichsbank, to the BMFT and to a third party retained by it to evaluate the model tests. These parties are also obligated to observe secrecy, except for permissible publications in a harmless form. 5. JTU grants the BMFT, and a representative appointed by it, the right to receive presentations, information and to effect examinations in the same extent as that granted to TBG. JTU declares its consent to the effect that TBG can transmit to the BMFT or to an institute assigned by it to this effect, the data on the scientific evaluation of the program mentioned inSection1 para. 1 of this agreement which are obtained through its enterprise and the supported innovation project. JTU declares itself prepared, furthermore, to provide directly to the BMFT, or an institute assigned by it, the information necessary for the scientific evaluation of the model tests. In the preparation and in the publication of data about the model test it shall be ensured that no harm be caused to JTU. 6. JTU shall make available to TBG upon request all the records for examination purposes, which the Bundesrechnungshof [Federal Audit Office] deems necessary. SECTION 6 ADVISORY BOARD TBG may at any time demand the formation of an advisory board. TBG participates in this advisory board under reasonable consideration of the amount of its contribution. The advisory board shall advise JTU in financial and technical matters, particularly with regard to the project described in Section 1 para. 2b. It has the same information and verification rights as those to which TBG is entitled under this agreement. SECTION 7 FINANCIAL YEAR, ANNUAL STATEMENT OF ACCOUNTS 1. The financial year of the undisclosed partnership is the same as that of JTU. 2. JTU has to draw up its annual statement of accounts (balance sheet, profit and loss account, appendix) in observance of SectionSection 238 - 285 HGB [Handelsgesetzbuch] [Commercial Code] within six months after expiration of the financial year, and to forward it to TBG in an original, signed copy and with the certificate of an auditor or of a certified public accountant. 3. The annual statement of accounts must respect, insofar as permissible under commercial law, 31 the profit determination provisions of the Income Tax Law. If, within the scope of the taxable profit determination or based on a external tax audit, other data than those contained in the original annual statement of account are deemed binding, such shall also be determining in the relation of JTU to TBG. 32 SECTION 8 PROFIT AND LOSS SHARING 1. TBG receives on its paid contribution a minimum compensation of 5% p.a., irrespective of the annual result of JTU. This compensation is payable semi-annually in retrospect by June 30 and December 31 of each year. 2. From the achieved annual surplus after the drawn contribution, TBG shall receive 9% of the profit provided it exceeds DM 100,000, but maximum 5% p.a. of the actually paid-in contribution. This profit sharing is payable within 2 weeks after adoption of the annual statement of account (Section 7 para. 2). 3. Determining for the calculation according to Para. 2 are the year's net earnings, which are shown in the annual statement of account drawn up according to Section 7 para. 3 prior to taking into account TBG share of the profit pursuant to No. 2 above. a) To the annual statement of account must be added - paid income taxes, insofar as they have reduced the year's net earnings as shown; - interest charged to the partners in JTU, provided the latter is a partnership, without having flowed into the year's net earnings of the co-entrepreneurs; - extraordinary expenditures, insofar as they result from business occasions which took place before the start of the undisclosed partnership; - losses from the sale or destruction of fixed assets, insofar as the latter were already present at the time of the start of the company. b) To be deducted from the year's net earnings are - Amounts from writing back of tax-free reserves, which were formed prior to the start of the undisclosed partnership; - compensations for activities or interest credited to the partners in JTU, provided the latter is a partnership, without having reduced the year's net earnings of the co-entrepreneurs; - extraordinary income, insofar as it is based on business occasions which took place before the start of the undisclosed partnership; 33 - income from the sale of fixed assets, insofar as the latter were already present at the time of the start of the company. c) In the year the partnership is called off, the year's net earnings for the calculation of the profit sharing pursuant to para. 2 shall be deemed to have accrued evenly over the year. 4. TBG shall have the right to demand, as of the end of the partnership period, a one-time compensation of 25% of paid-in contribution. TBG shall make use of this right only when, in its opinion, it appears to be justified on the basis of the overall financial situation of JTU, in particular on the basis of its profits attained during the last three years before the termination of the partnership and the undisclosed reserves formed during the time of the partnership. 5. TBG does not share in the losses of JTU. 34 SECTION 9 TAXES JTU shall be responsible for remitting the legally prescribed Capital Yield Tax in regard to the compensation for the undisclosed contribution, and will retain from the payments to TBG the Capital Yield Tax and remit these directly to the appropriate tax office. After the remittance, JTU will issue to TBG confirmations according to Section 45a para. 2 EStG [Income Tax Law] on the forms made available by TBG. SECTION 10 SALE AND ACQUISITION OF SHARES 1. TBG shall have the right to sell its investment at any time, in part or in full, to the BG or to a cooperation partner succeeding it. The cooperation partner shall have the right to demand, at the end of each business year, to convert the undisclosed investment which it has acquired from TBG, into a regular share of the company. The conversion conditions shall be agreed between JTU and BG. 2. TBG shall have the right to acquire the investment of another enterprise participating in JTU with which TBG has concluded a cooperation agreement, or to demand the transfer to a third party to be named by TBG. SECTION 11 DISSOLUTION OF THE UNDISCLOSED PARTNERSHIP 1. In the event of the dissolution of JTU, the undisclosed partnership shall be dissolved. 2. Section 3 para. 3 and Section 8 para. 4 shall also apply in this case. SECTION 12 TERMINATION 1. JTU has the right to redeem entirely or partially the participation of TBG, subject to observing a notice period of 3 months as of June 30 or December 31 of any year. If this redemption takes place at of the end of the fifth partnership year, the contribution of TBG has to be repaid with a premium in the amount of 25%. Beginning in the sixth partnership year, the arrangements set forth in Section 8 para. 4 will apply. TBG can waive the payment of the premium, if the termination is effected because of the suspension of the supported innovation project. 2. Moreover, the undisclosed partnership can be terminated with immediate effect, by any of its 35 partners upon existence of a weighty ground by means of a written statement. To the extent that the contribution has not or not yet been made in full, TBG shall by the notice of termination be released from its contribution obligation. TBG has the right to termination on weighty grounds, particularly, when a) JTU has made false statements in the partnership application; 36 b) it is determined that the conditions for granting or leaving intact the partnership did not exist already originally, or ceased to exist subsequently, particularly if the innovation project described in Section 1 para. 2b, proves to be impracticable or is abandoned or substantially changed by JTU. Should the innovation project described in Section 1 para. 2 prove to be technically impossible or financially unattainable, TBG can waive repayment of the investment in full or in part, if the continued existence of JTU is thereby made possible; c) notes accepted by JTU go to protest, JTU suspends its payments, files for bankruptcy or a petition is filed for institutional court settlement proceedings or insolvency is ascertained in some other way; d) the managerial know-how bearer(s) who was(were) active in such a position at JTU at the time the agreement on the undisclosed partnership was concluded is(are) no longer active in his or their main occupation in the management of JTU; e) one of the measures listed inSection4 para. 2 has been carried through without the prior consent of TBG. SECTION 13 MATURING PAYMENTS Payments due shall bear interest after occurrence of the delay and until receipt by TBG at the rate of 3% above the discount rate of the Deutsche Bundesbank. SECTION 14 GENERAL PROVISIONS 1. Amendments or supplements to this agreement must be in written form. There exist no oral subsidiary understandings to this agreement. 2. Should one provision of this agreement be invalid, the remaining provisions shall remain unaffected by this. JTU and TBG are committed to replace invalid provisions of the agreement by regulations that are legally valid and correspond as far as possible to the meaning and purpose of the invalid provisions. 3. Bonn has been agreed upon as the venue for all legal disputes that may arise from this agreement or its performance. Bonn, October 22, 1993 Planegg, October 21, 1993 Technologie-Beteiligungs- SCM Schneider Microsystems 37 Gesellschaft m.b.H. of the Entwicklungs- und Vertriebs- Deutsche Ausgleichsbank GmbH [signature] [two signatures] [Stamp:] MICROSYSTEM GMBH [illegible] EX-10.8 13 IMPERIAL BANK CONTINUING GUARANTEE FOR $2,500,000 1 EXHIBIT 10.8 IMPERIAL BANK Member FDIC CONTINUING GUARANTEE ORIGINATING OFFICE: LENDING SERVICES Name of Office: LENDING SERVICES Street Address: 9920 S La Cienega Blvd City, State, Zip Code: Inglewood, CA 90301 The undersigned (hereinafter referred to as "Guarantor") hereby requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend credit to SCM MICROSYSTEMS INC, a Corporation (hereinafter referred to as 'Debtor), and in consideration of the granting of such credit by the Bank to Debtor, Guarantor agrees as follows: 1. The words "indebtedness" and "credit" are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities, including interest thereon, of Debtor heretofore, now or hereafter made, incurred or created, with or without notice to Guarantor, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether assumed by Debtor's successors, heirs or assigns by operation of law or otherwise, and whether Debtor is liable individually or jointly with others, and whether recovery upon any such indebtedness or credit is or hereafter becomes barred by any statute of limitations or is or hereafter becomes otherwise unenforceable. 2. Credit may be granted from time to time at the request of Debtor and without further authorization from or notice to Guarantor, even though Debtor's financial condition may have deteriorated since the date hereof. If Debtor is a corporation or a partnership, the Bank need not inquire into the power of Debtor or the authority of its officers, directors, partners or agents acting or purporting to act in its behalf. Each credit heretofore or hereafter granted to Debtor shall be considered to have been granted at the special instance and request of Guarantor and in consideration of and in reliance upon this guarantee. 3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or its order any and all indebtedness of Debtor to the Bank and to perform any and all obligations of Debtor under the terms of any agreement or instrument evidencing, securing or executed in connection with any such indebtedness ("Credit Documents"). The liability of Guarantor shall not at any time exceed the sum of the amount set forth below, plus the interest thereon in accordance with the Credit Documents and the costs attorneys' fees and other expenses provided for in Paragraph 15 hereof. If no amount is set forth below, the liability of the Guarantor hereunder shall be unlimited. The Bank may permit Debtor's indebtedness to exceed any maximum liability without impairing the obligations of Guarantor hereunder. No payments made by or on behalf of Guarantor to the Bank shall reduce any such maximum liability unless written notice to that effect is received by the Bank at or prior to the time such payment is made. If Guarantor has executed more than one guarantee of the indebtedness of Debtor to the Bank, the guarantees shall be cumulative. 4. Either before or after revocation hereof and in such manner, upon such terms and at such times as it considers best and with or without notice to Guarantor. the Bank may alter, compromise, accelerate, extend or change the time or manner for the payment of any indebtedness hereby guaranteed, increase or reduce the rate of interest thereon, release or add any one or more guarantors or endorsers, accept additional or substituted security therefor, or release or subordinate any security therefor. No exercise or nonexercise by the Bank of any right hereby given it, no dealing by the Bank with Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Bank shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor arty recourse against the Bank. 5. In addition to all liens upon and rights of offset given to the Bank by law against any property of Debtor of Guarantor, Guarantor hereby grants a security interest in all property of Guarantor now or hereafter in the possession of or on deposit with the Bank, whether held in a general or special account or for safekeeping or otherwise. Each such security interest may be exercised without demand upon or notice to Guarantor, shall continue in full force unless specifically waived or released by the Bank in writing and shall not be considered waived by any conduct of the Bank or by any failure of the Bank to exercise any right of offset or to enforce any such security interest or by any neglect or delay in so doing. 6. Guarantor waives and agrees not to assert or take advantage of (a) any right to require the Bank to proceed against the Debtor or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power; (b) the defense of the statute of limitations in any action hereunder or for the collection of any indebtedness or the performance of any obligation guaranteed hereby; (c) any defense that may arise by reason of the incapacity lack of authority, death or disability of, or revocation hereof by, any other or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others; (d) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice 2 of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of the Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness hereby guaranteed; (a) any defense based upon an election of remedies by the Bank, including without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both, including, without limitation, the impairment of subrogation rights arising by virtue of California Civil Code 580(b) and 580(d); (f) any defense or right based upon the fair value deficiency protections and provisions of California Civil Code 580(a) and California Civil Procedure Code 726; and (g) any defense or right based upon the acceptance by the Bank or an affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both. 7. Guarantor, by execution hereof, represents to the Bank that the relationship between Guarantor and Debtor is such that Guarantor has access to all relevant facts and information concerning the indebtedness and Debtor and that the Bank can rely upon Guarantor having such access. Guarantor waives and agrees not to assert any duty on the part of the Bank to disclose to Guarantor any facts that the Bank may now or hereafter know about Debtor, regardless of whether the Bank has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor, or has a reasonable opportunity to communicate such facts to Guarantor. Guarantor is fully responsible for being and keeping informed of the financial condition of Debtor and all circumstances bearing on the risk of non-payment of the indebtedness guaranteed hereby 8. Until all indebtedness of Debtor to the Bank has been paid in full, even though such indebtedness is in excess of the liability of Guarantor, Guarantor shall have no right of subrogation and waives any right to enforce any remedy which the Bank now has or may hereafter have against Debtor and any benefit of and any right to participate in any security now or hereafter held by the Bank. 9. Except as otherwise provided in this paragraph, all existing or future indebtedness of Debtor to Guarantor and, if Debtor is partnership, any right to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated to all indebtedness hereby guaranteed and, without the prior written consent of the Bank, shall not be paid or withdrawn in whole or in part nor will Guarantor accept any payment of or on account of any such indebtedness or as a withdrawal of capital while this guarantee is in effect. At the Bank's request, Debtor shall pay to the Bank all or any part of subordinated indebtedness and any capital which Guarantor is entitled to withdraw. Each payment by Debtor to Guarantor in violation of this paragraph shall be received in trust for the Bank and shall be paid to the Bank immediately on account of the indebtedness of Debtor to the Bank. No such payment shall reduce or affect in any manner Guarantor's liability under any of the provisions of this guarantee. Guarantor reserves the right to receive from Debtor payment of any salary for personal services at the same monthly rate as that at which Guarantor has been paid during the preceding twelve months, it being expressly understood that such amount shall not be subordinated to the indebtedness guaranteed hereby. 10. Guarantor will file all claims against Debtor in any bankruptcy or other proceeding in which the filing of claims is required by upon any indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank all of the Guarantor's rights thereunder. If Guarantor does not file any such claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so in Guarantor's name or, in the Bank's discretion, to assign the claim and to cause proof of claim to be filed in the name of the Bank's nominee. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claims shall pay to the Bank the full amount thereof and, to the full extent necessary for the purpose, Guarantor hereby assigns to the Bank all of the Guarantor's rights to any and all such payments or distributions to which Guarantor would otherwise be entitled. If the amount so paid is greater than the guaranteed indebtedness then outstanding, the Bank will pay the amount of the excess to the person entitled thereto. 11. With or without notice to Guarantor, the Bank, in its sole discretion and at any time and from time to time either before or after delivery of any notice of revocation hereunder and in such manner and upon such terms as it considers fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor or from any other guarantor under this or any other instrument or realized from any security, in such manner and order or priority as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not such indebtedness is guaranteed hereby or is otherwise secured or is due at the time of such application; and (b) refund to Debtor any payment received by the Bank upon any indebtedness hereby guaranteed and payment of the amount refunded shall be fully guaranteed hereby. Any recovery realized from any other guarantor under this or any other instrument shall be first credited upon that portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability, if any, hereunder. 12. The amount of Guarantor's liability and all rights, powers and remedies of the Bank hereunder and under the Credit Documents and any other agreement now or at any time hereafter in force between the Bank and Guarantor shall be cumulative and not alternative, and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to the Bank by law. 13. Guarantor's obligations hereunder are independent of the obligations of Debtor and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Debtor or whether Debtor is joined in any such action or actions. The Bank may maintain successive actions for other defaults. The Bank's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations hereby guaranteed have been paid and fully performed. 14. This is a continuing guarantee and Guarantor agrees that it shall remain in full force until and unless Guarantor delivers to the Bank written notice that it has been revoked as to credit granted subsequent to the effective time of revocation as herein provided. Delivery of such notice shall be effective by personal service upon an officer of the Bank at the originating office of the Bank designated on the first page -2- 3 hereof or by mailing such notice by certified or registered mail, return receipt requested, postage prepaid and addressed to the Bank at the originating office designated on the first page hereof. Regardless of how notice of revocation is given, it shall not be effective until twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may be, on the next succeeding Bank business day following the day such notice is delivered, but delivery of such notice shall not affect any of Guarantor's obligations hereunder with respect to credit granted prior to the effective date of such revocation, nor shall it affect any of the obligations of any other guarantor for the credit granted to Debtor hereunder. If the originating office of the Bank designated above is not in existence at the time notice of revocation is desired to be given, then such notice may be given in the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La Cienega Boulevard, Inglewood, California, 90301. 15. Guarantor agrees to pay to the Bank without demand reasonable attorneys' fees and all costs and other expenses which the Bank expends or incurs in collecting or compromising any indebtedness of the Debtor, in protecting the Bank's security under the Credit Documents or in enforcing this guarantee against Guarantor or any other guarantor of any indebtedness hereby guaranteed whether or not suit is filed, including, without limitation, attorney's fees, costs and other such expenses incurred in any bankruptcy proceeding. Guarantor warrants and represents that it is fully authorized by law to execute this guarantee. 16. This guarantee shall benefit the Bank, its successors and assigns, including the assignees of any indebtedness hereby guaranteed, and binds Guarantor's successors and assigns. This guarantee is assignable by the Bank with respect to all or any portion of the indebtedness and obligations guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the assignees under this guarantee without in any manner affecting Guarantor's liability hereunder with respect to arty indebtedness or obligations retained by the Bank. No delegation or assignment of this guarantee by any Guarantor shall be of any force or effect or release Guarantor from any obligation hereunder. 17. No provision of this guarantee or right of the Bank hereunder can be waived, nor can any Guarantor be released from his/her obligations hereunder, except by a writing duly executed by an authorized officer of the Bank. Should any one or more provisions of this guarantee be determined to be illegal or unenforceable, all other provisions. nevertheless shall be governed by and construed in accordance with the State of California, and Guarantor agrees to submit to the jurisdiction of the Courts of California. 18. If more than one guarantor signs this guarantee, the obligation of all such guarantors shall be joint and several. When the context and construction so require, all words used in the singular shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter. Any married person who signs this guarantee agrees that recourse may be had against separate property for all obligations under this guarantee. 19. Except as provided in any other written agreement now or at any time hereafter in force between the Bank and Guarantor, this guarantee shall constitute the entire agreement of Guarantor with the Bank with respect to the subject matter hereof and no understanding, promise or condition concerning the subject matter hereof shall be binding upon the Bank unless expressed herein. Any notice to Guarantor shall be considered to have been duly given when delivered personally or forty-eight hours after being mailed, postage prepaid, to the address(es) set forth below or to such other address(es) as Guarantor may from time to time designate by giving notice in the same manner of notice to the Bank set forth in Paragraph 14 hereof. 20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true copy of this guarantee. 21. [ ] This guarantee is secured by a deed of trust dated N/A , 19 , to Imperial Bancorp, as Trustee. - ----------- -- GUARANTEE AMOUNT $2,500,000.00 Executed by or on behalf of Guarantor(s) on January 15, 1997 Signature of Guarantor(s) Address SCM MICROSYSTEMS GMBH By Luitpoldstrasse 6 85276 Pfaffenhoffen ----------------------------------- Robert Schneider, CEO By Germany ----------------------------------- Bernd Meier, COO/Gen. Manager -3- 4 (COMPLETE IF GUARANTOR IS A CORPORATION) RESOLUTION AUTHORIZING CONTINUING GUARANTEE, ENDORSEMENT AND GUARANTEE OF NOTE OR NOTES AND HYPOTHECATION OF ASSETS WHEREAS, SCM MICROSYSTEMS INC hereinafter referred to as "Debtor", has requested IMPERIAL BANK, hereinafter referred to as "Bank", to grant credit to Debtor. WHEREAS, the corporation hereinafter named expects to derive benefit from such financial accommodation by Bank, 1. NOW, BE IT RESOLVED, that any 2 of the following named officers Robert Schneider the CEO Bernd Meier the COO/General Manager the - ---------------------------------- --------------------------------------- the - ---------------------------------- --------------------------------------- for and on behalf of SCM MICROSYSTEMS GMBH be and they hereby are authorized and directed for and in the name of this corporation and as its act and deed to do and perform any one or more of the following: A. Execute a continuing guarantee in favor of Bank for any and all assets of this corporation. B. Endorse and/or guarantee a note or notes in favor of Bank whereunder Debtor is Maker and Bank is Payee including renewals and extensions thereof. C. Grant to Bank a security interest in and to any and all assets of this corporation: (1) as security for any obligation which this corporation may incur under subparagraphs A and/or B above; or (2) as security for indebtedness of Debtor to Bank to the extent of the value of the security interest so granted without personal liability on the part of this corporation to Bank. 2. RESOLVED FURTHER, that Bank may rely on the authority conferred herein until Bank receives notice in writing that the authority contained in this resolution has been revoked or the authority of the persons or officers named above has been revoked. 3. RESOLVED FURTHER, that the liability of this corporation to Bank hereunder shall not exceed the total sum of **TWO MILLION FIVE HUNDRED THOUSAND DOLLARS AND ZERO CENTS** ($2,500,000.00). 4. RESOLVED FURTHER, that any guarantees or other documents in like amount and terms as those stated above [heretofore executed by said officers in the name of this corporation are hereby ratified and approved, and the secretary or assistant secretary is authorized and directed to attach copies of such documents to the minutes of the corporation. I, the undersigned, William Ogdon, hereby certify that I am the duly elected, qualified and acting secretary of the above referenced corporation, duly organized and existing under the laws of the State of Germany; that the Board of Directors of said corporation duly and regularly adopted the resolution of which the foregoing is a full, true and correct copy. I further certify that said resolution is now in full force and effect, that it has not been revoked, suspended, or amended in any way and that the specimen signatures appearing below are the signatures of the officers authorized to sign for this corporation by virtue of said resolution. I further certify that shareholder consent IS NOT required in the event of hypothecation of all or substantially all of the assets of said corporation. EXECUTED ON AUTHORIZED SIGNATURES (SEAL) Signature:___________________________________ Confirmed By: Robert Schneider Signature:___________________________________ _______________________________ Bernd Meier Robert Schneider (President) Signature:___________________________________ _______________________________ William Ogdon (Secretary) -4- 5 IMPERIAL BANK Member FDIC CORPORATE RESOLUTION REGARDING CREDIT OFFICE: LENDING SERVICES ADDRESS: 9920 S. La Cienega Blvd. Inglewood, CA 90301 RESOLVED, that SCM MICROSYSTEMS INC borrow from IMPERIAL BANK, hereinafter referred to as "Bank", from time to time, such sums of money as, in the judgement of the officer or officers hereinafter authorized, this corporation may require; provided that the aggregate amount of such borrowing, pursuant to this resolution, shall not at any one time exceed the principal sum of **TWO MILLION FIVE HUNDRED THOUSAND DOLLARS AND ZERO** **CENTS** ($2,500,000.00 ), in addition to such amount as may be otherwise authorized; RESOLVED FURTHER, that any 1 of the following named officers Steven Humphreys the Chairman and President William E. Ogdon the Controller/Secretary the - ---------------------------------- ----------------------------------- the - ---------------------------------- ----------------------------------- of this corporation (the officer or officers acting in combination, authorized to act pursuant hereto being hereinafter designated as "authorized officers"), to execute and deliver, from time to time, renewals or extensions of such notes or other evidences of indebtedness; (2) to grant a security interest in, transfer, or otherwise hypothecate or deed in trust for Bank's benefit and deliver by such Instruments In writing or otherwise as may be demanded by the Bank, any of the property of this corporation as may be required by the Bank to secure the payment of any notes or other indebtedness of this corporation or third parties to the Bank, whether arising pursuant to this resolution or otherwise; and (3) to perform all acts and execute and deliver all instruments which the Bank may deem necessary to carry out the purposes of this resolution; RESOLVED FURTHER, that said authorized officers be and they are hereby authorized and empowered, and that any one of said authorized officers be and he/she is hereby authorized and empowered (1) to discount with or sell to the Bank conditional sales contracts, notes, acceptances, drafts, bailment agreements, leases, receivables and evidences of indebtedness payable to this corporation, upon such terms as may be agreed upon by them and the Bank, and to endorse in the name of this corporation said notes, acceptances, draft, bailment agreements, leases, receivables and evidences of indebtedness so discounted, and to guarantee the payment of the same to the Bank, and (2) to apply for and obtain from the Bank letters of credit and In connection therewith to execute such agreement, applications, guarantees, indemnities and other financial undertakings as Bank may require; RESOLVED FURTHER, that said authorized officers are also authorized to direct the disposition of the proceeds at any such obligation, and to accept or direct delivery from the Bank of any property of this corporation at any time held by the Bank; RESOLVED FURTHER, that the authority given hereunder shall be deemed retroactive and any and all acts authorized hereunder performed prior to the passage of this resolution are hereby ratified and affirmed; RESOLVED FURTHER, that this resolution will continue in full force and effect until the Bank shall give official notice in writing from this corporation of the revocation thereof by a resolution duly adopted by the Board of Directors of this corporation, and that the certification of the of this corporation as to the signatures of the above named persons shall be binding on this corporation. I, William E. Ogdon, Secretary of the above named corporation, duly organized and existing under the laws of the State of Delaware, do hereby certify that the foregoing is a full, true and correct copy of a resolution of the Board of Directors of said corporation, duly and regularly passed and adopted by the Board of Directors of said corporation. I further certify that said resolution is still in full force and effect and has not been amended or revoked, and that the specimen signatures appearing below are the signatures of the officers authorized to sign for this corporation by virtue of said resolution. EXECUTED ON 1/15/97 AUTHORIZED SIGNATURES (SEAL) Signature:___________________________________ Confirmed By: Robert Schneider Signature:___________________________________ _______________________________ Bernd Meier Robert Schneider (President) Signature:___________________________________ _______________________________ William Ogdon (Secretary) -5- 6 Imperial Bank Member FDIC January 15, 1997 226 Airport Parkway San Jose, California Subject: Credit Terms and Conditions ('Agreement") Borrower: SCM Microsystems, Inc. Gentlemen: To induce you to make loans to the undersigned (herein called "Borrower"), and in consideration of any loan or loans you, in your sole discretion, may make to Borrower, Borrower warrants and agrees as follows: A. Borrower represents and warrants that: 1. Existence and Rights. Company is a corporation Borrower is duly organized and existing and in good standing under the laws of the State of Delaware and is authorized and in good standing to do business in the State of California. Borrower has powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing to each State in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary, and Borrower has the power and authority to make and carry out this Agreement. Borrower has no investment in any other business entity, except as previously disclosed to Bank. 2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation nor any term or provision of Borrower's articles of incorporation, by-laws or Articles of Association, as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms. 3. NO CONFLICT. The execution, delivery and performance of this Agreement are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason hereof. 4. LITIGATION. To the best of Borrower's knowledge and belief, there is no litigation or other proceeding pending or threatened against or affecting injunction, decree or demand of any court or other governmental or regulatory authority. 5. FINANCIAL CONDITION. The balance sheet of Borrower as of 11/30/96, and the related profit and loss statement for the 11 months ended on that date, a copy of which has heretofore been delivered to you by Borrower, and all other statements and data submitted in writing by Borrower to you in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrower as of the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no materially adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet. other than in the ordinate and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 6. TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section C.3 hereof. 7. TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 9. REGULATION U. The proceeds of this loan shall not be used to purchase or carry margin stock (as defined with Regulation U of the Board of Governors of the Federal Reserve system). B. Borrower agrees that so long as it is indebted to you, it will, unless you shall otherwise consent in writing: 1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 2. INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. 3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manners as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder, and (b) it shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. 4. RECORDS AND REPORTS. Maintain a standard and modem system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit your representatives to have access to, and to examine its properties, books and records at all reasonable times; and furnish you: (a) As soon as available, and in any event within 25 days after the close of each month of each fiscal year of Borrower, commencing -6- 7 with the month next ending, a balance sheet, profit and loss statement and reconciliation of Borrower's capital accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail and stating in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower, subject, however, to year-end audit adjustments; (b) As soon as available, and in any event within 90 days after the close of each fiscal year of Borrower, a report of audit of Company as of the close of and for such fiscal year, all in reasonable detail and stating in comparative form the figures as of the close of and for the previous fiscal year, with the unqualified opinion of accountants satisfactory to you. (c) Within 25 days after the close of each month of each fiscal year of Borrower, a certificate by chief financial officer or partner of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Letter of Inducement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein, or, if any such event has occurred or any such condition exists, specifying the nature thereof, (d) Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim audit of the accounts of Borrower made by such accountants; (e) Promptly after the same are available, copies of all such proxy statements, financial statements and reports as Borrower shall send to its stockholders, if any, and copies of all reports which Borrower may file with the Securities and Exchange Commission or any governmental authority at any time substituted therefor; and (f) Such other information relating to the affairs of Borrower as you reasonably may request from time to time. (g) Notice of Default. Promptly notify the Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. C. Borrower agrees that so long as it is indebted to you, it will not, without your written consent: 1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the character of its business. 2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from you except obligations now existing as shown in financial statement dated 11/30/96, excluding those being refinanced by your bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. 3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by it, other than liens for taxes not delinquent, liens in your favor or liens for equipment leases. 4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or ,advances to any person or other entity other than in the ordinary and normal course of its business as now conducted or make any investment in the securities of any person or other entity other than the United States Government: or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. 5. ACQUISITION OR SALE OF BUSINESS: MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted including without limitation the selling of any property or other asset accompanied by the leasing back of the same, provided, however, that Borrower may sell assets which are obsolete or otherwise considered surplus and which are sold in the ordinary course of business, so long as such assets are sold for full, fair and reasonable consideration and so long as all such sales shall not exceed $25.000 in any fiscal year without your prior written consent. 6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any dividend (other than dividends payable in common stock of Borrower) or make any other distribution on any of its capital stock now outstanding or hereafter issued or purchase, redeem or retire any of such stock. D. The occurrence of any one of the following events of default shall, at your option, terminate your commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrower's indebtedness to you immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived; 1. FAILURE TO PAY NOTE. Failure to pay, any installment or principal or of any interest on any indebtedness of Borrower to you within 10 days of the due date thereof. 2. BREACH OF COVENANT. Failure of Borrower to perform any other term or condition of this Agreement binding upon Borrower within thirty days of written notice from you. 3. BREACH OF WARRANTY. Any of Borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect. 4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial pan of its property or business. 5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of attachment, or similar process, in excess of $50,000, shall be entered or filed against Borrower or any of its assets and shall remain unvacated unbonded or unstayed for a period of 10 days or in any event later than five days prior to the date of any proposed sale thereunder. 6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower and, if instituted against it, shall be consented to. E. Miscellaneous Provisions. 1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of your Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any note issued in connection with a loan that your Bank may make -7- 8 hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. See Addendum dated January 15, 1997, attached hereto and incorporated herein by this reference for additional terms. In the event of a conflict between this Agreement and the Addendum, the terms in the Addendum prevail. SCM Microsystems, Inc. By: ______________________________________ Steven Humphreys -8- 9 SCM MICROSYSTEMS, INC. ADDENDUM TO CREDIT TERMS & CONDITIONS DATED JANUARY 15, 1997 FACILITY: A modification and increase to $2,500,000 of the existing $1,000,000 Revolving Line of Credit ("Line of Credit"), to support short term working capital requirements and the issuance of letters of credit. $250,000 sub-limit for the issuance of trade- related Standby and Commercial Letters of Credit, $250,000 sub-limit for foreign exchange reserved for the issuance of forward contracts up to a maximum $2,500,000. Notwithstanding the foregoing, at no time shall Bank be obligated to disburse any amount in excess of the aggregate sum of $2,500,000 under the Facility. BORROWING Borrowing base to be monitored on a monthly basis BASE: and consist of: 80% of Eligible Accounts (as hereinafter defined) payable by debtors whose principal place of business is located within the United States of America ("Eligible Domestic Accounts") and any Bank-approved, Letter of Credit backed or insured Eligible Accounts payable by debtors whose principal place of business is located outside the United States of America ("Eligible Foreign Accounts"). Eligible Accounts will include those accounts outstanding less than 90 days from invoice date subject to certain exclusions for non-approved foreign, government, contra accounts and inter-company accounts. Concentration Limit of 20%, defined as: any account which alone exceeds 20% of the total accounts receivable will be ineligible to the extent said accounts receivable exceed 20% of the total accounts receivable. Exceptions to the 20% concentration limit to be allowed for Dell Computer, Gateway Computer, Digital Equipment Corporation, IBM, and Packard Bell, which will each be allowed to constitute up to 35 % of the total accounts of Borrower. If 25% or more of an account receivable is past due (greater than 90 days) the entire account is ineligible. MATURITY: May 15, 1997. PAYMENT: Interest due monthly. Principal due upon maturity. SECURITY: Perfected first priority security interest in all corporate assets, excluding previously leased equipment. SUBORDINATION: Continued subordination of a minimum of $3,000,000 in inter-company indebtedness to SCM Microsystems GmbH (formally known as SCM Schneider Microsysteme Entwicklungs-und Vertriebs GmbH). GUARANTOR: Continuing commercial guarantee of SCM Microsystems GmbH (formally known as SCM Schneider Microsysteme Entwicklungs-und Vertriebs GmbH). PRICING: INTEREST RATE: Bank's Prime Rate + 1.00% per annum (floating). Rate to be reduced to Bank's Prime Rate per annum (floating) following Bank's receipt of evidence that Borrower has achieved two fiscal quarters of operating and after-tax profitability in excess of $200,000 per quarter, beginning with the quarter ending 12/31/96. FEES: $3,750, payable upon written acceptance of commitment. DEPOSITS: Borrower to maintain primary operating and depository accounts with Bank. -9- 10 FINANCIAL Beginning with the month ending 12/31/96, the COVENANTS: following covenants will be monitored on a monthly basis except where noted otherwise. 1) Minimum Quick Ratio(1) of 1.25 to 1.00. 2) Minimum Tangible Net Worth(2) of $1,800,000 plus 75% of any new equity. 3) Maximum Total Liabilities(2) to Tangible Net Worth(2) of: -1.50 to 1.00. 4) Borrower to maintain quarterly profitability on an operating and pretax basis, with the exception of one quarterly loss per fiscal year, not to exceed $200,000. DEFINITIONS: 1 Quick Ratio is cash plus accounts receivable divided by current liabilities less the current portion of indebtedness fully subordinated to the debt due Bank. 2 Tangible Net Worth is the financial statement net worth of the Borrower prepared according to generally accepted accounting principles less intangible assets, plus indebtedness fully subordinated to the debt due to Bank." 3 Total Liabilities are all the Borrower's liabilities less deferred revenue and indebtedness fully subordinated to the debt due to Bank. REPORTING In addition to the reporting requirements of REQUIREMENTS: Section B.4. of the Credit Terms and Conditions, Borrower will, from time to time, provide Bank in form and substance satisfactory to Bank: 1) Monthly listing of aged accounts receivable and accounts payable from invoice date, with a Bank borrowing base certificate within 10 days of each month end. 2) Monthly internally prepared financial statements prepared according to generally accepted accounting principles and Bank compliance certificate within 25 days of each month end. 3) Quarterly financial statements of SCM Microsystems GmbH, within 45 days of the end of each fiscal quarter. 4) Unqualified audit of Borrower's consolidated and consolidating annual financial statements within 90 days of the end of each fiscal year. 5) Budgets, sales projections, operating plans, or other financial exhibits which Bank may reasonably request. OTHER A) Borrower, without prior written permission COVENANTS: of the Bank, will not: 1) Incur additional borrowed indebtedness other than Bank-approved subordinated debt and domestic equipment leases. 2) Merge, liquidate a substantial portion of its assets, or acquire other assets other than in the normal course of business. 3) Transfer funds to SCM Microsystems GmbH (formally known as SCM Schneider Microsysteme Entwicklungs-und Vertriebs GmbH), except in the ordinary course of business. 4) Transfer funds to SCM Microsystems GmbH (formally known as SCM Schneider Microsysteme Entwicklungs-und Vertriebs GmbH), if such transfer would cause Borrower to violate any of its financial covenants with Bank. 5) Make loans, investments or advances to outside parties other than in the normal course of business. 6) Make distributions or dividends to shareholders. B) Borrower to notify Bank in writing of any legal action commenced against it which may result in damages over $100,000. Borrower shall provide said notice to Bank immediately upon the receipt by Borrower of notice of the commencement of such legal action. C) Annual Accounts Receivable Audit, performed by the Bank's Asset Based Department, with results satisfactory to Bank, at Borrower's expense, not to exceed $1,500. CONDITIONS 1) Execution by Borrower of loan documentation PRECEDENT satisfactory to Bank. TO LENDING: MISCELLANEOUS: All reasonable Bank legal fees shall be for the account of the Borrower. All reasonable out-of-pocket expenses incurred by the Bank in connection with its due diligence and closing of this transaction shall be reimbursed by the Borrower. -10- 11 SCM MICROSYSTEMS, INC. __________________________________ (signature) Steven Humphreys __________________________________ February 12, 1997 (title) President ----------------- -11- 12 IMPERIAL BANK Member FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE) This Agreement is entered Into between SCM MICROSYSTEMS INC, a Corporation (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: 80% of eligible accounts and in no event more than $2,500,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower Loan Account on demand and (b) on or before the tenth day of each month, Interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of One and no/1000ths percent (1.000%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for Interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower In a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used In this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or In which Bank now has or hereafter acquires a security interest. C. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith Is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor, and hereby grants to Bank a continuing security interest in all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver -12- 13 said collections daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower may continue present policies with respect to returned merchandise represented by the Accounts and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. 8. Borrower represents and warrants to Bank: (i) if Borrower is a corporation, that Borrower is duly organized and existing in the State of its Incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (i) Furnish Bank from time to time such financial statements and Information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon; (iii) Permit representatives of Bank to Inspect the Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any Information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank In respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred In collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating lo the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; and (viii) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower Is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts to endorse the name of the undersigned upon document or Instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral In favor of any secured party or person other than Bank. 12. Should: (i) Default be made In the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commended by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute; then in any such event, bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral -13- 14 in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at its option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. *16. Additional Provisions: Subject to the conditions and limitations contained in the Credit Terms and Conditions dated January 15, 1997. See Exhibit A attached. Executed this 15th day of JANUARY, 1997 SCM MICROSYSTEMS INC. ___________________________________________ (Name of Borrower) IMPERIAL BANK By: _______________________________________ Steven Humphreys, President By:___________________________ By: _______________________________________ Title Wm. E. Ogdon, Controller *If none, insert "None" -14- 15 Exhibit A to Security and Loan Agreement dtd. 1/15/97 SCM MICROSYSTEMS INC. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent ten or more days, obligor agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph to be construed as any obligation on the part of the holder of this note to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payment shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. SCM MICROSYSTEMS INC. by: _______________________________ Steven Humphreys 16 IMPERIAL BANK Member FDIC AGREEMENT TO PROVIDE INSURANCE (REAL OR PERSONAL PROPERTY) TO: IMPERIAL BANK DATE: January 15, 1997 9920 S La Cienega Blvd. Borrower: SCM MICROSYSTEMS INC. Inglewood, CA 90301 In consideration of a loan in the amount of $2,500,000.00, secured by all tangible personal property including inventory and equipment. I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan. I/We also agree to advise the below named agent to add Imperial Bank as loss payee on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies. I/We understand that the policy must contain: 1. Fire and extended coverage in an amount sufficient to cover: a) The amount of the loan, OR b) All existing encumbrances, whichever is greater, But not in excess of the replacement value of the improvements on the real property. 2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial Bank, or any other form acceptable to Bank. INSURANCE INFORMATION Insurance Co./Agent: Christina Marson Telephone No.: 415-393-8175 Agent's Address: Marsh McLennan SCM MICROSYSTEMS INC. PO Box 193880 San Francisco, CA 94119 Signature of Obligor: By:__________________________ Steven Humphreys Signature of Obligor:______________________________ ================================================================================ - ------------------------------------------------------- FOR BANK USE ONLY INSURANCE VERIFICATION: Date:________________ Person Spoken to:______________________________________ Policy Number:_________________________________________ Effective From:__________________________ To:__________ Verified By:___________________________________________ - ------------------------------------------------------- 17 IMPERIAL BANK Member FDIC ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS Name(s): Date: January 15, 1997 SCM MICROSYSTEMS INC $ paid to you directly by Cashiers Check No. credited to deposit account No. 0017059254, when $1,700,000.00 advances are requested. $ 800,000.00 paid on Loan(s) No. 003 $ amounts paid to Bank for: [Amounts paid to others on your behalf: $ to Title Insurance Company $ to Public Officials $ to $ to $ to $ to $2,500,000.00 SUBTOTAL (NOTE AMOUNT) LESS $ 0.00 Prepaid Finance Charge (Loan fee(s)) $2,500,000.00 TOTAL (AMOUNT FINANCED) Upon consummation of this transaction, this document will also serve as the authorization for Imperial Bank to disburse the loan proceeds as stated above. SCM MICROSYSTEMS INC. By: -------------------------- ---------------------------- Steven Humphreys Signature -------------------------- ---------------------------- Wm E. Ogdon Signature EX-10.9 14 DEUTSCHE BANK LINE OF CREDIT FOR DM 1,500,000 1 EXHIBIT 10.9 DEUTSCHE BANK AKTIENGESELLSCHAFT P.O. Box 21 03 62 85018 Ingolstadt Headquarters (08 41) 3 15-0 Confidential SCM Microsystems GmbH - - Management - Luitpoldstr. 6 85276 Pfaffenhofen October 23, 1996 Dear Messrs. Meier and Schneider: We are writing in reference to the telephone discussion between you, Mr. Schneider and your Mr. Lang, the topic of which was, among other things, the intensification of our business relationship. In this connection, there was also discussion of coverage of future working capital needs in the amount of about DM 4 to 5 million, which are to be covered in a sensible manner by at least three banks. We are pleased to be able to inform you that we are available to you with a working capital line of credit, which is increased to DM 1,500,000.00 (in words: one million five hundred thousand German marks). For debit drawing in connection with this line of credit, we currently charge you an interest rate of 8% p.a. and will continue to charge you this rate until further notice. For the increased working capital needs which you addressed--particularly in the 4th quarter of each year--we will be glad to disburse special low-interest cash credits to you in connection with the aforementioned line of credit; the maturity dates and terms of said credits will be coordinated with you on a case by case basis. In addition, we have granted a guarantee credit in the current amount of about DM 18,000 charged against the aforementioned line of credit. As customary, we will extend our credit assurance by one year and set the expiration date at 9/30/97. We will contact you to negotiate the further handling of the line of credit in a timely manner prior to the expiration of said expiration date. Our willingness to extend credit is based on the following premises: [ ] You will not furnish collateral to other banks (or you will only do so if our credit line is secured in the same manner). In this connection, you will ensure that the collateral at 2 Sparkasse Pfaffenhofen or other financial institutions, particularly guarantees which have been issued, are released. [Footer Information] [ ] Submission of an annually revolving 3-year plan, incl. liquidity plan for one year each. [ ] Submission of quarterly status figures with a comparison of target/ actual figures and a deviation analysis. [ ] Presentation of credit assurances from neighbor banks which confirms coverage of the entire working capital needs of at least DM 4 million and equal treatment by the banks. [ ] Early submission of audited annual financial statements and consolidated balance sheets [ ] In the event that the holding function existing to date at SCM Microsystems GmbH/Pfaffenhofen (currently vis a vis SCM Microsystems Inc./USA) is relinquished and transferred to SCM Microsystems Inc./USA or another corporation, you shall ensure that the future parent corporation submits a firm letter of comfort to us. We will send you a draft in this regard at the appropriate time. We assume that future profits will be reinvested and that future withdrawal/distribution policy will be designed in such a manner that a sufficient equity endowment (at least 20% of the balance sheet total) is guaranteed at all times. In addition, we are assuming a sales allocation which is in accordance with our working capital credit line. Our credit assurance is based in substantial part on the plan figures submitted to us for the 1996-1998 fiscal years and, in particular, on the achievement of positive results in the 3rd and 4th quarter of 1996. If the actual figures substantially deviate downward or an unplanned loss occurs, we will keep open the option of extraordinary credit termination. Otherwise, our Standard Contract Terms shall apply. As a sign of your agreement to this credit assurance, we ask that you return the signed copy of this letter. Naturally, we will be available to you at any time for questions in connection with this credit assurance and in all other financial matters. Our credit assurance dated July 12, 1996, lapses pursuant hereto. Sincerely yours, Deutsche Bank AG Ingolstadt Branch [signature] [signature] Reichgeid Maier 3 In agreement with the content of this letter. SCM Microsystems GmbH Pfaffenhofen, [blank date] please sign on company stamp DEUTSCHE BANK [logo] AKTIENGESELLSCHAFT Ingolstadt Branch Corporate customer department Ludwigstr. 24 85049 Ingolstadt Mailing address: SCM Microsystems GmbH P.O. Box 21 03 62 - - Management - 85018 Ingolstadt Luitpoldstr. 6 85276 Pfaffenhofen Gunter Maier Telephone: (0841) 315-229 Fax: (0841) 315-218 November 13, 1996 Our credit assurance dated 10/23/96 Gentlemen: We are writing in reference to our credit assurance dated 10/23/96 and the telephone discussion which was conducted with your Mr. Lang in the interim. As discussed, the following items of the above-captioned credit assurance will be specified in greater detail: [ ] Equity endowment In light of the fact that we were credibly assured that the shareholder loan extended to you in the approximate amount of DM 4 million will be converted to equity (nominal amount plus premium) by 1/31/97, we will view this as owners' equity at this time, and therefore the 20% clause of our credit assurance is satisfied. [ ] Achievement of a positive result in the 3rd quarter: According to the numerical material before us, the firm of SCM Microsystems GmbH generated a loss of about DM 166,000 in the third quarter of 1996, although September was already clearly in the positive result range (DM +499,000). In light of the September result and the consolidated (GmbH [German limited liability corporation] and Inc.) quarterly profit in the amount of US$ 154,000, we 4 view the 3rd quarter as satisfying the prerequisite to our willingness to extend credit in this regard as well. As you confirmed, the 4th quarter of 1996 will produce a positive result, viewed from both the individual (GmbH) and the consolidated (GmbH + Inc.) standpoint. However, if contrary to expectations, the conversion option is not exercised by 1/31/97 and/or no positive result is achieved in the 4th quarter of 1996 and thereafter, we will have to reconsider our willingness to extend credit. We hope to have been of assistance to you and remain Sincerely yours, Deutsche Bank AG Ingolstadt Branch [signature] [Footer Information] EX-10.10 15 BHF BANK LINE OF CREDIT FOR DM 1,500,000 1 EXHIBIT 10.10 BHF BANK Aktiengesellschaft Munich Branch Confidential SCM Microsystems GmbH 12/3/96 - - Management - Munich Branch Luitpoldstr. 6 Corporate Banking 85276 Pfaffenhofen Hm Telephone: 089/55173-232 Fax: 089/55173/292 Re: Credit assurance Dear Messrs. Meier and Schneider: We are writing in reference to the telephone discussion between you, Mr. Meier and your Mr. Lang and are pleased to be able to extend to your enterprise a framework line of credit in the amount of DM 1,500,000.00 (in words: one million five hundred thousand German marks) through 9/30/97 on the basis of our Standard Contract Terms. The line of credit may--to the extent presentable--be used as follows: 1. cash credit with current account 2. cash credit from Euro funds with terms of 1-3 months (up to 50% of amount used) 3. guarantee credit. For uses in the form of cash credit, we will charge interest at the rate of 8.0% p.a. until further notice, payable at the end of the calendar month. We reserve the right to adjust this interest rate to the changing monetary and capital market situation. The interest rates for Euro credit uses are based on the respective market situation and will be agreed upon on a case by case basis. For uses arising from the guarantee credit, we charge a 1.5% guarantee commission. Our guarantee terms will apply. Due to the strong link between SCM Microsystems GmbH and its U.S. subsidiary, the consolidated situation is of particular importance to us. The basis of and prerequisite to our willingness to extend credit is the satisfaction of the following conditions and plans: - - positive development in the 4th quarter (consolidated result at least US$ 150,000.00) and thus 2 a maximum consolidated loss of US$ 600,000.00 in 1996, with documentation of the existing order volume of SCM Microsystems Inc. for December 1998 (GmbH + Inc. about DM 6 million in total); BHF BANK Aktiengesellschaft Munich Branch [signature] [Footer Information] 3 BHF BANK Aktiengesellschaft Munich Branch [illegible address] Page 2 of the letter dated 12/3/96 to SCM Microsystems GmbH, Pfaffenhofen - - positive development according to plan in 1997, i.e., clear increase in sales and profit which permits adequate owners' equity endowment (at least 20%); - - conversion of convertible shareholder loans in the amount of DM 4,000,000.00 into owners' equity (capital stock and additional paid-in capital) by no later than January 31, 1997, and achievement of a consolidated equity ratio of at least 20% by 12/96 and maintenance thereof in the future course of business; - - regular information on at least a quarterly basis (quarterly report with comparison of target/actual figures) on the SCM Microsystems GmbH and Inc. enterprises, individually as well as consolidated, each by the 15th of the following month; - - near contemporaneous submission of your audited annual financial statements, individually and consolidated; - - submission of a liquidity plan; - - equal treatment analogous to other banks is agreed upon; previously posted collateral will be returned by no later than 12/15/96. In the event that the foregoing prerequisites/conditions are not (or cannot be) observed, we reserve the right to fundamentally reconsider our willingness to extend credit on the basis of the changed situation or hold open the right of extraordinary termination. In addition, the extension of credit is subject to the proviso that additional lines of credit--currently from Deutsche Bank AG and Stadtparksparkasse Munchen--are made available (consortial reservation permissible) and maintained, each in the amount of DM 1,500,000.00 with at least the same term. Until the repayment of this credit, you shall be obligated not to furnish collateral to other credit creditors for the same type of credits. You shall ensure that corporations in which you hold a majority interest likewise do not furnish collateral to other credit creditors for the same type of credits. This obligation does not extend to the customary collateral in the industry based on the Standard Contract Terms of the credit institutions. If other third parties (in which you do not hold a majority interest) furnish or have furnished collateral for the same types of credits to you, you shall inform us in this regard as soon as become aware of the posting of security. 4 In the event that intended to furnish collateral to other credit creditors for the same type of credits, you shall notify us promptly--in any case prior to furnishing collateral--in order to also give us the opportunity to obtain appropriate security. At our request, you shall either forego furnishing collateral or offer us collateral of equal value. BHF BANK Aktiengesellschaft Munich Branch [signature] [Footer Information] EX-10.11 16 STADTSPARKASSE MUNCHEN LINE OF CREDIT 1 EXHIBIT 10.11 [logo] STADTSPARKASSE MUNCHEN unicef helps children Munich helps unicef--so do we! - -------------------------------------------------------------------------------- Sparkassenstr. 2 80331 Munich SCM Schneider Microsysteme Entwicklungs- u. Vertriebs GmbH Luitpoldstrasse 6 Mr. Seemuller Tel. 21675914 85276 Pfaffenhofen Fax 21675936 Munich, 11/13/96 Re: Your checking account 23-254444 Ladies and Gentlemen: We are pleased to extend to you a framework credit through 3/30/98 with current account in the amount of DM 1,500,000.00 in words: one million five hundred thousand German marks. The terms and additional conditions can be found in the attached framework credit contract dated 11/13/96, which shall constitute a substantial component of this assurance. Please send us the documents which are checked in the disbursement schedule (see attachment). Sincerely yours, Enclosure(s) Stadtsparkasse Munchen Corporate Customer Service Headquarters [signature] [Footer Information] x-smf1311kre02 b1149 2 [logo] Stadtsparkasse Munchen Sparkassenstr. 2 80331 Munich Universal contract for business credits Customer no./Account. no. 23254444 Date Munich, 11/13/96 - -------------------------------------------------------------------------------- SCM Schneider Microsysteme Entwicklungs- u. Vertriebs GmbH Luitpoldstrasse 6, 85276 Pfaffenhofen - -------------------------------------------------------------------------------- - - hereinafter referred to as the Borrower - hereby concludes an agreement with Sparkasse concerning the grant of the business credits named under no. 1; the maximum sum defined below for the individual credits shall apply. If no individual maximum sums are stipulated, an overall credit framework of DM 1,500,000.00 shall apply, within which the individual credits may be used in fluctuating amounts. 1 CREDIT TYPES, CREDIT COSTS 1.1 CREDIT WITH ONGOING STATEMENT GERMAN MARKS For the credit proceeds which are drawn, the interest and commission rates set by Sparkasse for credits of this type shall be paid. The interest rate is currently 8.75% per annum. Changes in the rate shall be communicated to the Borrower. If the credit is not used, a credit commission of [blank]% per year shall be charged as compensation for keeping the credit proceeds available. At each closing of accounts, the credit costs incurred to date shall be charged. If the granted credit is exceeded as a result, Sparkasse shall--as with every credit overdraft--charge the following for the excess amount: // the overdraft commission set at Sparkasse for overdrafts (along with the aforementioned credit interest) which is currently [blank]% per annum; /X/ overdraft interest set for overdrafts, which is currently 14.50% per annum. In each instance, the Borrower shall be obligated to settle the overdrafts promptly. 1.2 DRAFT DISCOUNT CREDIT GERMAN MARKS; BUNDESBANK-ELIGIBLE DRAFT--AND--GOOD TRADE DRAFT(1) The drafts shall be settled at the rates set by Sparkasse. Interest shall be computed according to calendar days; for the purpose of calculating the interest divisor, a 360-day year shall be assumed. This rule shall also apply to return debits. In addition to a commission, the cash outlays which arise when a draft was not made payable on one banking place shall be placed for account. These fees shall be deducted from the draft amount at the time of settlement. The equivalent value of the purchased draft shall be credited to the checking account in the settlement amount. Otherwise, the additional terms for draft discount credits which are attached as an appendix hereto shall apply. 3 1.3 GUARANTEE FRAMEWORK CREDIT GERMAN MARKS IN GUARANTEE ACCOUNT For the guarantees assumed by Sparkasse, the Borrower shall be charged to the aforementioned guarantee account. If Sparkasse is sued arising from the guarantee, the Borrower shall be obligated to immediately reimburse the sums paid toward the guarantee by Sparkasse. For the guarantees assumed, Sparkasse shall charge the commission rates which it has set for guarantee credits of this type, currently one time--per month--per(1) [blank]% of the guarantee sum, but at least DM [blank]. The customer shall receive the debit notice separately. Changes in the guarantee commission shall be reported to the customer. At the time of assumption or cancellation of a guarantee, the customer shall receive notice concerning the resulting amount of the overall obligation arising from the guarantee credit. Sparkasse shall be authorized to obtain information from the guarantee creditors concerning the respective amount of the guaranteed obligations. Otherwise, the special terms concerning the guarantee transaction, which are attached as an appendix, shall apply. 2 TERMINATION, TERM 2.1 The credit contract may be terminated by either party without compliance with a termination notice period. Notwithstanding the rights of both parties to terminate at any time without notice, the term for the granting of credit shall initially extend until 3/30/93; if no term is entered above, the term for the grant of credit shall be indefinite. If the term for granting credit is limited, it can be extended at the request of the Borrower. 2.2 The provisions of this contract shall continue to apply to the guarantees already assumed at the time of termination. Notwithstanding the release claim pursuant to Section 775 BGB [German Civil Code], however, Sparkasse may demand a release from these guarantee obligations from the Borrower. Sentence 1 shall apply mutatis mutandis to drafts already discounted up to the time of termination. 3 SPECIAL AGREEMENTS - -------------------------------------------------------------------------------- See special attachment - -------------------------------------------------------------------------------- 4 COLLATERAL The credit may only be used if the stipulated collateral is furnished and Sparkasse has a confirmation in this regard, if necessary. Notwithstanding the liability from any existing or future collateral in connection with its security purpose, Sparkasse shall be given the following collateral in special documents: - -------------------------------------------------------------------------------- See separate attachment - -------------------------------------------------------------------------------- 1. [Footnote] Please delete as applicable 4 5 MULTIPLE BORROWERS/RETURN OF COLLATERAL Multiple borrowers shall be jointly and severally liable for the liabilities arising from this contract. If Sparkasse is satisfied by one Borrower, Sparkasse shall not examine whether said Borrower is entitled to claims to collateral no longer needed by Sparkasse. In principle, Sparkasse shall return such collateral to the provider of security, unless the performing Borrower demonstrates that the provider of security has consented to the release of said Borrower. 6 DISCLOSURE AND INFORMATIONAL DUTY The credit institutions also have to disclose the financial circumstances of their borrowers pursuant to statutory provisions. Accordingly, the Borrower shall allow Sparkasse (or an office hired by Sparkasse) access to its financial circumstances at any time; specifically, it shall present its books, balance sheets, financial statements and business papers or permit access and review of these documents, provide all requested information and facilitate an inspection of its business operation. In consultation with the Borrower, Sparkasse may demand the documents necessary therefor directly from the Borrower's advisors in bookkeeping and tax matters. If the aforementioned documents are stored on data media, the Borrower shall be obligated to make them legible in a reasonable period of time. In the event that the Borrower does not satisfy these obligations, Sparkasse shall be entitled to terminate the credit relationship for immediate repayment. Sparkasse shall be entitled to inspect the public register and land register at any time and request simple or certified copies and excerpts at the Borrower's expense; in addition, it may obtain information from insurance companies, governmental authorities and other offices, particularly credit institutions, which Sparkasse may consider necessary in order to evaluate the credit circumstances. 7 COSTS OF THE CONTRACT The Borrower shall bear all costs arising as a result of the conclusion and performance of this contract, including the provision of collateral. 8 PLACE OF VENUE To the extent that jurisdiction of Sparkasse's general place of venue does not arise from Section 29 ZPO [German Code of Civil Procedure], Sparkasse may pursue its claims by way of litigation proceedings in its general place of venue if the borrower to be sued by way of litigation proceedings is a Kaufmann [statutory "merchant" under the German Commercial Code] or a legal entity within the meaning of no. 6 AGB [Standard Contract Terms], or if the borrower has no general place of venue domestically at the time of the conclusion of the contract or later shifts his domicile or ordinary place of residence from the Federal Republic of Germany or if his domicile or ordinary place of residence is unknown at the time of the filing of the complaint. 9 LEGAL VALIDITY If agreements which are made in this contract lack legal validity in whole or in part or are not performed, it is intended that the remaining agreements remain in effect. 5 10 STANDARD CONTRACT TERMS Sparkasse hereby expressly points out that its Standard Contract Terms (AGB) shall constitute a supplemental component of the contract. The AGB shall be available for inspection in the cash offices of Sparkasse.(1) The contract and the copy shall be signed by all Borrowers named on the front side. Place, date (if different from page 1) Company and signature(s), Borrower Munich NOV. 13, 1996 The Borrower(s) is/are acting for his/their own account: / / Yes / / No For Sparkasse: [signature]
1. Every contract partner of Sparkasse receives a copy of the Standard Contract Terms, as long as there is not yet a business connection and the execution of the contract does not involve Sparkasse. 6 Terms for the guarantee transaction The credit institution shall assume guarantees and suretyships--hereinafter referred to in the aggregate as "liability assurance"--on behalf of customers under the following terms and conditions: 1. DIRECT/INDIRECT LIABILITY ASSURANCE, WORDING The credit institution may prepare the liability assurance personally (direct liability assurance) or have it prepared on its behalf by a different credit institution (second bank). To the extent that the credit institution or second bank follows the instructions of the principal in drafting the document concerning the liability assurance (document), it shall not be subject to any review or notice duty vis a vis the principal. The credit institution shall assume guarantees as a principal, waiving the defenses of voidability or offset. 2. GUARANTEE ACCOUNT/GUARANTEE COMMISSION The guarantee account of the principal shall be charged in the amount of the assured sum upon delivery/dispatch of the document or dispatch of the order to the second bank for the creation of a liability assurance. From that point in time on, the principal shall be charged a guarantee commission on the charged amount until deletion. In the case of any later use, the guarantee commission shall be remitted retrospectively until payment. 3. RETURN OF THE DOCUMENT, RELEASE FROM LIABILITY After the end/settlement of the liability assurance, the principal shall ensure the return of the document, or, alternatively, the release of the credit institution from liability. 4. DELETION In the case of direct liability assurances for which a maturity date is designated in the document, the credit institution shall delete the charge from the guarantee account after the passage of the maturity date if the following prerequisites are satisfied: - - the liability assurance lapses in accordance with its clear wording if no use takes place prior to the passage of the maturity date and - - the liability assurance is governed by German law and - - the credit institution is not sued within the time period. If, in such a case, the credit institution is sued by the beneficiary under foreign law on the basis of the liability assurance after the passage of the maturity date, it shall only pay if there is an authorization 7 by the principal to pay or an enforceable decision ordering payment. In other cases, the credit institution shall delete the sum of the liability assurance from the guarantee account if the document issued concerning the liability assurance has been returned to it or if it has been clearly released from liability by the beneficiary or the second bank. If the subject matter of the liability assurance is a litigation guarantee in which the consent of the beneficiary is necessary to return the document, the credit institution shall be required to delete the charged amount only upon demonstration of such consent. 5. ENTITLEMENT TO DEPOSIT UPON USE The credit institution shall also be entitled to deposit the assured amount--to the same extent stipulated with regard to the beneficiary in the liability assurance. 6. EXAMINATION OF DOCUMENTS If the credit institution must receive documents/declarations in connection with the liability assurance, it shall exercise the care of an ordinary businessman to examine whether they comply, with regard to external form, with the conditions for use arising from the liability assurance. The credit institution shall be subject to no further examination obligations, particularly with regard to authenticity and absence of forgery, formal correctness, completeness or legal validity of the documents/declaration or the general or specific conditions contained therein or the correctness of attached translations. Declarations shall also be deemed to be in order if they have been transmitted by cable, telegram, facsimile or via other information systems. 7. REIMBURSEMENT OF EXPENDITURES The principal shall reimburse the credit institution in the same currency for all expenditures which are incurred in connection with the execution of its function--even after deletion of the liability assurance and/or in connection with judicial or extra-judicial prosecution of rights domestically or abroad. This shall also apply if the credit institution avails itself of a right to deposit. If the credit institution is not able to debit the expenditures to a current account in connection with a balance or line of credit, the interest, fees and commissions generally charged for overdrafts shall be paid. 8. FURNISHING OF COLLATERAL Upon request, the principal shall be obligated in accordance with no. 22 AGB to provide the credit institution with bank collateral or cash coverage or increase existing collateral if a change in the risk situation arises as a result of circumstances which arise or become known subsequently. 8 Notwithstanding other collateral, all claims arising in favor of the principal against the beneficiary in connection with the use arising from the liability assurance are assigned to the credit institution to secure the credit institution's claim for reimbursement of expenditures. The credit institution shall assign the claims back as soon as it has been satisfied with respect to all of its claims against the principal. In the event of deposit, the reimbursement claim which the principal acquires through a deposit made in the principal's name by the credit institution it assigned to the credit institution at this time to secure the expenditure reimbursement claim. 9. PLACE OF VENUE If the customer is a Kaufmann [statutory "merchant" under the German Commercial Code] which is not included in the business persons described in Section 4 of the Commercial Code, a legal entity organized under public law or a public law special fund, the credit institution may sue at its general place of venue and may only be sued at such place of venue. 9 APPENDIX TO THE FRAMEWORK CREDIT CONTRACT DATED 11/13/96, ACCOUNT 23-254444 SCM SCHNEIDER MICROSYSTEME ENTWICKLUNGS- U. VERTRIEBS GMBH CONCERNING NUMBER 3 - SPECIAL AGREEMENTS When the credit is granted, the current account credit dated 5/14/93 - 2/20/95 for DM 350,000.00 shall lapse. 1. This framework contract shall relate to all existing or future obligations at Stadtsparkasse Munchen; said liabilities may not exceed the total of the framework credit which has been extended. 2. It shall be deemed agreed upon that Stadtsparkasse Munchen shall receive a guarantee declaration or comfort letter from the future parent corporation (holding). 3. The corporation shall be obligated to take all measures to maintain the current capital base. This shall apply in particular to any losses in subsequent years and any planned distributions. If it is not possible to meet this obligation, Sparkasse shall have the right of extraordinary termination of this contract. CONCERNING NUMBER 4 - COLLATERAL In order to secure the claims of Sparkasse against the customer arising from the credit framework contract, the customer shall be obligated not to place other credit providers in a better position than Sparkasse. If, in future, the customer obtains comparable grants of credits and loans, it shall treat Sparkasse equally to the other credit providers with regard to the type and scope of collateral. Moreover, the customer shall be obligated to send Sparkasse the same information as other credit providers. The customer shall likewise provide assurance that only negative declarations have been submitted to secure comparable credit relationships and that no other additional collateral has been furnished. 11/13/96 [signature] - ------------ ------------------------ ------ --------------------------- Date Stadtsparkasse Munchen Date Company stamp and signature smf1311krel.sdw EX-10.12 17 LEASE DATED SEPTEMBER 30, 1994 1 EXHIBIT 10.12 LEASE THIS LEASE is made on the 29th day of September 1994, by and between Los Gatos Business Park (hereinafter called "Lessor") and SCM Microsystems, Inc., a Delaware corporation (hereinafter called "Lessee"). IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: 1. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the terms and conditions herein set forth, those certain Premises ("Premises") situated in the City of Los Gatos, County of Santa Clara, California, as outlined in Exhibit "A" attached hereto and described as follows: Approximately 5,311 square feet of a larger building located at 131-B Albright Way, Los Gatos, California. 2. Term. The term of this Lease shall be for Four Years commencing on November 1, 1994 and ending on October 31, 1998, unless sooner terminated pursuant to any provision hereof. SEE ADDENDUM #1 3. Rent. Lessee shall pay to Lessor rent for the Premises of three thousand six hundred seventy-five Dollars ($3,675.00) per month in lawful money of the United States of America, subject to adjustment as provided in Section A of this Paragraph. Rent shall be paid without deduction or offset, prior notice, or demand, at such place as may be designated from time to time by Lessor as follows: $3,675.00 shall be paid upon execution of the Lease, which sum represents the amount of the first month's rent. A deposit of $5,577.00 as a Security Deposit shall be made by Lessee and held by Lessor pursuant to Paragraph 5 of this Lease, and shall be paid upon execution of the Lease. If Lessee is not in default or is attempting to cure an existing default, of any provision of this Lease, this sum, without interest thereon, shall be applied toward the rent due for the last month of the term of this Lease or the extended term, pursuant to any extension of the initial term in accordance with the provisions of this Lease. $3,675.00 shall be paid on December 1, 1994, and in advance on the first (1st) day of each succeeding calendar month until August 1, 1995. Rent for any period during the term hereof which is for less than one (1) full month shall be a pro-rata portion of the monthly rent payment. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due Lessor will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, if any installment of rent or other payment due from Lessee is not received by Lessor within five (5) days following the date it is due and payable, Lessee shall pay to Lessor an additional sum of ten percent (10%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. 2 SEE ADDENDUM #2 If, for any reason whatsoever, Lessor cannot deliver possession of the Premises on the commencement date set forth in Paragraph 2 above, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but in such event, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee and the commencement and termination dates of this Lease shall be revised to conform to the date of Lessor's delivery of possession. In the event that Lessor shall permit Lessee to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all of the provisions of this Lease, including the obligation to pay rent at the same monthly rate as that prescribed for the first month of the Lease term. SEE ADDENDUM #3 [ A. Cost of Living Increase. The rent payable in advance on the first day of each month succeeding , 199 , shall be determined in the following manner: the All Urban Consumer Price Index (all items) for the San Francisco/Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index"), which is published most immediately preceding the date of , 199 , shall be compared with the Index published for the date at the commencement of the Lease ("Beginning Index").] [ If the __________, 199_, Index has increased over the Beginning Index, the monthly rent payable during the _______, 199_, to _________, 199_, period shall be set by multiplying the monthly rent paid for the period from ___________, 199_, to ___________, 199_, by a fraction, the numerator of which is the , 199 , Index and the denominator of which is the Beginning Index. In no event shall the monthly rent as determined by this adjustment be less than the monthly rent immediately prior to such adjustment. On adjustment of the monthly rent as herein provided, Lessor shall notify Lessee in writing of the new monthly rent.] B. All taxes, insurance premiums, Outside Area Charges, late charges, costs and expenses which Lessee is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Lessee's failure to pay such amounts, and all reasonable damages, costs, and attorney's fees and expenses which Lessor may incur by reason of any default of Lessee or failure on Lessee's part to comply with the terms of this Lease, shall be deemed to be additional rent (hereinafter, "Additional Rent"), and, in the event of non-payment by Lessee, Lessor shall have all of the rights and remedies with respect thereto as Lessor has for the non-payment of monthly installment of rent. 4. Option to Extend Term. A. Lessee shall have the option to extend the term on all the provisions contained in this Lease for two one-year periods ("extended term(s)") at an adjusted rental calculated as provided in Subparagraph B below on the condition that: (a) Lessee has given to Lessor written notice of exercise of that option ("option notice") at least six (6) months before expiration of the initial term or extended term(s), as the case may be. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -2- 3 (b) Lessee is not in default, or is diligently pursuing a cure for default in the performance of any of the terms and conditions of the Lease on the date of giving the option notice, and Lessee is not in default, or is diligently pursuing a cure for default on the date that the extended term is to commence. [ B. Monthly rent for the extended term shall be set in the following manner: the rent payable in advance for any of each option period of each month succeeding _________, 199_, to _________, 199_, shall be determined in the following manner: the All Urban Consumer Price Index (All Items) for the San Francisco/Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index") which is published most immediately preceding the date , 199 , shall be compared to the Index published at the commencement of the Lease ("Beginning Index").] [ If the , 199 Index has increased over the Beginning Index, the monthly rent payable during the __________, 199_, to __________, 199_, period shall be set by multiplying the monthly rent paid for the period from __________, 199_, to _________, 199_, by a fraction, the numerator of which is , 199 , Index and the denominator of which is the Beginning Index. A new Lease for the term of such extension shall be unnecessary, this Lease constituting a present demise for both the original and any extended term. Lessor shall notify Lessee in writing of the new monthly rent during the extended term.] Monthly rent for the option periods shall be at 95% of the then prevailing market rent for similar buildings in the Los Gatos area. C. In no event shall the monthly rent for any extended term be less than the monthly rent paid immediately prior to such extended term. 5. Security Deposit. Lessor acknowledges that Lessee has deposited with Lessor a Security Deposit in the sum of $5,577.00 to secure the full and faithful performance by Lessee of each term, covenant, and condition of this Lease. If Lessee shall at any time fail to make any payment or fail to keep or perform any term, covenant, or condition on its part to be made or performed or kept under this Lease, Lessor may, but shall not be obligated to and without waiving or releasing Losses from any obligation under this Lease, use, apply, or retain the whole or any part of said Security Deposit (a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for any loss, damage, attorneys' fees or expense sustained by Lessor due to Lessee's default. In such event, Lessee shall, within five (5) days of written demand by Lessor, remit to Lessor sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Should Lessee comply with all the terms, covenants, and conditions of this Lease and, at the end of the term of this Lease, leave the Premises in the condition required by this Lease, then said Security Deposit or any balance thereof, less any sums owing to Lessor, shall be returned to Lessee within fifteen (15) days after the termination of this Lease and vacancy of the Premises by Lessee. Lessor can maintain the Security Deposit separate and apart from Lessor's general funds, or can commingle the Security Deposit with the Lessor's general and other funds. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -3- 4 6. Use of the Premises. The Premises shall be used exclusively for the purpose of Sales, marketing and distribution of computer-related products. Lessee shall not use or permit the Premises, or any part thereof, to be used for any purpose or purposes other than the purpose for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will increase the existing rate of insurance upon the building in which the Premises are located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall not commit or suffer to be committed any waste upon the Premises or any public or private nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the premises are located; nor, without limiting the generality of the foregoing, shall Lessee allow the Premises to be used for any [improper, immoral] unlawful or objectionable purpose. Lessee shall not place any harmful liquids in the drainage system of the Premises or of the building of which the Premises form a part. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the [Premises] outside of the building proper except in trash containers placed inside exterior enclosures designated for that purpose by Lessor [or inside the building proper where designated by Lessor.] No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper. Lessee shall comply with all the covenants, conditions, and/or restrictions ("C.C.&R.'s") affecting the Premises. SEE ADDENDUM #4 [Should, at any time during the term of this Lease, or for a period of five (5) years after the termination or expiration of this Lease, there be charges or findings of toxic waste, spillage, or other contaminants found by a governmental agency to be hazardous and requiring removal or remedial work of the same, Lessee hereunder shall be assumed responsible for, and hold Lessor harmless from all claims, obligations, liabilities, and costs, including reasonable attorneys' fees, for the removal, remedial work, or other action required by the governmental agency so prescribing said action, or any other agency having jurisdiction, unless Lessee can demonstrate that such toxic waste, spillage, or other contaminants did not occur as a result of Lessee's operations while occupying the Premises.] If, at any time during the term of this Lease, Lessor suspects that toxic waste, spillage, or other contaminants may be present on the Premises, Lessor may order a soils report, or its equivalent, at Lessee's expense and Lessee shall pay such costs within fifteen (15) days from the date of the invoice by Lessor provided that said report determines that Lessee was cause of contamination. If any such toxic waste, spillage, or other contaminants are found upon the Premises, Lessee shall deposit with Lessor, within fifteen (15) days of notice from Lessor to Lessee to do so, the amount necessary to remove the substances and remedy the problem. Lessee shall abide by all laws, ordinances, and statutes, as they now exist or may hereafter be enacted by legislative bodies having jurisdiction thereof, relating to its use and occupancy of the Premises. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -4- 5 SEE ADDENDUM #5 7. Improvements. Lessor will provide improvements at Lessor's sole cost and expense, subject to Paragraph 5 of Addendum I, to the Premises as specified in Exhibit "B" attached hereto and by this reference made apart hereof. Lessor will make reasonable efforts to complete such improvements prior to November 1, 1994. Possession of the premises, pursuant to Paragraph 13 of this lease, shall be deemed tendered upon [receipt of final city approvals] substantial completion of tenant improvements. 8. Taxes and Assessments. A. Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or imposed upon or against Lessee's fixtures, equipment, furnishings, furniture, appliances, and personal property installed or located on or within the Premises. Lessee shall cause said fixtures, equipment, furnishings, furniture, appliances, and personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Losses within ten (10) days after receipt of a written statement from Lessor setting forth the taxes applicable to Lessee's property. B. All property taxes or assessments levied or assessed by or hereafter levied or assessed by any governmental authority against the Premises or any portion of such taxes or assessments which becomes due or accrued during the term of this Lease shall be paid by Lessor. Lessee shall pay to Lessor Lessee's proportionate share of such taxes or assessments within ten (10) days of receipt of Lessor's invoice demanding such payment. Lessee' s liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. 9. Insurance. A. Indemnity. Lessee agrees to indemnify and defend Lessor against and hold Lessor harmless from any and all demands, claims, causes of action, judgments, obligations, or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees) on account of, or arising out of, the condition, use, or occupancy of the Premises. This Lease is made on the express condition that Lessor shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Lessee, its agents, officers, employees, licensees, and invitees. Lessee shall not be responsible for the negligent or willful misconduct of Lessor, its agents, officers, employees, licensees and invitees. B. Liability Insurance. Lessee shall, at its expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Lessor and Lessee, with cross-liability endorsements, against any liability arising out of the condition, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such insurance shall be in an amount satisfactory to Lessor of not less than one million dollars ($1,000,000) for bodily injury or death as a result of one occurrence, and five hundred thousand dollars ($500,000) for NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -5- 6 damage to property as a result of any one occurrence. The insurance shall be with companies approved by Lessor, which approval Lessor agrees not to withhold unreasonably. Prior to possession, Lessee shall deliver to Lessor a certificate of insurance evidencing the existence of the policy which (1) names Lessor as an additional insured, (2) shall not be canceled or altered without thirty (30) days' prior written notice to Lessor, (3) insures performance of the indemnity set forth in Section A of Paragraph 9, and (4) coverage is primary and any coverage by Lessor is in excess thereto. C. Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance (including earthquake(1) and flood coverage) covering loss or damage to the Premises, in the amount of the full replacement value thereof. Lessee shall pay to Lessor its pro-rata share of the cost of said insurance within ten (10) days of Lessee's receipt of Lessor's invoice demanding such payment. Lessee acknowledges that such insurance procured by Lessor shall contain a deductible which reduces Lessee's cost for such insurance, and, in the event of loss or damage, Lessee shall be required to pay to Lessor the amount of such deductible. Lessor agrees to cap the deductible at $1,000 per occurrence. D. Lessee hereby releases Lessor, and its partners, officers, agents, employees, and servants, from any and all claims, demands, loss, expense, or injury to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of Lessee in, about, or upon the Premises, which is caused by or results from perils, events, or happenings which are the subject of insurance in force at the time of such loss. 10. Reimbursable Expenses and Utilities. Lessee shall pay for all water, gas, light, heat, power, electricity, telephone, trash removal, landscaping, sewer charges, and all other services, including normal and customary property management fees, which shall not exceed 3% of net rents, supplied to or consumed on the Premises. In the event that any such services are billed directly to Lessor, then Lessee shall pay Lessor for such expenses within ten (10) days of Lessee's receipt of Lessor's invoice demanding payment. SEE ADDENDUM #6 11. Repairs and Maintenance. A. Subject to provisions of paragraph 15, Lessor shall keep and maintain the roof, paving, structural elements, landscaping, irrigation, and exterior walls of the building in which the Premises are located in good order and repair. Lessee shall reimburse Lessor for its proportionate share of said expenses, except for roof structure and other structural elements which shall be at Lessor's sole cost and expense, within ten (10) days of Lessee's receipt of Lessor's invoice demanding payment. If, however, any repairs or maintenance is required because of an act or omission of - ---------- (1)Lessor does not currently carry earthquake insurance. However, Lessor reserves the right to do so should it become available at commercially reasonable rates. Lessee's obligation to pay premiums for earthquake insurance shall be limited to 150% of the cost of coverage provided for in this Section 9C. -6- 7 Lessee or its agents, employees, or invitees, Lessee shall pay to Lessor upon demand one hundred percent (100%) of the costs of such repair and maintenance. SEE ADDENDUM #7 B. Except as expressly provided in Subparagraph A above, Lessee shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including, without limitation, the windows, window frames, plate glass, glazing, truck doors, doors, all door hardware, interior of the Premises, interior walls and partitions, and electrical, plumbing, lighting, heating, and air conditioning systems in good and sanitary order, condition, and repair. Lessee shall, at all times during the Lease term and at his expense, have in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term hereof. Lessee shall further provide Lessor with a copy of such contract and all periodic service reports. Should Lessee fail to maintain the Premises or make repairs required of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same, and in that event, Lessee shall reimburse Lessor as additional rent for the cost of such maintenance or repairs on the next date upon which rent becomes due. Lessee hereby expressly waives the provision of Subsection 1 of Section 1932, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Lessor, as provided in Section 942 of said Civil Code. 12. Alterations and Additions. Lessee shall not make, or suffer to be made, any alterations, improvements, or additions in, on, or about, or to the Premises or any part thereof, without prior written consent of Lessor(2) and without a valid building permit issued by the appropriate governmental authority, if required. Lessor retains, at his sole option, the right to retain a General Contractor of his own choosing, provided Lessor's contractor is competitive with its fees and that the work is done on an "open book" basis, to perform all repairs, alterations, improvements, or additions in, on, about, or to said Premises or any part thereof. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, improvements, or additions at the termination of this Lease, and to restore the Premises to their prior condition, normal wear and tear, Acts of God, Damage and Destruction excepted. Upon requesting Lessor's written consent for any alteration, addition or improvements, Lessee shall also specifically request Lessor's written clarification as to whether Lessor will require said alterations to be removed upon termination of Lease. Any alteration, addition, or improvement to the Premises, excluding trade fixtures, shall become the property of Lessor upon Lessee's surrender of Premises or upon earlier termination of Lease, and shall remain upon and be surrendered with the Premises at the termination of this Lease. - -------- (2)Lessee does not need prior written approval of Lessor for alterations that are non-structural in nature provided that costs for said alterations do not exceed $1,000.00 and the alterations do not penetrate the roof membrane. -7- 8 ["Lessor can elect, however, within thirty (30) days before expiration of the term or within five (5) days after termination of the term, to require Lessee to remove any alterations, additions, or improvements that Lessee has made to the Premises."] If Lessor so elects, Lessee shall restore the Premises to the condition designated by Lessor in its election, before the last day of the term, or within thirty (30) days after notice of election is given, whichever is later. Alterations and additions which are not to be deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, except for furniture systems that include partitions, electrical signs, carpeting, or any other installation which has become an integral part of the Premises, excluding trade fixtures. In the event that Lessor consents to Lessee's making any alterations, improvements, or additions, Lessee shall be responsible for the timely posting of notices of non-responsibility on Lessor's behalf, which shall remain posted until completion of the alterations, additions, or improvements. Lessee's failure to post notices of non-responsibility as required hereunder shall be a breach of this Lease. Lessor represents to Lessee that at the time of Lessee's taking occupancy, the Premises meet all governmental codes and regulations. If, during the term hereof, any alteration, addition, or change of any sort through all or any portion of the Premises or of the building of which the Premises form a part, is required by law, regulation, ordinance, or order of any public agency, Lessee, at its sole cost and expense, shall promptly make the same, provided, however, that cost for said alteration, addition, change shall be amortized over the useful life of the alteration or addition, and Lessee shall be obligated to pay only the amortized amounts which coincide with the term of the Lease. 13. Acceptance of the Premises and Covenant to Surrender. By entry and taking possession of the Premises pursuant to this Lease, and subject to existing warranties and representations, Lessee accepts the Premises as being in good and sanitary order, condition, and repair, and accepts the Premises in their condition existing as of date of such entry, and Lessee further accepts any tenant improvements to be constructed by Lessor, if any, as being completed in accordance with the plans and specifications for such improvements. However, within sixty (60) days of taking occupancy, Lessee shall provide to Lessor a "punch list" of items to be corrected and Lessor will use its best efforts to complete items on said list. Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the Premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition, and repair, excepting for reasonable wear and tear, Acts of God, Damage and Destruction [as would be normal for the period of the Lessee's occupancy.] Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Lessee. Lessee further agrees that at the end of the term or sooner termination of this Lease, Lessee, at its sole expense, shall have the carpets steam cleaned, the walls and columns painted, the flooring waxed, any damaged ceiling tile replaced, the windows cleaned, the drapes cleaned, and any damaged doors replaced if necessary to restore the Premises to its original condition, normal wear and tear excepted. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -8- 9 If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. SEE ADDENDUM #8 14. Default. In the event of any breach of this Lease by the Lessee, or an abandonment of the Premises by the Lessee, the Lessor has the option of (1) removing all persons and property from the Premises and repossessing the Premises, in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee; or (2) allowing the Lessee to remain in full possession and control of the Premises. If the Lessor chooses to repossess the Premises, the Lease will automatically terminate in accordance with the provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the Lessee: (1) the worth at the time of award of the unpaid rent which had been earned at the time of termination, including interest at the maximum rate an individual is permitted by law to charge; (2) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, including interest at the maximum rate an individual is permitted by law to charge; (3) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; ["and (4) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which, in the ordinary course of things, would be likely to result therefrom."] "The worth at the time of award," as used in (1) and (2) of this Paragraph, is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of award," as used in (3) of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). If the Lessor chooses not to repossess the Premises, but allows the Lessee to remain in full possession and control of the Premises, then, in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the Lease, as specified in the Lease. For the purpose of this paragraph, the following do not constitute a termination of Lessee's right to possession: (1) acts of maintenance or preservation, or efforts to relet the property; (2) the appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, unamortized brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this Section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -9- 10 possession of the Premises, if Lessee obtains Lessor's consent, Lessee shall have the right to assign or sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withhold. If Lessor elects to relet the Premises as provided in this Paragraph, rent that Lessor receives from reletting shall be applied to the payment of: (1) any indebtedness from Lessee to Lessor as agreed under this Lease other than rent due from Lessee; (2) all costs, including for maintenance, incurred by Lessor in reletting; (3) rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sum remaining from the rent Lessor receives from reletting shall be held by Lessor and applied in payment of future rent as rent becomes due under this Lease. In no event shall Lessee be entitled to any excess rent received by Lessor. If, on the date rent is due under this Lease, the rent received from reletting is less than the rent due on that date, Lessee shall pay to Lessor, in addition to the remaining rent due, all costs, including for maintenance, Lessor incurred in reletting that remain after applying the rent received from the reletting, as provided in this Paragraph. Lessor, at any time after Lessee comments a default, subject to cure period outlined in no. 8 of Addendum I, can cure the default at Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due immediately from Lessee to Lessor at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge from the date the sum is paid by Lessor until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. Rent not paid when due shall bear interest at the maximum rate an individual is permitted by law to charge from the date due until paid. 15. Destruction. In the event the Premises are destroyed in whole or in part from any cause, Lessor may, at its option, (1) rebuild or restore the Premises to their condition prior to the damage or destruction or (2) terminate the Lease. If Lessor does not give Lessee notice in writing within thirty (30) days from the destruction of the Premises of its election either to rebuild and restore the Premises, or to terminate this Lease, Lessor shall be deemed to have elected to rebuild or restore them, in which event Lessor agrees, at its expense, promptly to rebuild or restore the Premises to its condition prior to the damage or destruction. If Lessor does not complete the rebuilding or restoration within one hundred [eighty (180)] fifty (150) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Lessee because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond control of Lessor but in no event greater than 180 days), then Lessee shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Lessor. If said destruction occurs during the last twelve (12) months of the Lease term, Lessee may terminate Lease upon written notice to Lessor. Lessor's obligation to rebuild or restore NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -10- 11 shall not include restoration of Lessee's trade fixtures, equipment, merchandise, or any improvements, alterations, or additions made by Lessee to the Premises. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Lessee hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than thirty-three and one-third percent (33 1/3%) of the replacement cost thereof, Lessor may elect to terminate this Lease,[whether] only if the premises be injured [or not]. 16. Condemnation. If any part of the Premises shall be taken for any public or quasi-public use, under any statute of by right of eminent domain, or private purchase in lieu thereof, and a part thereof remains, which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after taking such bears to the value of the entire Premises prior to such taking. Lessor shall have the option to terminate this Lease in the event that such taking causes a reduction in rent payable hereunder by fifty percent (50%) or more. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, as reasonably necessary for Lessee's conduct of its business as contemplated in this Lease and in Lessee's reasonable discretion, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go to the Lessor, and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages to which the Lessee may become entitled during the term hereof by reason of the purchase or condemnation of all or a part of the Premises, except that Lessee shall have the right to recover its share of any award or consideration for (1) moving expenses; (2) loss or damage to Lessee's trade fixtures, furnishings, equipment, and other personal property; and (3) business goodwill. Each party waives the provisions of the Code of Civil Procedure, Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. 17. Free from Liens. Lessee shall (1) pay for all labor and services performed for materials used by or furnished to Lessee, or any contractor employed by Lessee with respect to the Premises, and (2) indemnify, defend, and hold Lessor and the Premises harmless and free from any liens, claims, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for materials used by or furnished to Lessee or any contractor employed by Lessee with respect to the Premises, and [(3) give notice to Lessor in writing five (5) days prior to employing any laborer or contractor to perform services related, or receiving materials for use upon the premises, and] (4) shall post, on behalf of Lessor, a notice of non-responsibility in accordance with the statutory requirements of the California Civil Code, Section 3904, or any amendment thereof. In the event an improvement bond with a public agency in connection with the above is required to be posted, Lessee agrees to include Lessor as an additional obligee. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -11- 12 18. Compliance with Laws. Lessee shall, at its own cost, comply with and observe all requirements of all municipal, county, state, and federal authority now in force, or which may hereafter be in force, pertaining to the particular use and occupancy of the Premises. 19. Subordination. Lessee agrees that this Lease shall, at the option of Lessor, be subjected and subordinated to any mortgage, deed of trust, or other instrument of security, which has been or shall be placed on the land and building, or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee or Lessor. The Lessee shall, at any time and within five (5) business days hereinafter [on demand], execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, trustor, or beneficiary under any deed of trust, for the purpose of subjecting or subordinating this Lease to the lien of any such mortgage, deed of trust, or other instrument of security. If Lessee fails to execute and deliver any such documents or instruments, Lessee irrevocably constitutes and appoints Lessor as Lessee's special attorney-in-fact to execute and deliver any such documents or instruments. 20. Abandonment. Lessee shall not vacate or abandon the Premises at any time during the term; and if Lessee shall abandon, vacate, or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor; provided, however, that Lessee shall not be deemed to have abandoned or vacated the Premises so long as Lessee continues to pay all rents as and when due, and otherwise performs pursuant to the terms and conditions of this Lease. 21. Assignment and Subletting. Lessee's interest in this Lease is not assignable, by operation of law or otherwise, nor shall Lessee have the right to sublet the Premises, transfer any interest of Lessee's therein, or permit any use of the Premises by another party, without the prior written consent, which consent shall not be unreasonably withheld or delayed, of Lessor to such assignment, subletting, or transfer of use. If Lessee is a partnership, a withdrawal or change, voluntary, involuntary, or by operation of law, of any partner(s) not owning fifty percent (50%) or more of the partnership, of the dissolution of the partnership, shall be deemed as a voluntary assignment. If Lessee consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from one person to the other or from a majority of persons to the others, shall be deemed a voluntary assignment. If Lessee is a corporation, any dissolution, merger, consolidation, or other reorganization of Lessee, or the sale or other transfer of a controlling percentage of the capital stock of Lessee, or sale of at least fifty-one percent (51%) of the value of the assets of Lessee, shall be deemed a voluntary assignment except in the case of a public offering of stock. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one percent (51%) of the total combined voting power of all classes of Lessee's capital stock issued, outstanding, and entitled -12- 13 to vote for the election of directors. This Paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. In the event of any subletting or transfer which is consented to, or not consented to, by Lessor, a subtenant or transferee agrees to pay monies or other consideration, whether by increased rent or otherwise, in excess of or in addition to those provided for herein, then all of such excess or additional monies or other consideration shall be paid solely to Lessor, after deducting Lessee's reasonable expenses incurred in the re-leasing of the Premises, and this shall be one of the conditions to obtaining Lessor's consent. Lessee immediately and irrevocably assigns to Lessor, as security for Lessee's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted by this Lease, and Lessor, as assignee and as attorney-in-fact for Lessee, or a receiver for Lessee appointed on Lessor's application, may collect such rent and apply it toward Lessee's obligations under this Lease; except that, until the occurrence of an act of default by the Lessee, Lessee shall have the right to collect such rent. A consent to one assignment, subletting, occupation, or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupation, or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of the Lessor, terminate this Lease. Lessor's waiver or consent to any assignment or subletting hereunder shall not relieve Lessee from any obligation under this Lease unless the consent shall so provide. If Lessee requests Lessor to consent to a proposed assignment or subletting, Lessee shall pay to Lessor, whether or not consent is ultimately given, Lessor's reasonable attorneys' fees incurred in conjunction with each such request, not to exceed $500.00. 22. Parking Charges. Lessee agrees to pay upon demand, based on its percent of occupancy of the entire Premises, its pro-rata share of any parking charges, surcharges, or any other cost hereafter levied or assessed by local, state, or federal governmental agencies in connection with the use of the parking facilities serving the Premises, including, without limitation, parking surcharge imposed by or under the authority of the Federal Environmental Protection Agency. 23. Insolvency or Bankruptcy. Either (1) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or (2) a general assignment by Lessee for the benefit of creditors, or (3) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. Upon the happening of any such event, this Lease shall terminate ten (10) days after written notice of termination from Lessor to Lessee. This section is to be applied consistent with the applicable state and federal law in effect at the time such event occurs. 24. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor to (1) execute and deliver to Lessor any documents, including estoppel certificates presented to Lessee by Lessor, (a) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force -13- 14 and effect and the date to which the rent and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and (c) evidencing the status of the Lease as may be required either by a lender making a loan to Lessor, to be secured by deed of trust or mortgage covering the Premises, or a purchaser of the Premises from Lessor, and (2) to deliver to Lessor the [current] most recent financial statements of Lessee [with an opinion of a certified public account] signed by an authorized representative of company, including a balance sheet and profit and loss statement, for the current fiscal year if available and the two immediately prior fiscal years, all prepared in accordance with Generally Accepted Accounting Principles consistently applied. Lessee's failure to deliver an estoppel certificate within [three (3) days] five (5) business days following such request shall constitute a default under this Lease and shall be conclusive upon Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. If Lessee fails to deliver the estoppel certificates within the [three (3) days] five (5) business days, Lessee irrevocably constitutes and appoints Lessor as its special attorney-in-fact to execute and deliver the certificate to any third party and the default shall be considered cured. 25. Surrender of Lease. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger nor relieve Lessee of any of Lessee's obligations under this Lease, and shall, at the option of Lessor, terminate all or any existing Subleases or Subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such Subleases or Subtenancies. 26. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any provision of this Lease, the prevailing party shall be entitled to legal costs, expert witness expenses and reasonable attorneys' fees, as fixed by the court. 27. Notices. All notices to be given to Lessee may be given in writing, personally, or by depositing the same in the United States mail, postage prepaid, and addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned, or vacated the Premises. Any notice or document required or permitted by this Lease to be given Lessor shall be addressed to Lessor at the address set forth below, or at such other address as it may have theretofore specified by notice delivered in accordance herewith: LESSOR: Los Gatos Business Park 900 Welch Road, Suite 10 Palo Alto, California 94304 LESSEE: SCM Microsystems, Inc. 131-B Albright Way Los Gatos, CA 95030 28. Transfer of Security. If any security be given by Lessee to secure the faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -14- 15 be sold, and thereupon Lessor shall be discharged from any further liability in reference thereto, upon the assumption by such transferee of Lessor's obligations under this Lease. 29. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant, or condition, herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 30. Holding Over. Any holding over after the expiration of the term or any extension thereof, with the consent of Lessor, shall be construed to be a tenancy from month to month, at a rental of [one and one half (1 1/2)] one and one quarter (1 1/4) times the previous month's rental rate per month, and shall otherwise be on the terms and conditions herein specified, so far as applicable. 31. Covenants, Conditions, and Restrictions. Attached hereto, marked Exhibit "C" and by this reference incorporated as if set out in full, are Covenants, Conditions, and Restrictions pertaining to Los Gatos Business Park. As a condition to this Lease, Lessee agrees to abide by all of said Covenants, Conditions, and Restrictions. Moreover, such reasonable rules and regulations as may be hereafter adopted by Lessor for the safety, care, and cleanliness of the Premises and the preservation of good order thereon, are hereby expressly made a part hereof, and Lessee agrees to obey all such rules and regulations. 32. Limitation on Lessor's Liability. If Lessor is in default of this Lease, and, as a consequence, Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Lessor in the Premises, or in the building, other improvements, and land of which the Premises are part, and out of rent or other income from such real property receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title, and interest in the Premises or in the building, other improvements, and land of which the Premises are part, provided that the default of Lessor is not caused by the negligence or willful misconduct of Lessor, its agents, officers, employees, licensees or invitees. Neither Lessor nor any of the partners comprising the partnership designated as Lessor shall be personally liable for any deficiency. 33. Miscellaneous. A. Time is of the essence of this Lease, and of each and all of its provisions. B. The term "building" shall mean the building in which the Premises are situated. C. If the building is leased to more than one tenant, then each such tenant, its agents, officers, employees, and invitees, shall have the non-exclusive right (in conjunction with the NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -15- 16 use of the part of the building leased to such Tenant) to make reasonable use of any driveways, sidewalks, and parking areas located on the parcel of land on which the building is situated, except such parking areas as may from time to time be leased for exclusive use by other Tenant(s). D. Lessee's such reasonable use of parking areas shall not exceed that percent of the total parking areas which is equal to the ratio which floor space of the Premises bears to floor space of the building. E. The term "assign" shall include the term "transfer." F. The invalidity or unenforceability of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. G. All parties hereto have equally participated in the preparation of this Lease. H. The headings and titles to the Paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. I. Lessor has made no representation (s) whatsoever to Lessee (express or implied) except as may be expressly stated in writing in this Lease instrument. J. This instrument contains all of the agreements and conditions made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all of the parties hereto or their respective successors in interest. K. It is understood and agreed that the remedies herein given to Lessor shall be cumulative, and the exercise of any one remedy by Lessor shall not be to the exclusion of any other remedy. L. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, and administrators, and assigns of all the parties hereto; and all of the parties hereto shall jointly and severally be liable hereunder. M. This Lease has been negotiated by the parties hereto and the language hereof shall not be construed for or against either party. N. All exhibits to which reference is made are deemed incorporated into this Lease, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. -16- 17 IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first above-written. LESSOR: LESSEE: Los Gatos Business Park SCM Microsystems, Inc. By: s\ Howard S. White, III By: s\ Robert Schneider -------------------------------- ------------------------------ Howard J. White, III Robert Schneider, General Partner CEO Date: 10/14/94 Date: 10/10/94 -------------------------------- ------------------------------ -17- 18 ADDENDUM I REFERENCE IS MADE TO THAT LEASE BY AND BETWEEN LOS GATOS BUSINESS PARK, LESSOR, AND SCM MICROSYSTEMS, INC., 131B ALBRIGHT WAY, LOS GATOS, LESSEE, DATED SEPTEMBER 29, 1994. To that certain Lease the following wording is added: 1. Late Charge. Lessor agrees to provide Lessee with written notice of delinquent rent and a five (5) day cure period before assessing a late charge for the first three (3) instances of Lessee being delinquent. After the third instance, Lessor is not required to notify Lessee before assessing a late charge. 2. Delivery of Premises. If Lessor is unable to deliver the Premises to Lessee within thirty (30) days of commencement of Lease, this Lease may be terminated by Lessee and all deposits shall be returned to Lessee. 3. Rent. Rent for the term of the Lease shall be as follows:
MONTHS SQUARE FEET MONTHLY RENT/NNN ------ ----------- ---------------- 11/94 - 7/95 01/09 3,500 $3,675.00 9/95 - 12/95 10/14 4,000 $4,200.00 1/96 - 4/96 15/18 4,500 $4,725.00 5/96 - 10/98 19/48 5,311 $5,577.00
Lessee agrees to pay for the triple net expenses for the entire Premises (5,311 square feet) effective the commencement date of the Lease. 4. Hazardous Materials. The following language is added to Section 6 of Lease: Lessor represents and warrants to Lessee that to the best of its knowledge there are no Toxic or Hazardous materials present on, at or under the Premises, which shall be deemed to include underlying land and groundwater, at the time of Lessee's occupancy. Lessor shall therefore indemnify, defend and hold harmless Lessee, its partners, directors, officers, employees, lenders, and successors against all claims, obligations, liabilities, demands, damages, judgements, and costs, including reasonable attorneys' fees arising from or in connection with any prior Toxic or Hazardous materials that existed prior to Lessee's occupancy of the Premises. Lessee in turn represents to Lessor that it does not now and will not in the future permit the use or storage on the Premises of Toxic or Hazardous materials, excluding, however, basic janitorial, maintenance and office supplies, and materials commonly used in connection with Lessee's business as described in Paragraph 6 hereof. For purposes of this Paragraph 6 "Toxic or Hazardous Materials" shall mean any product, substance, chemical, material or waste whose presence, nature, quality and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the leased premises, is either (i) potentially injurious to the public 19 health, safety or welfare, the environment, or the leased premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessee and Lessor to any governmental agency or third party under any applicable statute or common law theory. "Toxic or Hazardous Materials" shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee hereunder shall be responsible for and indemnify, and hold Lessor and its partners, directors, officers, employees, lenders, successors and assigns harmless from all claims, obligations, liabilities, demands, damages, judgments and costs, including reasonable attorneys' fees arising at any time during or in connection with Lessee's causing or permitting any materials referred to under any governmental provisions or regulatory scheme as hazardous or "toxic" or which contain petroleum, gasoline, or other petroleum product, to be brought upon, stored, manufactured, generated, handled, disposed, or used on, under or about the Premises. Lessee shall not be responsible for any costs whatsoever in connection with any contamination on the site that takes place during the lease term unless Lessor proves said contamination is caused by Lessee, its agents, officers, employees, licensees or invitees. Lessee's and Lessor's obligations hereunder shall survive the termination of this Lease. 5. Tenant Improvements. Lessee agrees to pay to Lessor $1,000.00 upon taking occupancy of the Premises for tenant improvements. 6. Lessor's Warranty. Notwithstanding anything to the contrary contained herein, Lessor will guarantee the performance, at its sole cost and expense, of the HVAC system, roof membrane, and all other systems to the Premises for the first twelve (12) months of the Lease term only. Not included in this guarantee is the standard maintenance of the HVAC system and repairs to the HVAC system that do not exceed $500.00. 7. Repairs. Notwithstanding anything in Section 11 or elsewhere in the Lease to the contrary, Lessee shall have no obligation to perform any repairs or replacements in excess of $2,500.00 considered to be a capital expenditure; instead, Lessor shall perform such repairs or replacements and Lessee shall be responsible only for a portion of said costs based on the useful life of the repairs/replacement and the remaining term of the lease. Lessee may choose to pay for its share, as outlined above, in either one lump sum payment due upon completion of repairs/replacement, or Lessee may request Lessor amortize said costs over the remaining lease term at the rate of Lessor's cost of funds, not to exceed Bank of America Prime + 3%. 8. Default. Lessor shall not exercise any of its remedies against Lessee by reason of any default under this Lease unless and until Lessor shall have given to Lessee written notice of such default and unless Lessee shall have failed to remedy a monetary default within ten (10) days or any -2- 20 other default within thirty (30) days. If the nature of any other default is such that it cannot reasonably be cured or remedied within thirty (30) days but Lessee is diligently pursuing its cure, Lessor shall not exercise its remedies against Lessee by reason of default. The remedy described in Section 14 of Lease regarding interest rate is modified by substituting "Bank of America Prime + 4% per annum" in place of the phrase "the maximum rate an individual is permitted by law to charge" wherever it appears in said Section. 9. Utilities. Lessor acknowledges that the PG&E meter is shared by Lessee and the space adjacent to leased Premises. Since adjacent space is vacant at time of Lessee's occupancy, Lessee agrees to pay for 100% of the utilities to the Premises pursuant to Section 10 of base Lease. Should the adjacent space be leased to a third party, Lessee's usage up to that time shall become the base in determining Lessee's share of PG&E charges. 10. Lessor's Consent. It is agreed that whenever required under the terms of the Lease, Lessor's consent shall not be unreasonably withheld or delayed. 11. Covenants, Conditions & Restrictions. In the event of any inconsistency between the Lease/Addendum I and the Covenants, Conditions and Restrictions, the terms of the Lease/Addendum shall control. All other terms and conditions of the base Lease remain in full force and effect. AGREED AND ACCEPTED: LESSOR LESSEE Los Gatos Business Park SCM Microsystems, Inc. s/ Howard J. White, III s/ Robert Schneider - --------------------------------- ----------------------------------- Howard J. White, III Robert Schneider General Partner CEO Date: 10/14/94 Date: 10/10/94 [SUCCEEDING TWO (2) PAGES CONTAIN MAPS OF THE LEASED PROPERTY] -3- 21 IMPROVEMENTS: 1. Wall off openings in existing demising wall. 2. Remove existing water line drop in office to be removed and capped above ceiling. 3. New walls: Add (2) new offices, +/- 11' x 12' as shown. Add (1) new conference room, +/- 12' x 18' as shown. Add wall for new coffee bar, as shown. 4. Remove existing door and fill in wall at existing office. 5. Add (6 ft. long) plastic laminate base cabinet next to existing restrooms in coffee bar. 6. Paint existing office doors and new walls or affected work only, to match existing. 7. Flooring: Provide new carpet in front open office area and VCT in coffee bar area. Tenant to select from building standard selections. 8. Electrical: Standard 2x4 fluorescent lights to be relocated in new rooms and standard office lighting in open office area. Add electrical outlets and telephone boxes with pull strings, as shown. 9. HVAC: Existing to be modified as required by new rooms only. 10. Fire Sprinklers: Existing modified as required for new walls. 11. Plumbing: One new sink in new coffee bar counter. 12. Repair existing rear H.M. man door. Excludes: Telephone, data and communication cabling, window blinds, millwork other than 6 ft. base unit, office sidelites, addition power, furniture and installation including power panels, restroom modifications, modifications to warehouse area. 13. Landlord, at landlord's sole cost & expense. EXHIBIT B: LOS GATOS BUSINESS PARK 131 ALBRIGHT WAY, SUITE B LOS GATOS, CA - --------------------------- TENANT - --------------------------- LESSOR DATE - --------------------------- LESSEE DATE *Agrees to remove electrical box, repair damage from said removal, and relocate said box to the warehouse area. -4- 22 LOS GATOS BUSINESS PARK COVENANTS, CONDITIONS AND RESTRICTIONS AGREED & ACCEPTED: -------------------------- ------------ LESSEE DATE -------------------------- ------------ LESSOR DATE -6- 23 LOS GATOS BUSINESS PARK THIS DECLARATION is made on this 2nd day of February, 1976, by LOS GATOS BUSINESS PARK, A LIMITED PARTNERSHIP organized under the laws of the State of California. The property described in Exhibit "A" is subject to this Declaration and will be known as LOS GATOS BUSINESS PARK. LOS GATOS BUSINESS PARK is being developed as a planned industrial complex which will provide employment opportunities for the residents of the County of Santa Clara and the surrounding area. This Declaration is designed to complement local government and municipal regulations. Except where the LOS GATOS BUSINESS PARK RESTRICTIONS conflict with such local government and municipal regulations, said Restrictions shall be binding upon all owners, lessees, licensees, occupants, users of the property subject to these Restrictions, and their successors in interest as set forth in this Declaration. It is assumed that the users of industrial sites in the LOS GATOS BUSINESS PARK will be motivated to preserve these qualities through mutual cooperation and by enforcing not only the letter but the spirit of this Declaration. ARTICLE I DEFINITIONS Unless the context otherwise specifies or requires, the terms defined in this Article I shall, for all purposes of this Declaration, have the meanings herein specified. Section 1 - "ARCHITECT": The term "Architect" shall mean a person holding a certificate to practice architecture in the State of California under authority of Division 3, Chapter 3 of the Business and Professions Code of the State of California. 24 Section 2 - "BENEFICIARY": The term "Beneficiary" shall mean a mortgagee under a mortgage, as well as a beneficiary under a deed of trust. Section 3 - "DECLARATION": The term "Declaration" shall mean the COVENANTS, CONDITIONS AND RESTRICTIONS FOR LOS GATOS BUSINESS PARK. Section 4 - "DEED OF TRUST": The term "Deed of Trust" or "Trust Deed" shall mean a mortgage as well as a deed of trust. Section 5 - "FILE": The term "File" shall mean, with reference to any subdivision map, record of survey or parcel map, the filing of said map in the Office of the Recorder of the County of Santa Clara, State of California. Section 6 - "GRANTOR": The term "Grantor" shall mean LOS GATOS BUSINESS PARK, a LIMITED PARTNERSHIP; and to the extent provided in Article VII Section I below, its successors and assigns. Section 7 - "IMPROVEMENTS": The term "Improvements" shall include buildings, outbuildings, roads, driveways, parking areas, fences, screening walls and barriers, retaining walls, stairs, decks, hedges, windbreaks, plantings, planted trees and shrubs, poles, signs, loading areas and all other structures or landscaping improvements of every type and kind. Section 8 - "MORTGAGEE": The term "Mortgagee" shall mean a beneficiary under, or a holder of a deed of trust as well as a mortgagee under a mortgage. Section 9 - "LOS GATOS BUSINESS PARK": The term "LOS GATOS BUSINESS PARK" shall mean all of the real property now or hereafter made subject to this Declaration. -2- 25 Section 10 - "LOS GATOS BUSINESS PARK RESTRICTIONS": The term "Los Gatos Business Park Restrictions" shall mean the covenants, conditions and restriction set forth in this Declaration, as it may from time to time be amended or supplemented. Section 11 - "OWNER": The term "Owner" shall mean and refer to any person having any estate in any site, excluding any person who holds such interest as security for the payment of an obligation, but including any mortgagee or other security holder in actual possession of any lot, by foreclosure or otherwise, and any person taking title from an such security holder. Section 12 - "RECORD" - "RECORDED": The term "Record" or "Recorded" shall mean, with respect to any document, the recordation of said document in the Office of the County Recorder of the County of Santa Clara, State of California. Section 13 - "SIGN": The term "Sign" shall mean any structure, device or contrivance, electric or non-electric, and all parts thereof which are erected or used for advertising purposes upon or within which any poster, bill, bulletin, printing, lettering, painting, device or other advertising of any kind whatsoever is used, placed, posted, tacked, nailed, pasted, or otherwise fastened or affixed to ground or improvements. Section 14 - "SITE": The term "Site" shall mean all contiguous land under one ownership. Section 15 - "STREETS": The term "Streets" shall mean any street, highway or other thoroughfare within or adjacent to the property and shown on any recorded subdivision or parcel map, or record of survey, whether designated thereon as street, boulevard, place, drive, road, terrace, way, land, circle or otherwise. Section 16 - "VISIBLE FROM NEIGHBORING PROPERTY": The term "Visible From Neighboring Property" shall mean, with respect to any given object, that such object is or would be -3- 26 visible to a person six (6) feet tall, standing on any part of such neighboring property at an elevation no greater than the elevation of the base of the object being viewed. Section 17 - "LOT": The term "lot" shall mean the fractional part of blocks as divided and sub-divided on subdivision or parcel maps of the Official Records of the Recorder of Santa Clara County, California, as they from time to time become current. ARTICLE II PROPERTY SUBJECT TO THE LOS GATOS BUSINESS PARK RESTRICTIONS Section 1 - General Declaration Creating Los Gatos Business Park: Grantor hereby declares that all of the real property located in the Town of Los Gatos, County of Santa Clara, State of California, described in Exhibit "A", which is attached hereto and incorporated herein by this reference is and shall be, conveyed, hypothecated, encumbered, leased, occupied, built upon or otherwise used, improved or transferred in whole or in part subject to the LOS GATOS BUSINESS PARK RESTRICTIONS, meaning the covenants, conditions and restrictions set forth in this Declaration. All of said restrictions are declared and agreed to be in furtherance of a general plan for the subdivision, improvement and sale of said real property and are established for the purpose of enhancing and perfecting the value, desirability and attractiveness of said real property and every part thereof. All of the LOS GATOS BUSINESS PARK RESTRICTIONS shall run with all of said real property for all purposes and shall be binding upon and inure to the benefit of Grantor and all owners, lessees, licensees, occupants and their successors in interest as set forth in this Declaration. -4- 27 Section 2 - Addition of Other Real Property by Grantor: A. Grantor's Power: Grantor may at any time during the pendency of this Declaration add all or a portion of any land now or hereafter owned by Grantor to the property which is covered by this Declaration, and upon recording of a notice of addition of real property containing at least the provisions set forth in Section 2B of this Article II, the provisions of this Declaration specified in said notice shall apply to such added land in the same manner as if it were originally covered by this Declaration. Thereafter, to the extent this Declaration is made applicable thereto, the rights, powers and responsibilities of Grantor and the owners, lessees, licensees and occupants of parcels within such added land shall be the same as in the case of the land described in Exhibit "A". B. Notice of Addition of Land: The notice of addition of real property referred to in Section 2A above shall contain at least the following provisions: (1) A reference to this Declaration stating the date of recording hereto and the book or books of the records of Santa Clara County, California, and the page numbers where this Declaration is recorded; (2) A statement that the provisions of this Declaration, or some specified part thereof, shall apply to such added real property; (3) A legal description of such added real property; and (4) Such other or different covenants, conditions and restrictions as Grantor shall, in its discretion, specify to regulate and control the use, occupancy and improvement of such added real property. ARTICLE III REGULATION OF IMPROVEMENTS -5- 28 Section 1 - Approval of Plans: A. Approval Required: No improvement shall be erected, placed, altered, maintained or permitted to remain on any land subject to this Declaration until final plans and specifications shall have been submitted to and approved in writing by Grantor. Such final plans and specifications shall be submitted in writing in duplicate over the authorized signature of the owner, lessee, licensee or other occupant of the site or his authorized agent. Such plans and specifications shall be in such form and shall contain such information as may be required by the Grantor, but in any event shall include: (1) A site development plan of the lot showing the nature, grading scheme, kind, shape, materials and location with respect to the particular lot (including proposed front, rear and side setback lines) of all structures, the location thereof with reference to structures on adjoining portions of the property, and the number and location of all parking spaces and driveways on the lot; (2) A landscaping plan for the particular lot; (3) A signing and lighting plan; and (4) A building elevation plan showing dimensions, materials and exterior color scheme and be in no less detail than required by the appropriate governmental authority for the issuance of a building permit. Changes in approved plans which materially affect building size, placement or external appearance must be similarly submitted to and approved by Grantor. B. BASIS FOR APPROVAL: Approval shall be based, among other things, on adequacy of site dimensions, adequacy of structural design, conformity and harmony of external design with neighboring structures, effect of location and use of proposed improvements on neighboring sites, proper facing of main elevation with respect to nearby streets, adequacy of -6- 29 screening of mechanical air conditioning or other roof top installations, and conformity of the plans and specifications to the purpose and general plan and intent of this Declaration. No plans will be approve which do not provide for the underground installation of power, electrical, telephone and other utility lines from the property line to buildings. No plans will be approved which provide for buildings covering more than fifty percent (50%) of the lot areas. Grantor shall not arbitrarily or unreasonably withhold its approval of such plans and specifications. Grantor shall have the right to disapprove any plans and specifications submitted hereunder, including but not limited to any of the following: (1) Failure to comply with any of the Restrictions; (2) Failure to include information in such plans and specifications as may have been reasonably requested by Grantor; (3) Objection to the exterior design, appearance of materials of any proposed structure; (4) Objection on the ground of incompatibility of any proposed structure or use with existing structures or uses upon other lots or other properties in the vicinity; (5) Objection to the location of any proposed structure upon any lot with reference to other lots in the vicinity; (6) Objection to the grading plan for any lot; (7) Objection to the color scheme, finish, proportions, style or architecture, height, bulk or appropriateness of any structure; (8) Objection to the number or size of parking spaces, or to the design of the parking area; -7- 30 (9) Any other matter, which in the judgment of the Grantor, would render the proposed structure or structures or use inharmonious with the general plan for improvement of the property or with structures located upon other lots or other properties in the vicinity. C. Approval: Upon approval by the Grantor of any plans and specification submitted hereunder, a copy of such plans and specifications as approved, shall be deposited for permanent record with the Grantor, and a copy of such plans an specifications bearing such approval, in writing, shall be returned to the applicant submitting the same. D. Result of an Action: If Grantor fails either to approve or disapprove such plans and specifications within sixty (60) days after the same have been submitted to it, it shall be conclusively presumed that Grantor has disapproved said plans and specifications; provided, however, that if within said sixty (60) day period Grantor gives written notice of the fact that more time is required for the approval of such plans and specifications, there shall be no presumption that the same are disapproved until the expiration of a reasonable period of time as set forth in said notice. E. Proceeding with Work: Upon receipt of approval from Grantor pursuant to this Section the Owner or lessee to whom the same is given shall as soon as practicable, satisfy all conditions thereof and diligently proceed with the commencement and completion of all approved construction, refinishing, alternating and excavations. In all cases work shall be commenced within one (1) year from the date of such approval. If there is a failure to comply with this paragraph, then the approval given pursuant to this Section shall be deemed revoked unless Grantor upon request made prior to the expiration of said one (1) year period extends the time for commencing work. F. Completion of Work: In any event, reconstruction, refinishing or alteration of any such improvement shall be completed within two (2) years after the commencement thereof -8- 31 except for so long as such completion is rendered impossible or would result in great hardship due to strikes, fire, national emergencies, natural calamities or other supervening forces beyond the control the Owner, lessee, licensee or occupant or his agents. Failure to comply with this paragraph shall constitute a breach of the LOS GATOS BUSINESS PARK RESTRICTIONS and subject the defaulting party or parties to all enforcement procedures set forth in this Declaration and any other remedies provided by law or in equity. G. Liability: Grantor shall not be liable for any damage, loss or prejudice suffered or claimed on account of: (1) The approval or disapproval of any plans, drawings and specifications whether or not defective; (2) The construction or performance of any work, whether or not pursuant to approved plans, drawings and specifications; or (3) The development of any property within the LOS GATOS BUSINESS PARK. H. Review Fee: An architectural review fee shall be paid to Grantor at such time as plans and specifications are submitted for approval based on the following schedule; (1) When the plans submitted are prepared by an architect, the architectural review fee shall be Two Hundred Fifty Dollars ($250.00); (2) In all other cases the architectural review fee shall be Five Hundred Dollars ($500.00). I. Construction Without Approval: If any improvement shall be altered, erected, placed or maintained upon any lot, or any new use commenced on any lot, otherwise than in -9- 32 accordance with the approval by the Grantor pursuant to the provisions of this Section, such alteration, erection, maintenance or use shall be deemed to have been undertaken in violation of this Section and without the approval required herein, and upon written notice from the Grantor, any such structure so altered, erected, placed or maintained upon any lot in violation hereto shall be removed or re-altered, and any such use shall be terminated so as to extinguish such violation. If within fifteen (15) days after the notice of such violation the Owner of the lot upon which such violation exists shall not have taken reasonable steps toward the removal or termination of the same, Grantor shall have the right, through its agents and employees, to enter upon such lot, subject to any security controls imposed by the Government of the United States (or any agency thereof) with respect to any operation being conducted thereon, and to take such steps as may be necessary to extinguish such violation. Grantor or any such agent shall not thereby be deemed to have trespassed upon such lot and shall be subject to no liability to the Owner or occupant of such lot for such entry and any action taken in connection with the removal of any violation. The cost of any abatement or removal hereunder shall be a binding personal obligation of such mortgagee upon the lot in question. The lien provided in this Section shall not be valid as against a bona-fide purchaser (or bona-fide mortgagee) of a lot in question unless a suit to enforce said lien shall have been filed in a court of record in Santa Clara County, California, prior to the recordation among the land records of Santa Clara County, California, of the deed (or mortgage) conveying the lot in question to such purchaser (or subjecting the same to such mortgage). Section 2 - Limitations on Developments: A. Minimum Setback Lines: No improvements of any kind, and no part thereof, shall be placed closer than permitted by Grantor to an interior property line. No improvements of -10- 33 any kind, and no part thereof, shall be placed closer than twenty-five (25) feet from a property line fronting streets. B. Exceptions to Setback Requirements: The following structures and improvements are specifically excluded from the foregoing setback requirements: (1) Roof overhang subject to the specific approval of Grantor in writing, provided it does not extend more than six (6) feet into the setback area; (2) Steps and walks; (3) Paving and associated curbing except that vehicle parking area shall not be permitted to extend within street setback area. (4) Fences, except that no fence shall be placed within the street setback area unless specific approval is given by Grantor in writing; (5) Landscaping; (6) Planters, not to exceed three (3) feet in height, unless specific written approval is given by Grantor; (6) Signs identifying the owner, lessee or occupant subject to the specific approval of Grantor in writing; (7) Lighting facilities, subject to the specific approval of Grantor in writing. C. Landscaping: Every site on which a building shall have been placed shall be landscaped in accordance with plans and specifications submitted to and approved by Grantor pursuant to Section 1 above. Landscaping as approved by Grantor shall be installed within thirty (30) days of occupancy or completion of the building, whichever occurs first, unless Grantor approves in writing another completion date. After completion such landscaping shall be maintained in a sightly -11- 34 and well-kept condition. The area of each site between any street and any minimum setback line as defined by paragraphs A and B of this Section shall be landscaped with an effective combination of street trees, trees, ground cover and shrubbery. All other areas fronting on a street that are not utilized for parking or driveways shall be landscaped in a similar manner. All areas of each site not fronting on a street and not used for parking or storage shall be landscaped utilizing ground cover and/or shrub and tree materials. Undeveloped areas proposed for future expansion shall be maintained in a weed-free condition and shall be landscaped if required by Grantor. Unpaved areas between the street curb line and the property line adjoining any street shall be landscaped and maintained by owner. An underground automatic landscape irrigation system shall be provided by the owner over all landscaped areas. Areas used for parking shall be landscaped, bermed or fenced in such a manner as to screen said areas from view from adjacent streets. Such screening shall extend at least forty two (42) inches above the high point of the finished pavement in said parking area. Plant materials used for this purpose shall consist of lineal or grouped masses of shrubs and/or trees. If, in the opinion and sole discretion of the Grantor, the required landscaping is not maintained in a sightly and well-kept condition, the Grantor shall have the right, through its agents and employees, to enter onto any site and to take such steps as may be necessary to maintain the landscaping in a sightly and well-kept condition. Grantor, or any such agent or employee, shall not thereby be deemed to have trespassed upon such site and shall be subject to no liability to the owner or occupant of such site for such entry and any action taken in connection with such necessary maintenance. The cost of any such maintenance hereunder shall be a binding personal obligation of such Owner, as well as a lien (enforceable in the same manner as a mortgage) upon the site in question. The lien provided in this Section shall not be valid as against a bona-fide purchaser (or -12- 35 bona-fide mortgagee) of a site in question unless a suit to enforce said lien shall have been filed in a court of record in Santa Clara County, California, prior to the recordation among the land records of Santa Clara County, California, of a deed (or mortgage) conveying the site in question to such purchaser (or subjecting the same to such mortgage). D. Signs: (1) No sign shall be permitted on any site unless approved by Grantor in writing. No sign shall be approved other than those identifying the name, business and products of the person or firm occupying the premises and those offer the premises for sale or for lease; (2) The location of signs shall be governed by the setback requirements set forth in Article III-Section 2 unless Grantor gives permission for a nonconforming location; E. Parking Areas: (1) Adequate off-street parking shall be provided to accommodate all parking needs for employee, visitor and company vehicles on the site. The intent of this provision is to eliminate the need for any on-street parking; provided that this provision does not prohibit on-street parking of public transportation vehicles. (2) On-Site: Required off-street parking shall be provided on the site of the use served, or on a contiguous site, or within six hundred (600) feet of the subject site. Where parking is provided on other than the site concerned, a recorded document shall be filed with the Grantor and signed by the owners of the alternate site stipulating to the permanent reservation of the use of the site for said parking. (3) Paved Areas: Parking areas shall be paved so as to provide dust-free, all-weather surfaces. Each parking space provided shall be designated by lines painted on the paved -13- 36 surfaces and shall be adequate in area, and all parking areas shall provide, in addition to parking spaces, adequate driveways and space for the movement of vehicles. (4) Parking Plan: The number of parking spaces required for each site, and the specific location of the same, shall be designated in plans for each site which have been submitted and approved in the manner set forth herein. In determining the number of parking spaces and the location thereof of each site, Grantor shall consider the exact nature of the use proposed for the site; the anticipated number and manner of employment of persons on the site; the nature and location of proposed structures on the site; and such other matters as Grantor shall deem relevant. (5) Limitation: No parking spaces shall be located on, and no parking shall be permitted by the Grantor within designated street setback areas. F. Storage and Loading Areas: (1) Unless specifically approved by Grantor in writing, no materials, supplies or equipment, including company-owned or operated trucks and motor vehicles shall be stored in any area on a site except inside a closed building, or behind a visual barrier screening such areas so that they are not visible from the neighboring properties or public streets. Any storage areas screened by visual barriers shall be located on the rear portions of the site, unless approved by Grantor in writing. No storage areas shall extend into setback lines as established herein unless approved by Grantor in writing. (2) All provisions for vehicle loading shall be provided on the site with on-street vehicle loading not permitted. -14- 37 (3) No loading dock, trucking or railroad activity shall be permitted between the structure and any street, and no loading areas shall encroach into setback areas unless specifically approved by Grantor. (4) Loading dock areas shall be set back and screened so as not to be visible from neighboring properties and streets, but in any event, the docks shall not be closer than forty-five (45) feet from a property line fronting any street unless specifically approved by Grantor in writing. ARTICLE IV REGULATION OF OPERATIONS AND USES Section 1 - Permitted Uses: Unless otherwise specifically prohibited herein, any industrial operation and use will be permitted, provided Grantor specifically consents to such use in writing, if it is performed or carried out entirely within a building that is so designed and constructed that the enclosed operations and uses do not cause or produce a nuisance to adjacent sites such as, but not limited to vibration, sound, electromechanical disturbances and radiation, electromagnet disturbances, radiation, air or water pollution, dust, emission of odorous, toxic and non-toxic matter. Certain activities which cannot be carried on within a building may be permitted, provided Grantor specifically consents to such activity in writing and further provided such activity is screened so as not to be visible from neighboring properties and streets. All lighting is to be shielded from adjacent sites. Section 2 - Restrictions and Prohibited Uses: A. Prohibited Uses: The following operations and uses shall not be permitted on any property subject to these restrictions: (1) Residential of any type; -15- 38 (2) Trailer courts or recreation vehicle campgrounds; (3) Hotels or motels; (4) Junk yards or recycling facilities; (5) Drilling for and/or the removal of oil, gas or other hydrocarbon substances (except that this provision shall not be deemed to prohibit the entry of subject property below a depth of five hundred (500) feet for such purposes); (6) Commercial excavation of building or construction materials, except in the course of approved construction as provided by Article III-Section 1 above; (7) Distillation of bones; (8) Dumping, disposal, incineration or reduction of garbage, sewage, offal, dead animals or refuse; (9) Fat rendering; (10) Stockyard or slaughter of animals; (11) Refining of petroleum or of its products; (12) Smelting of iron, tin, zinc, or other ores; (13) Cemeteries (14) Jail or honor farms; (15) Labor or migrant worker camps; (16) Truck terminals; (17) Petroleum storage yards. -16- 39 B. Nuisances: No nuisance shall be permitted to exist or operate upon any site so as to be offensive or detrimental to any property in the vicinity thereof or to its occupants. A "nuisance" shall include but not be limited to any of the following conditions: (1) Dirt, Dust and Waste Discharge: No use of the property will be permitted which emits dust, sweepings, dirt or cinders into the atmosphere, or discharges liquid, solid wastes or other harmful matter into any stream, river or other body of water which, in the opinion of the Grantor may adversely affect the health, safety, comfort of, or intended property use by persons within the area. Nor shall waste or any substance or materials of any kind be discharged into any public sewer serving the property, or any part thereof, in violation of any regulations of any public body having jurisdiction. (2) Fumes, Cases, Odors, Etc.: No fumes, odors, gases, vapors, acids, or other substances shall be permitted to escape or be discharged into the atmosphere which, in the opinion of Grantor, may be detrimental to the health, safety or welfare of persons, or may interfere with the comfort of persons within the area, or which may be harmful to property or vegetation. -16- 40 (3) Glare or Heat: Any operation producing intense glare or heat shall be performed only within an enclosed or screened area and then only in such manner that the glare or beat emitted will not be discernible from any exterior lot line. (4) Noise: At no point outside of any property plane shall the sound pressure level of any machine, device, or any combination of same, from any individual plant or operation exceed the decibel levels in the designated preferred octave bands shown below:
MAXIMUM SOUND OCTAVE BAND PRESSURE LEVELS (DB) AT CENTER FREQUENCY BOUNDARY PLANE OF LOT 31.5 78
-17- 41 63 72 125 65 250 59 500 55 1000 52 2000 50 4000 48 8000 47
A-scale levels for monitoring purposes are equivalent to 60 dB(A). The maximum permissible noise levels for the octave bands shown above are equal to an NC-50 Noise Criterion curve when plotted on the preferred frequency scale. Noise from motor vehicles and other transportation facilities are exempted. The operation of signaling devices and other equipment having impulsive or non-continuous sound characteristics shall have the following corrections applied: CORRECTIONS Pure tone content -5dB Impulsive character -5dB Duration for non-continuous sounds in daytime only, 1 min/hr -5dB 10 sec/10 min -l0dB 2 sec/10 min -l5dB
The reference level for the dB values listed above is the pressure of 0.0002 microbar or 0.0002 dyne/em. (5) Smoke and Particulate Matter: Visible emissions of smoke will not be permitted (outside any building) which exceed Ringlemann No. 1 on the Ringlemann Chart of the United States Bureau of Mines, other than the exhausts emitted by motor vehicles or other transportation facilities. This requirement shall also be applicable to the disposal of trash and waste materials, Wind-borne dust, sprays and mists originating in plants will not be permitted. -18- 42 (6) Vibration: Buildings and other structures shall be constructed and machinery and equipment installed and insulated on each site so that the ground vibration inherently and recurrently generated is not perceptible without instruments at any point along any of the exterior lot lines. C. Condition of Property: The owner of any site or lot shall at all times keep the premises, buildings, improvements and appurtenances in a safe, clean and wholesome condition and comply in all respects with all government, health, fire and police requirements and regulations, and the Owner will remove at his or its own expense any rubbish of any character whatsoever which may accumulate on such site or lot. In the event such Owner fails to comply with any or all of such specifications or requirements, the Grantor shall have the right, privilege and license to enter upon such premises and make any and all corrections or improvements that may be necessary to meet such standards and to charge such Owner the expenses incurred in doing so. Grantor or any of its agents shall not thereby be deemed to have trespassed upon such lot and shall be subject to no liability to the Owner or occupant of such lot for such entry and any action taken in connection with the removal of any violation. The cost of any abatement or removal hereunder shall be a binding personal obligation on such Owner as well as a lien (enforceable in the same manner as a mortgage) upon the lot in question. The lien provided in this Section shall not be valid as against a bona-fide purchaser (or a bona-fide mortgagee) of a lot in question unless a suit to enforce said lien shall have been filed in a court of record in Santa Clara County, California, prior to the recordation among the land records of Santa Clara County, of the deed (or mortgage) conveying the lot in question to such purchaser, or subjecting the same to such mortgage. -19- 43 D. Repair of Buildings: No building or structure upon any site shall be permitted to fall into disrepair, and each such building and structure shall at all times be kept in good condition and repair and adequately painted or otherwise finished. E. Right of Entry: During reasonable hours and subject to reasonable security requirements, Grantor, or its authorized representative, shall have the right to enter upon and inspect any building, site or parcel and the improvements thereon embraced for the purpose of ascertaining whether or not the provisions of LOS GATOS BUSINESS PARK RESTRICTIONS have been or are being complied with and neither Grantor nor its authorized representative, shall be deemed to have committed a trespass or other wrongful act by reason of such entry or inspection. F. Refuse Collection Areas: All outdoor refuse collection areas shall be visually screened so as not to be visible from streets, freeways and neighboring property. No refuse collection areas shall be permitted between a street and the front of a building. G. Improvements: The Grantor reserves the sole right to grant consents for the construction and operation of street railways, interurban, rapid transit or other public utility facilities, freight railways, electric light, telephone and telegraph pole lines aboveground or underground conduits, and gas pipes in and upon any and all streets now existing or hereafter established upon which any portion of the premises may now or hereafter front or abut. The Grantor reserves and is hereby granted the exclusive right to grant consents and to petition the proper authorities for any and all street improvements such as grading, seeding, tree planting, sidewalks, paving, sewer and water installation, whether it be on the surface or sub-surface which in the opinion of the Grantor are necessary in or to the property subject to these restrictions. The Grantor reserves the right to -20- 44 approve aboveground utility lines across any property subject to these restrictions, when such utility lines, in the opinion of the Grantor, are necessary to the property subject to these restrictions. Section 3 - Other Operations and Uses: Operations and uses which are neither specifically prohibited nor specifically authorized by these restrictions may be permitted in a specific case if operational plans and specifications are submitted to and approved in writing by Grantor. Approval or disapproval of such operational plans and specifications shall be based upon the effect of such operations or uses on other property subject to these restrictions or upon the occupants thereof, but shall be in the sole discretion of Grantor. ARTICLE V DURATION, MODIFICATION AND REPEAL Section 1 - DURATION OF RESTRICTIONS: The LOS GATOS BUSINESS PARK RESTRICTIONS shall continue and remain in full force and effect at all times with respect to all property, and each part thereof now or hereafter made subject thereto (subject, however, to the right to amend and repeal as provided for herein) until January 1, 2009. However, unless within one (1) year prior to January 1, 2009, there shall be recorded an instrument directing the termination of the LOS GATOS BUSINESS PARK RESTRICTIONS signed by owners of not less than two-thirds (2/3) of the property then subject to these restrictions, based on the number of square feet subject to these restrictions (excluding dedicated streets), the LOS GATOS BUSINESS PARK RESTRICTIONS, as in effect immediately prior to the expiration date shall be continued automatically without any further notice for an additional period of ten (10) years and thereafter for such periods of ten (10) years unless within one (1) year prior to the expansion of a such period the LOS GATOS BUSINESS PARK RESTRICTIONS are terminated as set forth above in this Section. -21- 45 Section 2 - TERMINATION AND MODIFICATION: This Declaration or any provision thereof, or any covenant, condition or restriction contained herein, may be terminated, extended, modified or amended, as to the whole of said property or portion thereof, with the written consent of the owners of sixty six and two-thirds (66-2/3%) of the property subject to these restrictions, based on the number of square feet owned as compared to the total number of square feet subject to these restrictions (excluding dedicated streets), provided, however, that so long as Grantor owns at least twenty five percent (25%) of the property subject to these restrictions, or for a period of fifteen (15) years from the effective date hereof, whichever period is longer, no such termination, extension modification or amendment shall be effective without the written approval of Grantor thereto. Provided further, that the provisions of Article III and Article IV hereof shall inure to the benefit of and be enforceable solely by Grantor, shall be capable of being amended by Grantor without the consent of any other owner, person or entity, and shall not give any third party any right or cause of action on account of the terms of this Declaration. No such termination extension, modification or amendment shall be effective until a proper instrument in writing has been executed and acknowledged and recorded in the County where the land affected thereby is situated. ARTICLE VI ENFORCEMENT Section 1 - ABATEMENT AND SUIT: Violation or breach of any restriction herein contained shall give to Grantor the right to enter upon the property or as to which said violation or breach exists and to summarily abate and remove at the expense of the owner, lessee or occupant thereof, any structure, thing or condition that may be or exist thereon contrary to the intent and meaning of the provisions hereof, or to prosecute a proceeding at law or in equity against the -22- 46 person or persons who have violated or are attempting to violate any of these restrictions to enjoin or prevent them from doing so, to cause said violation to be remedied or to recover damages for said violation. Section 2 - DEEMED TO CONSTITUTE A NUISANCE: The result of every action or omission whereby any restriction herein contained is violated in whole or in part is hereby declared to be and to constitute a nuisance, and every remedy allowed by law or equity against an owner, either public or private, shall be applicable against every such result and may be exercised by Grantor. Section 3 - ATTORNEY FEES: In any legal or equitable proceeding for the enforcement of this Declaration or any provision hereof, whether it be an action for damages, declaratory relief or injunctive relief, the losing party or parties shall pay the attorney fees of the prevailing party or parties, in such reasonable amount as may be fixed by the court in such proceedings, or in a separate action brought for that purpose. The prevailing party shall be entitled to said attorney fees, even though said proceeding is settled prior to judgment. All remedies provided herein or at law or in equity shall be cumulative and not exclusive. Section 4 - FAILURE TO ENFORCE NOT A WAIVER OF RIGHTS: The Grantor shall have the right to waive or grant a variance from any requirement, restriction or standard contained in these Restrictions. The failure of Grantor to enforce any requirement, restriction or standard herein contained, shall in no event be deemed to be a waiver of the right to do so thereafter, nor of the right to enforce any other restriction. -23- 47 ARTICLE VII MISCELLANEOUS PROVISIONS Section 1 - ASSIGNMENT OF RIGHTS AND DUTIES: Any and all of the rights, powers and reservations of Grantor herein contained may be assigned to any person, corporation or association which will assume the duties of Grantor pertaining to the particular rights, powers and reservations assigned, and upon any such person, corporation or association evidencing its consent in writing to accept such assignment and assume such duties, he or it shall, to the extent of such assignment, have the same rights and powers and be subject to the same obligations and duties as are given to and assumed by Grantor herein. The term "Grantor" as used herein includes all such assignees and their successors and assigns. If at any time Grantor ceases to exist and has not made such an assignment, a successor Grantor may be appointed in the same manner as these Restrictions may be terminated, extended, modified or amended under Article V - Section 2. Any assignment or appointment made under this Section shall be in recordable form and shall be recorded in the County where the land is situated. Section 2 - CONSTRUCTION NOISE AND ACCEPTANCE: Every person or other entity who now Or hereafter owns, occupies or acquires any right, title or interest in or to any portion of the property made subject to these Restrictions is and shall be conclusively deemed to have consented and agreed to every covenant, condition and restriction contained herein, whether or not any reference. to this Declaration is contained in the instrument by which such person or entity acquired an interest in said property. Section 3 - WAIVER: Neither Grantor nor its successors or assigns shall be liable to any Owner, lessee, licensee, or occupant of land subject to this Declaration by reason of any mistake in 23 48 judgment, negligence, nonfeasance, action or inaction or for the enforcement or failure to enforce any provision of this Declaration. Every Owner, lessee, licensee or occupant of any of said property by acquiring his interest therein agrees that he will not bring any action or suit against Grantor to recover any such damages or to seek equitable relief. Section 4 - MUTUALITY, RECIPROCITY - RUNS WITH LAND: All covenants, conditions, restrictions and agreements contained herein are made for the direct, mutual and reciprocal benefit of each and every part and parcel of the property now or hereafter made subject to this Declaration, shall create mutual, equitable servitudes upon each parcel in favor of every other parcel; shall create reciprocal rights and obligations between the respective Owners of all parcels and privity of contract and estate between all grantees of said parcels, their heirs, successors and assigns; and shall, as to the owner of each parcel, his heirs, successors and assigns, operate as covenants running with the land, for the benefit of all other parcels, except as provided herein. Section 5 - RIGHTS OF MORTGAGEES: No breach of the restrictions and other provisions. contained herein, or any enforcement thereof, shall defeat or render invalid the lien of any mortgage or deed of trust now or hereafter executed upon land subject to these Restrictions; provided, however, that if any portion of said property is sold under a foreclosure of any mortgage or under the provisions of any deed of trust, any purchaser of such sale and his successors and assigns shall hold any and all property so purchased subject to all of the restrictions and other provisions of this Declaration. Section 6 - PARAGRAPH HEADINGS: Paragraph headings, where used herein, are inserted for convenience only and are not intended to be a part of this Declaration or in any way to define, limit or describe the scope and intent of the particular paragraphs to which they refer. -25- 49 Section 7 - EFFECT OF INVALIDATION: If any provisions of this Declaration is held to be invalid by any court, the invalidity of such provision shall not effect the validity of the remaining provisions hereof. IN WITNESS WHEREOF, Grantor has executed this Declaration the day and year first above written LOS GATOS BUSINESS PARK A Limited Partnership s/ Howard J. White, III By: Howard J. White, III General Manager Article VI, Section 4 entitled "Failure to Enforce Not a Waiver of Rights" has been amended to read: The Grantor is hereby authorized and empowered to grant reasonable variances from the provisions of this Declaration in order to overcome practical difficulties and in order to prevent unnecessary hardship in the application of the provisions contained herein, provided, however, that said variances shall not materially alter or be inconsistent with the general plan and intent of this Declaration. The failure of Grantor to enforce any requirement, restriction or standard herein contained, shall in no event be deemed to be a waiver of the right to do so thereafter, nor of the right to enforce any other restriction. -26- EX-10.13 18 SUBLEASE AGREEMENT DATED DECEMBER 17, 1996 1 EXHIBIT 10.13 LEASE THIS LEASE is made on the 6th day of July, 1995, by and between Los Gatos Business Park (hereinafter called "Lessor) and lntermart Systems, Inc. (hereinafter called "Lessee"). IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN CONTAINED, THE PARTIES AGREE AS FOLLOWS: A. Premises. Lessor leases to Lessee, and Lessee leases from Lessor, upon the terms conditions herein set forth, those certain Premises ("Premises") situated in the City of Los Gatos, County of Santa Clara, California, as outlined in Exhibit "A" attached hereto and described follows: +/- 5,100 square feet of a larger building commonly known 131-D Albright Way, Los Gatos, California, 95030. Lessee's pro-rata share shall be +/- 22.7%. B. Term. The term of this Lease shall be for three (3) years, commencing on August 1, 1995 and ending on July 31, 1998, unless sooner terminated pursuant to any provision hereof. C. Rent. Lessee shall pay to Lessor rent for the Premises of Two Thousand Five Hundred Fifty and 00/100 Dollars ($2,550.00) per month in lawful money of the United States of America, subject to adjustment as provided in Section A of this Paragraph. Rent shall be paid without deduction or offset, prior notice, or demand, at such place as may be designated from time to time by Lessor as follows: $2,550.00 shall be paid upon execution of the Lease, which sum represents the amount of the first month's rent. A deposit of $5,355.00 as a Security Deposit shall be made by Lessee and held by Lessor pursuant to Paragraph 5 of this Lease, and shall be paid upon execution of the Lease. If Lessee is not in default of any provision of this Lease, this sum, without interest thereon, shall be applied toward the rent due for the last month of the term of this Lease or the extended term, pursuant to any extension of the Initial term in accordance with the provisions of this Lease. Rent shall be paid in advance on the first (1st) day of each succeeding calendar month as follows: 08/01/95 - 01/31/96 $2,550.00/mo/NNN --------------------- ---------------- 02/01/96 - 07/31/96 $3,825.00/mo/NNN --------------------- ---------------- 08/01/96 - 07/31/97 $5,100.00/mo/NNN --------------------- ---------------- 08/01/97 - 07/31/98 $5,355.00/mo/NNN --------------------- ---------------- Rent for any period during the term hereof which is for less than one (1) full month shall be a pro-rata portion of the monthly rent payment. Lessee acknowledges that late payment by Lessee to Lessor of rent or any other payment due Lessor will cause Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any encumbrance and note secured by any encumbrance covering the Premises. Therefore, in any installment of rent or other payment due from Lessee is not received by Lessor within five (5) days following the date it is due and payable, Lessee shall pay to Lessor an additional sum of ten 2 percent (10%) of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee's default with respect to the overdue amount, nor prevent Lessor from exercising any of the other rights and remedies available to Lessor. If, for any reason whatsoever, Lessor cannot deliver possession of the Premises on the commencement date set forth in Paragraph 2 above this Lease shall riot be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but in such event, Lessee shall not be obligated to pay rent until possession of the Promises is tendered to Lessee and the commencement and termination dates of this Lease shall be revised to conform to the date of Lessor's delivery of possession. In the event that Lessor shall permit Lessee to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all of the provisions of this Lease, including the obligation to pay rent at the same monthly rate as that prescribed for the first month of the Lease term. [A. Cost of Living Increase. The rent payable in advance on the first day of each month succeeding, 19 , shall be determined in the following manner: the All Urban Consumer Price Index (all items) for the San Francisco/Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index"), which is published most immediately preceding the date of, 19 , shall be compared with the Index published for the date at the commencement of the Lease ("Beginning Index"). If the , 19 , Index has increased over the Beginning Index, the monthly rent payable during the , 19 , to , 19 , period shall be set by multiplying the monthly rent paid for the period from, 19 , to , , by a fraction, the numerator of which is the , 19 , index and the denominator of which is the Beginning Index. In no event shall the monthly rent as determined by this adjustment be less than the monthly rent immediately prior to such adjustment. On adjustment of the monthly rent as herein provided, Lessor shall notify Lessee in writing of the new monthly rent.] B. All taxes, insurance premiums, Outside Area Charges, late charges, costs and expenses which Lessee is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Lessee's failure to pay such amounts, and all reasonable damages, costs, and attorney's fees and expenses which Lessor may incur by reason of any default of Lessee or failure on Lessee's part to comply with the terms of this Lease, shall be deemed to be additional rent (hereinafter, "Additional Rent"), and, in the event of non-payment by Lessee, Lessor shall have all of the rights and remedies with respect thereto as Lessor has for the nonpayment of monthly installment of rent. D. Option to Extend Term. 1. Lessee shall have the option to extend the term on all the provisions contained in this Lease for one one-year periods ("extended term(s)") at an adjusted rental calculated as provided in Subparagraph B below on the condition that: 2 3 (a) Lessee has given to Lessor written notice of exercise of that option ("option notice") at least six (6) months before expiration of the initial term or extended term(s), as the case may be. (b) Lessee is not in default in the performance of any of the terms and conditions of the Lease on the date of giving the option notice, and Lessee is not in default on the date that the extended term is to commence. 2. Monthly rent for the extended term shall be $5,610.00. 3. In no event shall the monthly rent for any extended term be less than the monthly rent paid immediately prior to such extended term. E. Security Deposit. Lessor acknowledges that Lessee has deposited with Lessor a Security Deposit in the sum of $5,355.00 to secure the full and faithful performance by Lessee of each term, covenant, and condition of this Lease. If Lessee shall at any time fail to make any payment or fail to keep or perform any term, covenant, or condition on its part to be made or performed or kept under this Lease, Lessor may, but shall not be obligated to and without waiving or releasing Lessee from any obligation under this Lease, use, apply, or retain the whole or any part of said Security Deposit (a) to the extent of any sum due to Lessor; or (b) to compensate Lessor for any loss, damage, attorneys' fees or expense sustained by Lessor due to Lessee's default. In such event, Lessee shall, within five (5) days of written demand by Lessor, remit to Lessor sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Should Lessee comply with all the terms, covenants, and conditions of this Lease and, at the and of the term of this Lease, leave the Promises in the condition required by this Lease, then said Security Deposit or any balance thereof, less any sums owing to Lessor, shall be returned to Lessee within fifteen (15) days after the termination of this Lease and vacancy of the Promises by Lessee. Lessor can maintain the Security Deposit separate and apart from Lessor's general funds, or can co- mingle the Security Deposit with the Lessor's general and other funds. F. Use of the Premises. The Premises shall be used exclusively for the purpose of sales, marketing, light manufacturing and distribution of computer systems. Lessee shall not use or permit the Premises, or any part thereof, to be used for any purpose or purposes other than the purpose for which the Premises are hereby leased; and no use shall be made or permitted to be made of the Premises, nor acts done, which will increase the existing rate of insurance upon the building in which the Promises are located, or cause a cancellation of any insurance policy covering said building, or any part thereof, nor shall Lessee sell or permit to be kept, used, or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall not commit or suffer to be committed any waste upon the Premises or any public or private nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the building in which the promises are located; nor, without limiting the generality of the foregoing, shall Lessee allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose. 3 4 Lessee shall not place any harmful liquids in the drainage system of the Premises or of the building of which the Premises form a part. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the building proper except in trash containers placed inside exterior enclosures designated for that purpose by Lessor, or inside the building proper where designated by Lessor. No materials, supplies, equipment, finished or semi-finished products, raw materials, or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the building proper. Lessee shall comply with all the covenants, conditions, and/or restrictions ("C.C. & R.'s") affecting the Premises. Lessor represents and warrants to Lessee that to the best of its knowledge there are no Toxic or Hazardous materials present on, at or under the Premises, which shall be deemed to include underlying land and groundwater, at the time of Lessee's occupancy. Lessor shall indemnify, defend and hold harmless Lessee, its partners, directors, officers, employees, lenders, and successors against all claims, obligations, liabilities, demands, damages, judgements, and costs, including reasonable attorneys' fees arising from or in connection with any prior Toxic or Hazardous materials that existed prior to Lessee's occupancy of the Premises. Lessee in turn represents to Lessor that it does not now and will not in the future permit the use or storage on the Premises of Toxic or Hazardous materials, excluding, however basic janitorial, maintenance and office supplies, and materials commonly used in connection with Lessee's business as described in paragraph 6 hereof. For purposes of this paragraph 6 "Toxic or Hazardous Materials" shall mean any product, substance, chemical, material or waste whose presence, nature, quality and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the leased premises, is either (i) potentially injurious to the public health, safety or welfare, the environment, or the leased premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessee and Lessor to any governmental agency or third party under any applicable statute or common law theory. "Toxic or Hazardous Materials" shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee hereunder shall be responsible for and indemnify, and hold Lessor and its partners, directors, officers, employees. lenders, successors and assigns harmless from all claims, obligations, liabilities, demands, damages, judgments and costs, including reasonable attorneys' fees arising at any time during or in connection with Lessee's causing or permitting any materials referred to under any governmental provisions or regulatory scheme as "hazardous" or "toxic" or which contain petroleum, gasoline, or other petroleum product, to be brought upon, stored, manufactured, generated, handled, disposed, or used on, under or about the Premises. If, at any time during the term of this Lease, Lessor suspects that toxic waste, spillage, or other contaminants may be present on the Premises, Lessor may order a soils report, or its equivalent, at Lessee's expense and Lessee shall pay such costs within fifteen (15) days from the date of the invoice by Lessor. If any such toxic waste, spillage, or other contamination are found upon the Premises, Lessee shall deposit with Lessor, within fifteen (15) days of notice from Lessor to Lessee to do so, the amount necessary to remove the substances and remedy the problem. 4 5 Lessee shall abide by all laws, ordinances, and statutes, as they now exist or may hereafter be enacted by legislative bodies having jurisdiction thereof, relating to its use and occupancy of the Premises. G. Improvements: Lessor will provide improvements to the Premises as specified in Exhibit "B" attached hereto and by this reference made a part hereof. Lessor will make reasonable efforts to complete such improvements prior to August 1, 1995. Possession of the premises, pursuant to Paragraph 13 of this lease, shall be deemed tendered upon receipt of final city approvals. H. TAXES AND ASSESSMENTS. 1. Lessee shall pay before delinquency any and all taxes, assessments, license fees, and public charges levied, assessed, or Imposed upon or against Lessee's fixtures, equipment, furnishings, furniture, appliances, and personal property installed or located on or within the Premises. Lessee shall cause said fixtures, equipment, furnishings, furniture, appliances, and personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement from Lessor setting forth the taxes applicable to Lessee's property. 2. All property taxes or assessments levied or assessed by or hereafter levied or assessed by any governmental authority against the Premises or any portion of such taxes or assessments which becomes due or accrued during the term of this Lease shall be paid by Lessor. Lessee shall pay to Lessor Lessee's proportionate share of such taxes or assessments within ten (10) days of receipt of Lessor's invoice demanding such payment, Lessee's liability hereunder shall be prorated to reflect the commencement and termination dates of this Lease. I. INSURANCE. 1. Indemnity. Lessee agrees to indemnify and defend Lessor against and hold Lessor harmless from any and all demands, claims, causes of action, judgments, obligations, or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees) on account of. or arising out of, the condition, use, or occupancy of the Premises. This Lease is made on the express condition that Lessor shall riot be liable for, or suffer loss by reason of, injury to person or property, from whatever cause, in any way connected with the condition, use, or occupancy of the Premises, specifically including, without limitation, any liability for injury to the person or property of Lessee, its agents, officers, employees, licensees, and invitees. 2. Liability Insurance. Lessee shall, at its expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Lessor and Lessee, with cross-liability endorsements, against any liability arising out of the condition, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such 5 6 insurance shall be in an amount satisfactory to Lessor of not less than one million dollars ($1,000,000) for bodily injury or death as a result of one occurrence, and five hundred thousand dollars ($500,000) for damage to property as a result of any one occurrence. The insurance shall be with companies approved by Lessor, which approval Lessor agrees not to withhold unreasonably. Prior to possession, Lessee shall deliver to Lessor a certificate of insurance evidencing the existence of the policy which (1) names Lessor as an additional insured, (2) shall not be canceled or altered without thirty (30) days' prior written notice to Lessor, (3) insures performance of the indemnity set forth in Section A of Paragraph 9, and (4) coverage is primary and any coverage by Lessor is in excess thereto. 3. Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises, in the amount of the full replacement value thereof. Lessee shall pay to Lessor its pro-rata share of the cost of said insurance within ten (10) days of Lessee's receipt of Lessor's invoice demanding such payment. Lessee acknowledges that such insurance procured by Lessor shall contain a deductible which reduces Lessee's cost for such insurance, and, in the event of loss or damage, Lessee shall be required to pay to Lessor the amount of such deductible. Lessor does not currently carry earthquake insurance. However, Lessor reserves the right to do so should it become available at commercially reasonable rates. 4. Lessee hereby releases Lessor, and its partners, officers, agents, employees, and servants, from any and all claims, demands, loss, expense, or injury to the Premises or to the furnishings, fixtures, equipment, inventory, or other property of Lessee in, about, or upon the Promises, which is caused by or results from perils, events, or happenings which are the subject of insurance in force at the time of such loss. J. Reimbursable Expenses and Utilities. Lessee shall pay for all water, gas, light, heat, power, electricity, telephone, trash removal, landscaping, sewer charges, and all other services, including normal and customary property management fees, supplied to or consumed on the Premises. In the event that any such services are billed directly to Lessor, then Lessee shall pay Lessor for such expenses within ten (10) days of Lessee's receipt of Lessor's invoice demanding payment. K. Repairs and Maintenance. 1. Subject to provisions of paragraph 15, Lessor shall keep and maintain in good order, condition and repair the structural elements of the Promises including the roof, roof membrane, paving, floor slab, foundation, exterior walls, landscaping, irrigation and elevators. Lessor shall make such repairs, replacements, alterations or improvements as Lessor deems reasonably necessary with respect to such structural elements and Lessee shall pay to Lessor, within ten days of Lessor's invoice to Lessee therefor, Lessee's pro-rata share of such repairs, replacements, alterations or improvements. Notwithstanding the foregoing, if the reason for any repair, replacement, alteration or improvement is caused by Lessee or arises because of a 6 7 breach of Lessee's obligations under this Lease, then Lessee shall pay 100% of the costs or expense to remedy the same. 2. Except as expressly provided in Subparagraph A above, Lessee shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including, without limitation, the windows, window frames, plate glass, glazing, truck doors, doors, all door hardware, interior of the Premises, interior walls and partitions, and electrical, plumbing, lighting, heating, and air conditioning systems in good and sanitary order, condition, and repair. Lessee shall, at all times during the Lease term and at his expense, have in effect a service contract for the maintenance of the heating, ventilating, and air-conditioning (HVAC) equipment with an HVAC repair and maintenance contractor approved by Lessor which provides for periodic inspection and servicing at least once every three (3) months during the term hereof. Lessee shall further provide Lessor with a copy of such contract and all periodic service reports. Should Lessee fail to maintain the Premises or make repairs required of Lessee hereunder forthwith upon notice from Lessor, Lessor, in addition to all other remedies available hereunder or by law, and without waiving any alternative remedies, may make the same, and in that event, Lessee shall reimburse Lessor as additional rent for the cost of such maintenance or repairs on the next date upon which rent becomes due. Lessee hereby expressly waives the provision of Subsection 1 of Section 1932, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Lessor, as provided in Section 942 of said Civil Code. L. Alterations and Additions. Lessee shall not make, or suffer to be made any alterations, improvements or additions in, on, or about, or to the Premises or any part thereof, without prior written consent of Lessor and without a valid building permit issued by the appropriate governmental authority. Lessor retains, at his sole option, the right to retain a General Contractor of his own choosing to perform all repairs, alterations, improvements, or additions in, on, about, or to said Premises or any part thereof. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, improvements, or additions at the termination of this Lease, and to restore the Premises to their prior condition. Any alteration, addition, or improvement to the Premises, shall become the property of Lessor upon installation, and shall remain upon and be surrendered with the Premises at the termination of this Lease. Lessor can elect, however, within thirty (30) days before expiration of the term or within five (5) days after termination of the term, to require Lessee to remove any alterations, additions, or improvements that Lessee has made to the Premises. If Lessor so elects, Lessee shall restore the Promises to the condition designated by Lessor in its election, before the last day of the term, or within thirty (30) days after notice of election is given, whichever is later. Alterations and additions which are not to be deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, partitioning, electrical signs, carpeting, or any other installation which has become an integral part of the Premises. In the event that Lessor consents to Lessee's making any alterations, improvements, or additions, Lessee shall be responsible for the timely posting of notices of non-responsibility on Lessor's behalf, which shall remain posted until completion of the alterations, additions, or 7 8 improvements. Lessee's failure to post notices of non-responsibility as required hereunder shall be a breach of this Lease. If, during the term hereof, any alteration, addition, or change of any sort through all or any portion of the Premises or of the building of which the Premises form a part, is required by law, regulation, ordinance, or order of any public agency, Lessee, at its sole cost and expense, shall promptly make the same. M. Acceptance of the Premises and Covenant to Surrender. By entry and taking possession of the Premises pursuant to this Lease, Lessee accepts the Premises as being in good and sanitary order, condition, and repair, and accepts the Premises in their condition existing as of date of such entry, and Lessee further accepts any tenant improvements to be constructed by Lessor, if any, as being completed in accordance with the plans and specifications for such improvements. Lessee agrees on the last day of the term hereof, or on sooner termination of this Lease, to surrender the Premises, together with all alterations, additions, and improvements which may have been made in, to, or on the Premises by Lessor or Lessee, unto Lessor in good and sanitary order, condition, and repair, excepting for such wear and tear as would be normal for the period of the Lessee's occupancy. Lessee, on or before the end of the term or sooner termination of this Lease, shall remove all its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Lessee. Lessee further agrees that at the end of the term or sooner termination of this Lease, Lessee, at its sole expense, shall have the carpets steam cleaned, the walls and columns painted, the flooring waxed, any damaged ceiling tile replaced, the windows cleaned, the drapes cleaned, and any damaged doors replaced. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Lessee shall indemnify Lessor against loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. N. Default. In the event of any breach of this Lease by the Lessee, or an abandonment of the Premises by the Lessee, the Lessor has the option of (1.) removing all persons and property from the Premises and repossessing the Premises, in which case any of the Lessee's property which the Lessor removes from the Premises may be stored in a public warehouse or elsewhere at the cost of, and for the account of, Lessee: or (2.) allowing the Lessee to remain in full possession and control of the Premises. If the Lessor chooses to repossess the Premises, the Lease will automatically terminate in accordance with the provisions of the California Civil Code, Section 1951.2. In the event of such termination of the Lease, the Lessor may recover from the Lessee: (1.) the worth at the time of award of the unpaid -rent which had been earned at the time of termination, including interest at the maximum rate an individual is permitted by law to charge; (2.) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided, including interest at the maximum rate an individual is permitted by law to charge; (3.) the worth at the time of award of the amount by which the unpaid rent for the balance of 8 9 the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (4.) any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform his obligations under the Lease or which; in the ordinary course of things, would be likely to result therefrom. The worth at the time of award," as used in (1.) and (2.) of this Paragraph, is to be computed by allowing interest at the maximum rate an individual is permitted by law to charge. "The worth at the time of award," as used in (3.) of this Paragraph, is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). If the Lessor chooses not to repossess the Premises, buy allows the Lessee to remain in full possession and control of the Premises, then, in accordance with provisions of the California Civil Code, Section 1951.4, the Lessor may treat the Lease as being in full force and effect, and may collect from the Lessee all rents as they become due through the termination date of the Lease, as specified in the Lease. For the purposes of this paragraph, the following do not constitute a termination of Lessee's right to possession: (1.) acts of maintenance or preservation, or efforts to relet the property; (2.) the appointment of a receiver on the initiative of the Lessor to protect his interest under this Lease. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Reletting can be for a period shorter or longer than the remaining term of this Lease. Lessee shall pay to Lessor the rent due under this Lease on the dates the rent is due, less the rent Lessor receives from any reletting. No act by Lessor allowed by this Section shall terminate this Lease unless Lessor notifies Lessee that Lessor elects to terminate this Lease. After Lessee's default and for as long as Lessor does not terminate Lessee's right to possession of the Premises, if Lessee obtains Lessor's consent, Lessee shall have the right to assign of sublet its interest in this Lease, but Lessee shall not be released from liability. Lessor's consent to a proposed assignment or subletting shall not be unreasonably withheld. If Lessor elects to relet the Premises as provided in this Paragraph, rent that Lessor receives from reletting shall be applied to the payment of: (1.) any indebtedness from Lessee to Lessor other than rent due from Lessee; (2.) all costs, including for maintenance, incurred by Lessor in relenting; (3.) rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sum remaining from the rent Lessor receives from relenting shall be held by Lessor and applied in payment of future rent as rent becomes due under this Lease. In no event shall Lessee by entitled to any excess rent received by Lessor. If, on the date rent is due under this Lease, the rent received from reletting is less than the rent due on that date, Lessee shall pay to Lessor, in addition to the remaining rent due, all costs, including for maintenance, Lessor incurred in reletting that remain after applying the rent received from the reletting, as provided in this Paragraph. Lessor, at any time after Lessee commits a default, can cure the default at Lessee's cost. If Lessor at any time, by reason of Lessee's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Lessor shall be due immediately from Lessee to Lessor at the time the sum is paid, and if paid at a later date shall bear interest at the maximum rate an individual is permitted by law to charge form the date the sum is paid by 9 10 Lessor until Lessor is reimbursed by Lessee. The sum, together with interest on it, shall be additional rent. Rent not paid when due shall bear interest at the maximum rate an individual is permitted by law to charge from the date due until paid. O. Destruction. In the event the Premises are destroyed in whole or in part from any cause, Lessor may, at its option, (1.) rebuild or restore the Premises to their condition prior to the damage or destruction or (2.) terminate the Lease. If Lessor does not give Lessee notice in writing within thirty (30) days from the destruction of the Promises of its election either to rebuild and restore the Premises, or to terminate this Lease, Lessor shall be deemed to have elected to rebuild or restore them, in which event Lessor agrees, at its expense, promptly to rebuild or restore the Premises to its condition prior to the damage or destruction. If Lessor does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Lessee of because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond control of Lessor), then Lessee shall have the right to terminate this Lease by giving fifteen (15)days prior written notice to Lessor. Lessor's obligation to rebuild or restore shall not include restoration of Lessee's trade fixtures, equipment, merchandise, or any improvements, alterations, or additions made by Lessee to the Premises. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Lessee hereby expressly waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than thirty-three and one-third percent (33 1/3%) of the replacement cost thereof, Lessor may elect to terminate this Lease, whether the Premises be injured or not. P. Condemnation. If any part of the Premises shall be taken for any public or quasi-public use, under any statute of by right of eminent domain, or private purchase in lieu thereof, and a part thereof remains, which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the date title shall vest in the condemnor or purchaser, and the rent payable hereunder shall be adjusted so that the Lessee shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after taking such bears to the value of the entire Premises prior to such taking Lessor shall have the option to terminate this Lease in the event that such taking causes a reduction in rent payable hereunder by fifty percent (50%) or more. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, as reasonably necessary for Lessee's conduct of its business as contemplated in this Lease, this Lease shall thereupon terminate. If a part of all of the Premises be taken, all compensation awarded upon such taking shall go to the Lessor, and the Lessee shall have no claim thereto, and the Lessee hereby irrevocably assigns and transfers to the Lessor any right to compensation or damages 10 11 to which the Lessee may become entitled during the term hereof by reason of the purchase or condemnation of all or a part of the Premises, except that Lessee shall have the right to recover its share of any award or consideration for (1.) moving expenses; (2.) loss or damage to Lessee's trade fixtures, furnishings, equipment, and other personal property; and (3.) business goodwill. Each party waives the provisions of the Code of Civil Procedure, Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. Q. Free from Liens. Lessee shall (1.) pay for all labor and services performed for materials used by or furnished to Lessee, or any contractor employed by Lessee with respect to the Premises, and (2.) indemnity, defend, and hold Lessor and the Premises harmless and free from any liens, claims, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for materials used by or furnished to Lessee or any contractor employed by Lessee with respect to the Premises, and (3.) give notice to Lessor in writing five (5) days prior to employing any laborer or contractor to perform services related, or receiving materials for use upon the Premises, and (4.) shall post, on behalf of Lessor, a notice of non-responsibility in accordance with the statutory requirements of the California Civil Code, Section 3904, or any amendment thereof. In the event an improvement bond with a public agency in connection with the above is required to be posted, Lessee agrees to include Lessor as an additional obligee. R. Compliance with Laws. Lessee shall, at its own cost, comply with and observe all requirements of all municipal, county, state, and federal authority now in force, or which may hereafter be in force, pertaining to the use and occupancy of the Premises. S. Subordination. Lessee agrees that this Lease shall, at the option of Lessor, be subjected and subordinated to any mortgage, dead of trust, or other instrument of security, which has been or shall be placed on the land and building, or land or building of which the Premises form a part, and this subordination is hereby made effective without any further act of Lessee or Lessor. The Lessee shall, at any time hereinafter, on demand, execute any instruments, releases, or other documents that may be required by any mortgagee, mortgagor, trustor, or beneficiary under any dead of trust, for the purpose of subjecting or subordinating this Lease to the lion of any such mortgage, deed of trust, or other instrument of security. If Lessee fails to execute and deliver any such documents or instruments, Lessee irrevocably constitutes and appoints Lessor as Lessee's special attorney-in-fact to execute and deliver any such documents or instruments. T. Abandonment. Lessee shall not vacate or abandon the Premises at any time during the term; and if Lessee shall abandon, vacate, or surrender said Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Lessee and left on the Promises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor; provided, however, that Lessee shall not be deemed to have abandoned or vacated the Premises so long as Lessee continues to pay all rents as and when due, and otherwise performs pursuant to the terms and conditions of this Lease. 11 12 U. Assignment and Subletting. Lessee's interest in this Lease is no assignable, by operation of law or otherwise, nor shall Lessee have the right to sublet the Premises, transfer any interest of Lessee's therein, or permit any use of the Premises by another party, without the prior written consent of Lessor to such assignment, subletting, or transfer of use. If Lessee is a partnership, a withdrawal or change, voluntary, involuntary, or by operation of law, of any partner (s) owning fifty percent (50%) or more of the partnership, of the dissolution of the partnership, shall be deemed as a voluntary assignment. If Lessee consists of more than one person, a purported assignment, voluntary, involuntary, or by operation of law, from one person to the other or from a majority of persons to the others, shall be deemed a voluntary assignment. If Lessee is a corporation, any dissolution, merger, consolidation, or other reorganization of Lessee, or the sale or other transfer of a controlling percentage of the capital stock of Lessee, or sale of at least fifty-one percent (51%) of the value of the assets of Lessee, shall be deemed a voluntary assignment. The phrase "controlling percentage" means the ownership of, and the right to vote, stock possessing at least fifty-one percent (51 %) of the total combined voting power of all classes of Lessee's capital stock issued, outstanding, and entitled to vote for the election of directors. This Paragraph shall not apply to corporations the stock of which is traded through an exchange or over the counter. In the event of any subletting or transfer which is consented to, or not consented to, by Lessor, a subtenant or transferee agrees to pay monies or other consideration, whether by increased rent or otherwise, in excess of or in addition to those provided for herein, then all of such excess or additional monies or other consideration shall be paid solely to Lessor, and this shall be one of the conditions to obtaining Lessor's consent. Lessee immediately and irrevocably assigns to Lessor, as security for Lessee's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted by this Lease, and Lessor, as assignee and as attorney-in-fact for Lessee, or a receiver for Lessee appointed on Lessor's application, may collect such rent and apply it toward Lessee's obligations under this Lease; except that, until the occurrence of an act of default by the Lessee, Lessee shall have the right to collect such rent. A consent to one assignment, subletting, occupation, or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupation, or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of the Lessor, terminate this Lease. Lessor's waiver or consent to any assignment or subletting hereunder shall not relieve Lessee from any obligation under this Lease unless the consent shall so provide. If Lessee requests Lessor to consent to a proposed assignment or subletting, Lessee shall pay to Lessor, whether or not consent is ultimately given, Lessor's reasonable attorneys' fees incurred in conjunction with each such request. V. Parking Charges. Lessee agrees to pay upon demand, based on its percent of occupancy of the entire Premises, its pro-rata share of any parking charges, surcharges, or any other cost hereafter levied or assessed by local, state, or federal governmental agencies in connection with the use of the parking facilities serving the Premises, including, without limitation, parking surcharge imposed by or under the authority of the Federal Environmental Protection Agency. 12 13 W. Insolvency or Bankruptcy. Either (1.) the appointment of a receiver to take possession of all or substantially all of the assets of Lessee, or (2.) a general assignment by Lessee for the benefit of creditors, or (3.) any action taken or suffered by Lessee under any insolvency or bankruptcy act shall constitute a breach of this Lease by Lessee. Upon the happening of any such event, this Lease shall terminate ten (10) days after written notice of termination from Lessor to Lessee. This section is to be applied consistent with the applicable state and federal law in effect at the time such event occurs. X. Lessor Loan or Sale. Lessee agrees promptly following request by Lessor to (1.) execute and deliver to Lessor any documents, including estoppel certificates presented to Lessee by Lessor, (a.) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which the rent and other charges are paid in advance, it any, and (b.) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, and (c.) evidencing the status of the Lease as may be required either by a lender making a loan to Lessor, to be secured by deed of trust or mortgage covering the Premises, or a purchaser of the Premises from Lessor, and (2.) to deliver to Lessor the current financial statements of Lessee with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the current fiscal year and the two immediately prior fiscal years, all prepared in accordance with Generally Accepted Accounting Principles consistently applied. Lessee's failure to deliver an estoppel certificate within three (3) days following such request shall constitute a default under this Lease and shall be conclusive upon Lessee that this Lease is in full force and effect and has not been modified except as may be represented by Lessor. If Lessee fails to deliver the estoppel certificates within the three (3) days, Lessee irrevocably constitutes and appoints Lessor as its special attorney-in-fact to execute and deliver the certificate to any third party. Y. Surrender of Lease. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger nor relieve Lessee of any of Lessee's obligations under this Lease, and shall, at the option of Lessor, terminate all or any existing Subleases or Subtenancies, or may, at the option of Lessor, operate as an assignment to him of any or all such Subleases or Subtenancies. Z. Attorneys' Fees. If, for any reason, any suit be initiated to enforce any provision of this Lease, the prevailing party shall be entitled to legal costs, expert witness expenses, and reasonable attorneys' fees, as fixed by the court. AA. Notices. All notices to be given to Lessee may be given in writing, personally, or by depositing the same in the United States mail, postage prepaid, arid addressed to Lessee at the said Premises, whether or not Lessee has departed from, abandoned, or vacated the Premises. Any notice or document required or permitted by this Lease to be given Lessor shall be addressed to Lessor at the address set forth below, or at such other address as ft may have theretofore specified by notice delivered in accordance herewith: 13 14 LESSOR: Los Gatos Business Park 900 Welch Road, Suite 10 Palo Alto, California 94304 LESSEE: Intermart Systems, Inc. 131-D Albright Way Los Gatos, CA 95030 BB. Transfer of Security. If any security be given by Lessee to secure the faithful performance of all or any of the covenants of this Lease on the part of Lessee, Lessor may transfer and/or deliver the security, as such, to the purchaser of the reversion, in the event that the reversion be sold, and thereupon Lessor shall be discharged from any further liability in reference thereto, upon the assumption by such transferee of lessor's obligations under this Lease. CC. Waiver. The waiver by Lessor or Lessee of any breach of any term, covenant, or condition, herein contained shall not be deemed to be a waiver of such term, covenant, or condition, or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any term, covenant, or condition of this Lease, other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. DD. Holding Over. Any holding over after the expiration of the term or any extension thereof, with the consent of lessor, shall be construed to be a tenancy from month-to-month, at a rental of one and one-half (1 1/2) times the previous month's rental rate per month, and shall otherwise be on the terms and conditions herein specified, so far as applicable. EE. Covenants, Conditions, and Restrictions. Attached hereto, marked Exhibit "C" and by this reference incorporated as if set out in full, are Covenants, Conditions, and Restrictions pertaining to Los Gatos Business Park. As a condition to t his Lease, Lessee agrees to abide by all of said Covenants, Conditions, and Restrictions. Moreover, such reasonable rules and regulations as may be hereafter adopted by Lessor for the safety, care, and cleanliness of the Premises and the preservation of good order thereon, are hereby expressly made a part hereof, and Lessee agrees to obey all such rules and regulations. FF. Limitation on Lessor's Liability. If Lessor is in default of this Lease, and, as a consequence, Lessee recovers a money judgment against Lessor, the judgment shall be satisfied only out of the proceeds of sale received on execution of the judgment and levy against the right, title, and interest of Lessor in the Promises, or in the building, other improvements, and land of which the Premises are part, and out of rent or other income from such real property receivable by Lessor or out of the consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title, and interest in the Premises or in the building, other improvements, and land of which the Premises are part. Neither Lessor nor 14 15 any of the partners comprising the partnership designated as Lessor shall be personally liable for any deficiency. GG. Miscellaneous. 1. Time is of the essence of this Lease, and of each and all of its provisions. 2. The term "building" shall mean the building in which the Premises are situated. 3. If the building is leased to more than one tenant, then each such tenant, its agents, officers, employees, and invitees shall have the non-exclusive right (in conjunction with the use of the part of the building leased to such Tenant) to make reasonable use of any driveways, sidewalks, and parking areas located on the parcel of land on which the building is situated, except such parking areas as may from time to time be leased for exclusive use by other Tenant(s). 4. Lessee's such reasonable use of parking areas shall not exceed that percent of the total parking areas which is equal to the ratio which floor space of the Premises bears to floor space of the building. 5. The term "assign" shall include the term "transfer." 6. The invalidity or unenforceabilfty of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. 7. All parties hereto have equally participated in the preparation of this Lease. 8. The headings and titles to the Paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. 9. Lessor has made no representation(s) whatsoever to Lessee (express or implied) except as may be expressly stated in writing in this Lease instrument. 10. This instrument contains all of the agreements and conditions made between the parties hereto, and may not be modified orally or in any other manner than by agreement in writing, signed by all of the parties hereto or their respective successors in interest. 11. It is understood and agreed that the remedies herein given to Lessor shall be cumulative, and the exercise of any one remedy by Lessor shall riot be to the exclusion of any other remedy. 12. The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, and administrators, and 15 16 assigns of all the parties hereto; and all of the parties hereto shall jointly and severally be liable hereunder. 13. This Lease has been negotiated by the parties hereto and the language hereof shall not be construed for or against either party. 14. All exhibits to which reference is made are deemed incorporated into this Lease, whether covenants or conditions, on the part of Lessee shall be deemed to be both covenants and conditions. HH. First Right of Refusal. Lessee is granted first right of refusal to lease additional space within the building as it becomes available (subject to any other existing first rights of refusal) as outlined on Exhibit A. Lessor shall notify Lessee of space available and Lessee shall have three (3) business days to provide Lessor with written acceptance. No response shall be deemed a rejection of the offer of space. IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease on the date first above-written. LESSOR: LESSEE: Los Gatos Business Park Intermart Systems, Inc. BY: s\ BY: s\ ------------------------------ --------------------------------- DATE: 7/18/95 DATE: July 14, 1995 ----------------------------- ------------------------------ 16 17 EXHIBIT A OULINE OF PREMISES 17 18 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT ("Sublease") is entered into this 17th day of December, 1996 by and between INTERMART SYSTEMS, INC. ("SUBLESSOR"), and SCM MICROSYSTEMS, INC. ("SUBLESSEE"). Recitals: II. Los Gatos Business Park ("MASTER LESSOR"), and Sublessor entered into that certain Lease Agreement, dated as of July 6, 1995 (the "MASTER LEASE"), respecting those premises (the "MASTER PREMISES") commonly known as 131-D Albright Way, Los Gatos, California 95030, as more particularly described in the Master Lease. A copy of the Master Lease is attached to this Sublease as EXHIBIT A. JJ. Sublessor desires to sublet to Sublessee, and Sublessee desires to sublet from Sublessor, a portion of the Master Premises consisting of approximately 2,860 square feet of rentable area, as more particularly shown on Exhibit B attached hereto (the "SUBLEASE PREMISES"), on the terms and conditions set forth in this Sublease. Sublessor shall continue to occupy the remaining portion of the Master Premises under the terms of the Master Lease consisting of approximately 2,240 square feet (the "Remaining Premises"). NOW, THEREFORE, in consideration of the mutual covenants contained in this Sublease and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows: Agreement: 1. Sublease. Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the Sublease Premises on the terms and conditions hereinafter set forth. 2. Term. The term of this Sublease shall commence on July 15, 1996 (the "COMMENCEMENT DATE") and shall expire on July 31, 1998 (the "SUBLEASE TERM"), unless sooner terminated under the provisions of this Sublease. 3. Monthly Base Rent. (a) Commencing on the Commencement Date and continuing throughout the Sublease Term, Sublessee shall pay to Sublessor, in advance on the first day of each calendar month, as monthly rent ("MONTHLY BASE RENT") the sum of $ 4,147.00. Monthly Base Rent shall be prorated for any partial month during the Sublease Term. (b) Sublessee shall not be obligated to pay any Additional Rent as defined in the Master Lease or for any utilities or expenses set forth in Paragraph 10 of the Master Lease which are attributable to the Sublease Premises. 18 19 (c) Sublessee shall pay to Sublessor a deposit of $4,147.00, such amount to be held as a prepayment of the monthly rent for the last month of the Lease Term. 4. Place of Payment of Rent. All Monthly Base Rent and all other amounts payable to Sublessor under this Sublease shall be paid to Sublessor when due, without prior notice or demand and without deduction or offset, in lawful money of the United States of America in cash or by check payable to Intermart Systems, Inc., 131-D Albright Way, Los Gatos, CA 95030, Attention: Scott A. Moore, or to such other address as Sublessor shall designate in writing. 5. Use. The Sublease Premises shall be used and occupied only for those purposes set forth in the Master Lease, and for no other purpose. 6. Incorporation and Modification of Master Lease Terms. (a) Except as expressly set forth below in Paragraph 6(b), the Master Lease is incorporated herein in its entirety by this reference. For the purpose of this Sublease, all references in the Master Lease to "Lessor" shall be deemed to mean Sublessor, all references to "Lessee" shall be deemed to mean Sublessee and all references to "Lease" shall mean this Sublease. (b) The following provisions of the Master Lease are specifically excluded from this Sublease: Paragraphs 1, 2, 3, 5, 7, 8.B., 10, 22, 27, 28, and 32 of the Master Lease. (c) The waivers of rights of recovery and subrogation set forth in Paragraph 9.D. of the Master Lease shall be deemed to be a three party agreement binding among and inuring to the benefit of Sublessor, Sublessee and Master Lessor. (d) Notwithstanding anything to the contrary in Paragraph 8.A. of the Master Lease, Sublessee shall be responsible only for payment of taxes assessed on Sublessee's personal property, and for no other taxes levied in connection with the Sublease Premises or the Master Premises. (e) Notwithstanding anything to the contrary in Paragraph 12 of the Master Lease, Sublessee shall not be required to remove the following alterations and improvements at the expiration of the Sublease Term: (i) the built-in shelving on the Sublease Premises originally installed by Sublessor, and (ii) the dividing walls to be erected by Sublessor between the Sublease Premises and the Remaining Premises. 7. Telephone Console. Sublessee shall provide Sublessor with reasonable access to the telephone console located on the Sublease Premises. Sublessor shall have the right to enter onto the Sublease Premises for the purposes of accessing the telephone console at reasonable times and upon reasonable notice to Sublessee. 19 20 8. Indemnity. (a) Sublessee hereby agrees to indemnify and hold harmless Sublessor from and against any and all claims, liabilities, losses, damages and expenses (including reasonable attorneys' fees) incurred by Sublessor arising out of, from or in connection with (i) the use or occupancy of the Sublease Premises by Sublessee. (ii) any breach or default by Sublessee under this Sublease, or (iii) the failure of Sublessee to perform any obligation under the terms and provisions of the Master Lease assumed by Sublessee hereunder or required to be performed by Sublessee as provided herein, from and after the Commencement Date of this Sublease. (b) Sublessor hereby agrees to indemnify and hold harmless Sublessee from and against any and all claims, liabilities, losses, damages and expenses (including reasonable attorneys' fees) incurred by Sublessee arising out of, from or in connection with (i) the use or occupancy of the Remaining Premises by Sublessor, (ii) Sublessor's breach or default of any provision of this Sublease or any provisions of the Master Lease not assumed by Sublessee hereunder, or (iii) acts or omissions of Sublessor under the Master Lease in connection with the Premises prior to the Commencement Date of this Sublease. 9. Notices. All notices, demands or requests which may be or are required to be given under this Sublease shall be in writing and shall be given by personal delivery, or by certified or registered mail, return receipt requested, postage prepaid, or by Federal Express or similar overnight courier, charges prepaid, and addressed as follows: Sublessor: Sublessee: INTERMART SYSTEMS, INC. SCM MICROSYSTEMS, INC. Scott A. Moore, General Manager William E. Ogdon, Controller 131-D Albright Way 131 Albright Way Los Gatos, CA 95030 Los Gatos, CA 95030 Fax No.: 408/379-3666 Fax No.: 408/370-4880 The addresses of the parties may be changed from time to time by notice given in the manner set forth in this Paragraph 9. Each notice, request, demand, advice or designation given under this Sublease shall be deemed properly given only upon actual receipt or refusal of delivery. 10. Termination of Master Lease. This Sublease is, and shall at all times remain, subordinate to the Master Lease. In the event the Master Lease is terminated for any reason, then, on the date of such termination, this Sublease shall automatically terminate and be of no further force or effect. If the termination of the Master Lease (and resulting termination of this Sublease) occurs through no fault of Sublessor, Sublessor shall have no liability to Sublessee for the resultant termination of this Sublease. 11. Consent of the Master Lessor. Under Paragraph 21 of the Master Lease, a sublease of the Premises requires the written consent of the Master Lessor. The parties to this Sublease hereby agree that such consent has been given in the form of a letter attached hereto as Exhibit C. 20 21 12. Brokers. Each party represents to the other that no brokerage commission or finder's fee has been incurred in connection with this transaction, and each party shall indemnify the other against any such commission or fee which may be alleged to have been incurred by it in connection with this Sublease. 13. Entire Agreement. This Sublease contains all of the terms, covenants and conditions agreed to by Sublessor and Sublessee and may not be modified orally or in any manner other than by an agreement in writing signed by all the parties to this Sublease or their respective successors in interest. 14. Exhibits. All exhibits attached hereto are incorporated in this Sublease, except as expressly excluded herein. 15. Counterparts. This Sublease may be executed in any number of counterparts, each of which shall be deemed an original, and when taken together they shall constitute one and the same sublease. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized representatives as of the day and year first above written. SUBLESSOR: SUBLESSEE: INTERMART SYSTEMS, INC. SCM MICROSYSTEMS, INC. By: By: s/ William E. Ogdon Its: General Manager Its: Controller -21- 22 INTERMART SYSTEMS 131D Albright Way Los Gatos, California 95030 Tel: 408 379 0770 Fax: 408 379 3666 info@intermartsys.com Michelle Dillabough Los Gatos Business Park 900 Welch Road, Ste. 10 Palo Alto, CA 94304 tel: 415 322 2121 fax: 415 322 5029 July 30, 1996 Dear Michelle, Please be informed that we are subleasing office space to SCM, and that we give Los Gatos Business Park Permission to enter the office and do renovation, construction, office modification, or other similar activities as needed for SCM. Please let use know if there is anything you need from us and we would be happy to cooperate. Should you have any questions you may either contact myself or Scott Moore. Sincerely yours, s\ Robert Bruce Thomson Bruce Thomson SM: bt 23 http://www.intermartsys.com/ LOS GATOS BUSINESS PARK July 31, 1996 Mr. Bruce Thomson INTERMART SYSTEMS 131D Albright Way Los Gatos, CA 95030 Re: Sublease Dear Bruce: By way of this letter, Los Gatos Business Park is consenting to your request to sublease a portion of your space (as outlined on the attached plan) to SCM Microsystems. The attached plan detailing the improvements to be done to your space for the benefit and at the cost of SCM Microsystems is also approved. If you have any questions or concerns, please do not hesitate to call. Sincerely, s\ Michelle Dillabough Michelle Dillabough Property Manager cc: Howard White Bill Kelly, SCM Microsystems Karl Schneider, SCM Microsystems 24 SUBLEASE MAP 25 July 16, 1996 Mr. Karl Schneider SCM Microsystems 131 Albright Way Los Gatos, CA 95030 Re: Demise Suite D into Two Units Revised to include light switching & T-Star relocation Dear Karl: H & S is pleased to submit an estimate for installing two new walls @ 131 Albright, Suite D per your request. The costs are as follows:
A. Costs: Frame, sht rock, & texture 2 openings, 104 sf............................$ 750.00 Paint (2 coats min.) 104 sf.............................................. 270.00 Rubber Base 24 lf........................................................ 90.00 Electrical............................................................... 650.00 HVAC..................................................................... 250.00 Supervision.............................................................. 225.00 Clean-up................................................................. 90.00 OH&P..................................................................... 233.00 TOTAL AMOUNT THIS ITEM...................................................$ 2,558.00 Add (1) Door w/custom keyed lock (no closer).............................$ 710.00
B. Schedule Impact: It will take approximately 8 working days to complete this work. C. Status of work: The work described above is on hold pending receipt of your written approval of the costs as outlined above. D. Qualifications: o All work has been estimated to be performed during regular working hours 26 o All air-conditioning will be controlled by front tenant. There is no means to separate air-conditioning between spaces. o Lighting will be modified to provide separate switching o No electrical receptacles will be added o This quote does not include means to provide access from current SCM space o No adjustments will be made to acoustical ceiling tiles other than to remove and replace as necessary. E. Action Required: To signify your acceptance of the cost and schedule impact as detailed above, please sign at the line provided and return to H&S's office. Upon receipt of your acceptance, we will make arrangements with our subcontractors as to when work can begin and we will notify you of a start date. Approved: Date: 7/23/96 ------------------------------------------- -------------- Please initial here if you want the door installed ---------------------- Sincerely, H & S, Inc. s\ Patrick A. Forbeck Patrick A. Forbeck Project Manager 27 MAP 28 M E M O R A N D U M DATE: April 5, 1997 TO: Michelle Dillabough FROM: Pat Forbeck RE: SCM MICROSYSTEMS & INTERMART - SUBLEASE INFORMATION JOB #96-097 - -------------------------------------------------------------------------------- As discussed on Friday last week, I have reviewed my document regarding the small project we did for SCM Microsystems. The original project was requested by SCM with the intention to increase their amount of usable square footage via an agreement with Intermart to sublease a portion of Intermart's leased space. I built two walls to physically divide the intermart space into two space into two separate areas. My original calculation as to the division of the two spaces was as follows: Intermart: 2,240 Sq. ft. SCM: 3,038 Sq. ft. 5,278 Sq. ft. Since your inquiry regarding the sublease, I have reviewed the space arrangements and need to amend my original calculation. The correct proportions are as follows: INTERMART: 2,240 Sq. ft. SCM: 2,860 Sq. ft. 5,100 Sq. ft. Reason for difference: My original calculation included the electrical room located at the rear of the Intermart space, (that area to become SCM). The electrical room is approximately 178 Sq. ft. Note: Intermart's current lease does not include the square footage for the electrical room. Let me know if you need anything else. Pat EX-10.14 19 LEASE BETWEEN SCM MICROSYSTEMS AND OLBRICH FRANZ 1 EXHIBIT 10.14 1 Contract no. duplicate original for Lessor/Lessee LEASE CONTRACT FOR COMMERCIAL SPACE - -------------------------------------------------------------------------------- (* Bold-prints bullets at the margin indicate that an additional entry or a deletion must be made.) The lease parties shall be understood to be the Lessee and Lessor, even if they consist of multiple persons and, if applicable, legal entities. All persons named in the contract shall sign the lease contract personally. Inapplicable portions of the lease contract shall be crossed out. Empty spaces shall be filled out or crossed out. The following lease contract is hereby concluded o between Olbrich Franz in Hochstr. 22, 85298 Scheyern Lessor o represented by Mr. Olbrich Franz o and SCM Microsystems GmbH o in Pettenkofer Str. 7, 85276 Pfaffenhofen Lessee represented by Mr. Bernd Meier. Section 1 - LEASED ROOMS o 1. For the operation of a production and distribution of computer products. (type of business or commercial activity) the rooms in the building/real property located at Luitpoldstr. Pfaffenhofen are hereby rented, namely *) (precise description of location) In addition, the following shall be leased (free space, garages, etc.): see attachment o Leased space: approx. 627 m2. Maximum ceiling load: kg/m2. o 2. The following may be used (vehicle parking places, washing facilities, etc.): [Excluded shall be the parking places in front of the leased surfaces, to the extent that this rule is put into practice by all lessees.] 3. The keys shall be delivered to the Lessee for the lease period in accordance with a separate possession transfer protocol--immediately--upon moving in. The Lessee shall provide missing keys at his own expense. All keys shall be surrendered to the Lessor at the end of the lease relationship. 4. The Lessor shall grant the use of the leased rooms in a condition which is appropriate in principle for the intended commercial purpose. However, the Lessee shall satisfy governmental requirements at his own expense; the rooms may only be used for the purposes which are permissible under the respective governmental provisions. 5. This lease contract is concluded subject to the condition precedent that the Lessee makes the first rent payment to the Lessor prior to transfer of possession of the lease property. NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 2 Section 2 - LEASE TERM AND TERMINATION o 1. The lease relationship shall begin on 6/1/95, depending on completion of construction o The lease relationship shall end on 6/30/2000 o It shall be extended by consecutive 1 year terms if one of the parties does not object to extension no later than 12 months before expiration of the lease term. o The lease relationship shall run for an indefinite period and may be terminated upon notice of effective at the end of 2. Termination must be effected (or objection must be made) in writing and served upon the other contracting party by no later than the first working day prior to the beginning of the termination period. 3. During the termination period, the Lessee shall permit the placement of lease signs on the windows and other appropriate locations. 4. The Lessor may terminate the lease contract for good cause effective immediately without compliance with a termination notice period if the Lessee fails to satisfy his contractual obligations (for example, payment default of at least two months rent, substantial outstanding operating costs and/or heating costs and, in spite of warning, substantial disturbance of the Lessor or Lessee's, contractually violative use, unauthorized use by third parties, etc.). 5. [crossed out text] 6. The contract shall not be rescinded as a result of the death of the Lessee. Both contracting parties hereby waive the right of early termination arising from Section 569 BGB [German Civil Code]. 7. Upon expiration of the lease period, Section 568 BGB shall have no application to the two contracting parties. *) Attachments, drawings, surface calculations, floor plans, etc., shall be attached to the contract. Order-no. 25 203 No liability on the part of the publisher for erroneous or incorrect legal application. Printing, imitation and duplication are not permitted. 2.94 AGB 40 3 Section 3 - RENT AND ANCILLARY COSTS DM PER MONTH o 1. Rent shall be DM 9,000.00 per month in words: DM nine thousand o 2. In addition to rent, payment shall be made each month for the following: currently currently currently currently + value-added tax currently TOTAL currently 3. At the request of the Lessor, the Lessee of rooms used commercially or in an independent professional manner shall pay value-added tax in addition to rent, if the Lessor has opted for the duty to pay value-added tax. The parties are aware of the provisions of the Value-Added Tax Act. In this case, the Lessor shall be obligated to provide the Lessee with the necessary prepaid value-added tax slips. o 4. [crossed out text] The Lessor may allocate increases in operating costs. The Lessee hereby obligates himself to assume payment of his appropriate share. o 5. Cosmetic repairs and replacement of glass panes and mirrors shall be assumed by |X| the Lessee |_| the Lessor. o 6. Minor maintenance shall be performed by him during the term of the lease from 6/1/95 at his expense, to the extent that the other contracting party is not responsible for the damages. Minor maintenance shall encompass the remedying of minor damage, as well as maintenance of lines and facilities for water, electricity and gas, sanitation equipment, locks on windows and doors, roller blinds, ovens and stoves. Minor damage shall be damage whose remedy consists of not more than the total of 5% of the annual rent. Section 4 - PAYMENT OF RENT AND ANCILLARY COSTS 1. Rent and ancillary costs shall be paid monthly in advance by no later than the third working day of the month free of postage or fees to the Lessor or the person or office authorized by the Lessor to receive them. o Rent and ancillary costs shall be deposited into account no. at . The legal timeliness of payment shall depend not on the dispatch, but rather on the receipt of the money. o Rent and ancillary costs shall be booked from an account to be named by the Lessee using the automatic debit collection procedure. The Lessee shall be obligated to give the Lessor a collection authorization. In the event of a change of account, the Lessee shall be obligated to give a new collection authorization. o 2. The ancillary costs (heating costs, see Section 5) for operation, in the amount of DM 600 o shall be collected in the form of monthly installment payments and shall be settled with the Lessee annually after the closing date of 12/31 of each year. The compensation of subsequent payment of the credit shall be carried out on the rent payment deadline following settlement. o 3. Any additional costs with regard to the fire insurance premium resulting from an increase in danger created by the operation of the Lessee shall be borne by the Lessee. o 4. In the event of late payment, the Lessor shall be entitled to charge warning costs in the amount of DM 50.00 per warning, without prejudice 4 to penalty interest. Section 5 - CENTRAL HEATING AND HOT WATER SUPPLY 1. The Lessor shall be obligated to keep the central heating in operation to the extent that the external temperatures so requires, but shall do so at least during the period from October 1 through April 30. o Hot water shall be supplied on a continuous basis. The Lessee shall not have a claim to the supply of central heating and hot water on Saturdays--Sundays--statutory holidays. 2. The Lessee shall be obligated to pay a pro rate portion of operating and maintenance costs. Partial or complete shutdown of heating and hot water supply resulting from a local fuel shortage shall not entitle the Lessee to reduction claims or compensatory damage claims. This shall also apply to necessary operational interruptions of any kind. 3. Operating costs shall be allocated by the Lessor in accordance with the statutory settlement standards, i.e., according to useful or renovated space or according to a standard which takes heat consumption into account. If heat meters and/or o hot water cost allocators are used, a fixed portion of costs shall be divided according to consumption namely % *). o 4. The useful space, the renovated space, of the lease property shall be approx. 627 m2/m3. 5. Prepayments shall be made each month toward the allocation amount for operating costs; the amount thereof shall be reasonably set by the Lessor. Said amount must be settled following the close of the heating period. 6. If there are flow heaters or boilers for hot water preparation and/or a separate storey heating system in the leased rooms, the Lessee shall bear all operating, maintenance and cleaning costs within the meaning of appendix 3, Section 27 of the Second Calculation Regulation. Maintenance and cleaning shall take place on an annual basis. Section 6 - USE OF THE ELEVATOR FACILITIES o [1. The Lessee shall be entitled to use the elevators adjoining the rooms which he has leased, with the exception of] . 2. The Lessee shall have no claim to uninterrupted performance if operational disruptions occur. The Lessee shall be obligated to satisfy all aspects of the elevator provisions. No elevator service shall be provided. Operational disruptions shall be reported to the Lessor or his agent immediately. Section 7 - CONDITION OF THE LEASED ROOMS o 1. The Lessor shall be obligated to cause the work described in greater detail in the separate appendix to be performed--before the Lessee moves in or, if this is not possible, by no later than . 2. In the event that the performance of such work is delayed beyond the stipulated deadline without gross culpability on the part of the Lessor, the Lessee hereby grants the Lessor a reasonable remedial period. 3. The Lessee shall be obligated to treat the leased rooms in a careful manner and maintain and return them in a proper condition. 4. The Lessor is hereby released by the Lessee from strict liability for initial defects (Section 538 BGB). - ----------------------------- *) At least 50%, maximum of 70% (Regulation on Heating Cost Settlement dated 2/23/81, BGBl [German Legal Gazette] I p. 261) NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 5 Section 8 - USE OF THE LEASED ROOMS, SUBLEASING 1. The Lesse may only use the leased rooms for the commercial purposes stated in Section 1. Modifications of the intended use shall require the consent of the Lessor. 2. If the Lessee stores water-endangering substances or uses water-endangering substances in connection with his commercial activity, he shall, independent of any existing business liability insurance policy, enter into a special liability insurance policy relating to the storage or use of water-endangering substances and document such insurance for the Lessor upon request. The same shall apply mutatis mutandis to all other emissions as well. 3. Subleasing or other third-party use may take place only with the consent of the Lessor 4. In the event of unauthorized subleasing, the Lessor may demand that the Lessee terminate the sublease relationship as soon as possible, but not later than within a period of one month. If this does not occur, the Lessor may terminate the primary lease relationship without compliance with a notice period. The Lessor may only exercise this right within one month from the time at which he becomes aware of the unauthorized sublease. 5. [The Lessor shall be entitled to make his consent to the sublease conditional upon agreement to a sublease surcharge]. 6. In the event of a sublease or permitted third-party use, the Lessee shall be liable for all culpable acts or omissions of the sub-lessee or the party permitted to use the leased rooms as if such acts or omissions were the Lessee's own. 7. In the event of subleasing, the Lessee hereby assigns to the Lessor at this time the claims which the Lessee holds against the sub-lessee, in addition to a lien for security purposes in the amount of the claims of the Lessor. Section 9 - STRESS ON CEILINGS The Lessee may not exceed the ceiling stress permitted under construction law (see also Section 1, sec. 1). Section 10 - ELECTRICITY, GAS, WATER 1. The existing line network for electricity, gas and water may be used by the Lessee only to such an extent that no overload occurs. The Lessee may cover additional needs through expansion of the supply lines at his own expense upon prior consent by the Lessor. 2. Water may be taken from the water lines only for ordinary needs (drinking water, sanitation purposes). In the case of water consumption for commercial purposes, the Lessee shall attach an intermediate water meter at his own expense and bear the water supply and disposal costs according to information provided by the Lessor, unless the water is purchased by the Lessee directly from the water supply works. 3. In the case of disruption or damage to the supply line, the Lessee shall ensure immediate shutdown and shall be obligated to notify the Lessor or his agent immediately. 4. A change in energy supply, specifically a modification of the power voltage, shall not entitle the Lessee to compensatory damage claims against the Lessor. 5. If the power, gas, water supply, or the waste water disposal is interrupted for reasons for which the Lessor is not responsible, or if floods or other catastrophes occur, the Lessee shall have no rent reduction rights and no compensatory damage claims against the Lessor. Section 11 - PROMOTIONAL MEASURES o 1. The Lessee shall be entitled to place one sign of normal size on the surface designated by the Lessor . In the case of the existence or establishment of collective sign facilities, the Lessee shall be obligated to use them and assume pro rata portion of costs. 2. Other devices which serve promotion or sales may be attached to the external surfaces of the building, including the window panes (company signs, company logos, advertising text, display cases, automated vending machine, etc.) only with the express consent of the Lessor. Consent may be revoked. In such a case, as well as in the case of vacation of the leased rooms, the Lessee shall be obligated to restore the former condition 3. The Lessee shall be liable for all damage which arises in connection with the devices 4. The Lessee shall be solely responsible for compliance with the general technical and governmental provisions for the manner of attachment and maintenance and for the measures necessary therefor. Section 12 - IMPROVEMENTS AND STRUCTURAL MODIFICATIONS BY THE LESSOR NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 6 1. The Lessor may--even without the consent of the Lessee--make improvements and structural modifications which are necessary in order to preserve the building or the leased rooms or to prevent impending danger or remedy damages. This shall also apply to work which is not necessary, but is expedient, such as modernization of the building and the leased rooms. The Lessee shall keep the affected rooms accessible; he shall not be permitted to impair or delay the performance of the work. 2. The Lessor may convert the central heating and hot water supply to different heating fuels or have them connected to the long-distance heat; he may also install heat meters, heat cost allocators, hot water meters, hot water cost allocators and thermostats. Section 13 - STRUCTURAL MODIFICATIONS BY THE LESSEE 1. Structural modifications by the Lessee, particularly renovations, built-in items and installations, as well as the installation of grid work on the windows and the construction and modification of fire places, may be undertaken only with the consent of the Lessor. If the Lessor gives such consent, the Lessee shall be responsible for obtaining building authority permits and shall bear all costs in connection herewith. 2. Any operational equipment or other equipment taken over by the Lessor shall be deemed to not be part of the leased property and shall be deemed to have been installed or put in place by the Lessee. 3. The Lessee may remove installations which he has provided for the rooms. However, the Lessor may demand that the items be left at the end of the lease relationship, provided that the Lessor pays an amount which corresponds to the present market value--taking into account economic wear and tear and technical progreSection The Lessee and Lessor shall declare in a timely manner that agreements may be concluded in this regard prior to move-out. If the Lessor does not take over equipment installed by the Lessee, the Lessee shall be required to restore the prior condition, including all ancillary work necessary therefor, by the expiration of the contract. 4. The attachment of external antennas shall require the conclusion of an antenna contract. 5. The Lessee shall be liable for all damage which arises in connection with the construction measures which he has undertaken. Section 14 - MAINTENANCE OF THE LEASED ROOMS 1. Damage to and in the building and in the leased rooms shall be reported to the Lessor or his agent immediately. The Lessee shall be responsible for additional damages caused by delayed notification. 2. The Lessee shall be liable to the Lessor for damage which is caused by violation of a duty of care to which he is subject, specifically if the supply and outlet lines, toilets, heating facilities, etc., are improperly handled or the rooms are insufficiently ventilated or heated or not adequately protected against frost. In each instance, the Lessee shall remedy line clogs up to the main pipe at his own expense. 3. The Lessee shall be liable in the same manner for damage which has been culpably caused by his family members, employees, white-collar employees, sub-lessees, visitors, suppliers and artisans. 7 4. The Lessee shall treat the lines and equipment for electricity and gas, the sanitation equipment, locks, rolling blinds, ovens, stoves and similar equipment in a careful manner. The Lessee hereby assigns to the Lessor any and all claims against culpable third parties. The Lessee shall bear the expense of insurance, including reinsurance. 5. The Lessee shall eliminate the onset of insect pests in the leased property at his own expense. This shall apply to leased or open space which is used. 6. The Lessee shall immediately remedy damage for which he is responsible. If he fails to satisfy this obligation within a reasonable time, even after written warning, the Lessor may cause the necessary work to be performed at the Lessee's expense. In the case of potentially hazardous damage or in the event that the whereabouts of the Lessee are unknown, written warning and the imposition of a deadline shall be unnecessary. Section 15 - THE LESSOR'S LIEN - SECURITY (SECURITY DEPOSIT) o 1. The Lessee hereby declares that the property which is brought in when he moves in is his own property and is not attached or pledged, with the exception of the following objects: 2. The Lessee shall be obligated to notify the Lessor promptly of any pledge of objects which have been brought in and identify the court enforcement officer and the pledge creditor. o 3. The Lessee shall provide the Lessor with security for the performance of his obligations and/or to satisfy compensatory damage claims in the amount of up to three months rent, excluding operating cost advances, namely, in the amount of DM The Lessor shall invest the security deposit separately from his assets at a public bank or savings and loan under the terms for cash deposits with statutory termination period. Interest shall accrue on the security deposit. The security deposit shall be paid prior to transfer of possession of the leased rooms. The security deposit may be replaced at any time by a bank guarantee. 4. The security deposit, including interest, shall be paid back to the Lessee at the end of the lease relationship, if it is clear that no more claims exist against the Lessee. Section 16 - ENTRY OF THE LEASED ROOMS BY THE LESSOR 1. The Lessor and/or his agent may enter the leased rooms during business hours to inspect their condition or for other good cause. In the event of danger, they shall be permitted to enter at any time of day or night. 2. If the Lessor wishes to sell the real property, he and/or his agent may enter the leased rooms together with the potential purchaser during business hours. If the lease relationship has been terminated, he and/or his agent may enter the rooms with the potential lessee during business hours. 3. The Lessee must ensure that it is possible to enter the rooms during his absence. In the case of extended absence (such as company holidays), he shall deposit the keys at an easily accessible place and notify the Lessor appropriately. Section 17 - END OF THE LEASE TERM AT the end of the lease term, the Lessee shall return the leased rooms to the Lessor in a condition ready for occupancy with all keys, including keys which he personally purchased, without a claim for compensation. Otherwise, the Lessor shall be entitled to open and clean the leased rooms and have new locks and keys created at the Lessee's expense. Section 18 - MULTIPLE PERSONS ACTING AS LESSOR OR LESSEE The Lessor and/or Lessee shall be jointly and severally liable if multiple persons are involved. It shall be sufficient for purposes of the validity of a declaration by the Lessor if it is made to one of the Lessees. Section 19 - COMPETITION PROTECTION o Competition protection for the Lessee shall be barred--is stipulated to the following extent: Section 20 - CHANGE IN LEGAL FORM, SALE OF THE BUSINESS OPERATION 8 1. The Lessee shall notify the Lessor thereof promptly if the legal form of the Lessee's enterprise changes or if changes arise in the commercial register, the business registration or in other contexts which are of significance to the lease relationship. 2. In the event of the sale of the Lessee's operation or a portion thereof, a prior agreement with the Lessor shall be required concerning the transfer of this contract to the legal successor. No right to transfer this contract shall exist. Section 21 - ADDITIONAL AGREEMENTS 1. The Lessee shall observe relevant environmental protection provisions in the exercise of his commercial activity. o 2. Waste from the commercial activity of the Lessee may not be placed in waste containers provided by the Lessor for general use; instead, it shall be disposed of--by the Lessee himself--at the expense of the Lessor. 3. The building rules shall constitute a component of this contract and shall likewise be signed by the parties. 4. Subsequent modifications of and addenda to this contract shall be valid only by written agreement. If one of the provisions of this contract is or should become legally invalid in whole or in part, the validity of the remaining provisions shall not be affected thereby. 5. Additional agreements, such as the placement of signs, neon signs, option rights, sliding clauses and value assurance clauses, insurance duties, lease prepayments, snow removal, duty to make access ways safe, etc.: o APPENDICES: A, B, C, D, E,E1 F, G H I K In order to secure rent and ancillary rent cost, the Lessee shall provide an absolute bank guarantee for two months rent, which shall be due 1 month after the signing of the lease contract. (A cash deposit is also possible) Note: Distribution rights for drinks are held by Paulaner Brauerei Munchen [Paulener Brewery, Munich]. 9/30/94 9/30/94 -------------------------- -------------------------- Place, date Place, date [signature] s/Bernd Meier -------------------------- -------------------------- Lessor Lessee Order no. 25 203 EX-10.15 20 AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT 1 EXHIBIT 10.15 AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (the "Agreement"), is made and entered into as of April 11, 1997, by and among SCM Microsystems, Inc., a Delaware corporation (the "Company"), certain existing holders of the Company's Common Stock and Preferred Stock (the "Existing Stockholders"), and the existing holders (the "Note Holders") of convertible notes of the Company which are convertible into shares of the Company's Series C or Series D Preferred Stock (the "Convertible Notes"), and the undersigned purchasers of Series F Preferred Stock of the Company (the "Purchasers" and together with the Existing Stockholders, the "Stockholders"), all as set forth on Schedule A attached hereto. RECITALS: A. The Company, the Existing Stockholders and the Note Holders are parties to that certain Amended and Restated Stockholders' Agreement dated February 28, 1997 (the "Prior Agreement"), providing those Existing Stockholders and Note Holders with registration rights and certain other rights. B. Concurrently herewith, the Purchasers and the Company are entering into a Series F Preferred Stock Purchase Agreement pursuant to which the Purchasers are purchasing from the Company shares of the Company's Series F Preferred Stock. C. Pursuant to Section 6.1 of the Prior Agreement, the Company and the beneficial owners of a majority of the securities registrable pursuant to the Prior Agreement wish to amend and restated the Prior Agreement so as to provide the Purchasers with registration and certain other rights as set forth below. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties hereto hereby agree as follows: 1. Registration Rights. 1.1 Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) The term "Debtholder Shares" shall mean any Common Stock issued or issuable, or Common Stock issuable upon conversion of Preferred Stock issued or issuable, to any bank, savings and loan association or other institution or entity, including without limitation the Note Holders, which provides debt financing to the Company upon conversion of debt outstanding as of the date hereof, including without limitation the Convertible Notes, provided that on or prior to the date on which the debt is converted such entity agrees to be bound by the provisions hereof, which agreement shall be evidenced by such entity's execution hereof (and upon execution hereof, such entity shall be deemed to be included within the definition of "Stockholder" for all purposes hereunder). - - 2 (b) The terms "Holder" and "Holders" mean any person or persons holding or having the right to acquire Registrable Securities and transferees qualifying under paragraph 1.12 hereof. (c) The term "Initiating Holders" shall mean the persons and entities listed on Schedule B hereto (but shall exclude any such persons or entities who no longer hold Registrable Securities). (d) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of the effectiveness of such registration statement. (e) The term "Registrable Securities" means all of the following to the extent the same have not been resold to the public: (i) shares of Common Stock of the Company held by, or issuable upon conversion of the Preferred Stock of the Company held by the Existing Stockholders, the Note Holders and the Purchasers as of the date of this Agreement, (ii) the Debtholder Shares, (iii) the Warrantholder Shares and (iv) all shares of Common Stock and other securities issued or issuable in respect of the Common Stock referred to in clauses (i), (ii) and (iii) by reason of a stock split, stock dividend, stock combination, recapitalization or the like. (f) The term "Registration Expenses" shall mean all expenses incurred by the Company in complying with this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, accounting fees, fees and disbursements of counsel for the Company, Blue Sky fees and expenses, and the fees and disbursements of one special counsel retained by the Holders. (g) The term "SEC" means the Securities and Exchange Commission. (h) The term "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of the Registrable Securities. (i) The term "Shares" shall mean the shares of Common Stock and Preferred Stock of the Company, and in any provision where the context requires a vote or counting of Shares, the shares of Preferred Stock shall be counted based upon the number of shares of Common Stock into which such shares of Preferred Stock are then convertible. (j) The term "Warrantholder Shares" shall mean any Common Stock issued or issuable, or Common Stock issuable upon conversion of Preferred Stock issued or issuable, to any entity with which the Company enters into a technology development, licensing or other agreement or to any bank, savings and loan association, equipment lessor or other institution or entity which provides debt financing to the Company, which entity now holds or is hereafter issued warrants to purchase shares of the Company's equity securities provided that (i) on or prior to the date on which a warrant is issued to such entity the Board of Directors grants such entity rights hereunder and (ii) such entity agrees to be bound by the provisions hereof, which agreement shall be evidenced -2- 3 by such entity's execution hereof (and upon execution hereof, such entity shall be deemed to be included within the definition of "Stockholder" for all purposes hereunder). 1.2 Requested Registration. (a) Demand for Registration. In the event that the Company receives from Initiating Holders holding a majority of the Registrable Securities then held by the Initiating Holders a written request that the Company effect a registration, qualification or compliance with respect to all or a part of the Registrable Securities (other than a registration on Form S-3 or any successor form regardless of its designation) having an aggregate proposed offering price to the public of at least $5,000,000 the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect all such registrations, qualifications, or compliance (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable Blue Sky or other state securities laws and appropriate compliance with applicable requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within thirty (30) days after written notice from the Company is given under subparagraph 1.2(a)(i) above; provided that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this paragraph 1.2: (A) prior to the earlier of (i) June 30, 1997 or (ii) six (6) months after the effective date of a registration statement pertaining to the Company's initial registered offering; (B) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (C) after the Company has effected two (2) such registrations pursuant to this paragraph 1.2, which have been declared or ordered effective and the securities offered pursuant to such registration have been sold; (D) within six (6) months following the effective date of a prior registered offering of the Company's securities pursuant to this paragraph 1.2 or paragraph 1.3 below; or (E) more than five (5) years after the effective date of a registration statement pertaining to the Company's initial registered offering. -3- 4 Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement as soon as practicable after receipt of the request or requests of the Initiating Holders but in any event within sixty (60) days of receipt of such request; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days (the "Postponement Period") after receipt of the request of the Initiating Holders (and not more than once in any twelve month period). During such Postponement Period the Company may not effect any registration (other than a registration on Form S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, SB-2, S-2 or S-3, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities) for its own account or for the account of holders of other registration rights, unless such registration had been filed prior to receipt of the request or requests of the Initiating Holders. If the Company shall postpone the filing of a registration statement pursuant to this paragraph, Holders of Registrable Securities may withdraw their request for registration by giving notice to the Company within thirty (30) days after receipt of the President's certificate postponing registration. In the event of such withdrawal, such request will not be counted for purposes of the requests for registration to which Holders are entitled pursuant to paragraph 1.2(a)(ii)(C). (b) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this paragraph 1.2 and the Company shall include such information in the written notice referred to in subparagraph 1.2(a)(i). The underwriter shall be selected by the holders of a majority of the Registrable Securities proposed to be sold in the offering, which underwriter shall be reasonably acceptable to the Company. In such event, if so requested in writing by the Company, the Holders shall negotiate with the underwriter so selected with regard to the underwriting of such requested registration. The right of any Holder to registration pursuant to paragraph 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected as above provided. Notwithstanding any other provision of this paragraph 1.2, if the underwriter advises the Initiating Holders and the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the Company shall so advise all Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders requesting inclusion in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held (or entitled to be held upon conversion) by such Holders at the time of filing the registration statement; provided, however, that no Registrable Securities held by any Initiating Holders shall be so excluded until all Registrable Securities held by other Holders shall have been excluded. No Registrable Securities excluded from -4- 5 the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The Registrable Securities or other securities so withdrawn shall also be withdrawn from registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used in determining the underwriter limitation in this paragraph 1.2. 1.3 Company Registration. (a) If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its stockholders, other than (i) a registration on Form S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, SB-2, S-2 or S-3, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, or (ii) a registration statement pursuant to paragraph 1.2 hereof, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within thirty (30) days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subparagraph 1.3(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subparagraph 1.3(a)(i). In such event the right of any Holder to registration pursuant to paragraph 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other Holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this paragraph 1.3, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, and (i) if the registration is the first registered offering of the sale of the Company's securities to the general public, the underwriter may limit the amount of securities (including Registrable Securities) to be included in the registration and underwriting by the Company's stockholders, or may exclude such securities entirely from such -5- 6 registration and underwriting, provided, that securities (other than Registrable Securities) of any of the Company's stockholders may not be included in the registration and underwriting to the exclusion of Registrable Securities, or (ii) if such registration is other than the first registered offering of the Company's securities to the general public, the underwriter may limit the amount of securities to be included in the registration and underwriting by the Company's stockholders; provided, however, the number of Registrable Securities to be included in such registration and underwriting shall not be reduced to less than twenty-five percent (25%) of the aggregate number of shares included in the registration and underwriting without the prior written consent of Holders of a majority of the Registerable Securities; and provided, further, that no Registrable Securities held by any Initiating Holder shall be so excluded unless all Registrable Securities held by other Holders shall have been excluded first. In the event of any such limitation or exclusion of Registrable Securities, the Company shall so advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among Holders requesting registration in proportion, as nearly as practicable, to the respective amounts of Registrable Securities (or securities convertible into Registrable Securities) held by each of such Holders as of the date of the notice pursuant to subparagraph 1.3(a)(i) above. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 1.4 Form S-3. The Company shall use its best efforts to qualify for registration on Form S-3 or its successor form. After the Company has qualified for the use of Form S-3, Holders of not less than twenty percent (20%) of the Registrable Securities or Intel Corporation, if they are still a stockholder in the Company, shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by such Holders), subject only to the following: (a) The Company shall not be required to effect a registration pursuant to this subparagraph 1.4 within six (6) months of any registration referred to in this subparagraph 1.4 or in subparagraphs 1.2 and 1.3 above. (b) The Company shall not be required to effect a registration pursuant to this subparagraph 1.4 unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before any Selling Expenses) of at least $500,000. The Company shall give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this paragraph 1.4 and shall provide a reasonable opportunity (no fewer than twenty (20) days from the delivery of the notice) for other Holders to participate in the registration, provided that if the registration is for an underwritten offering, the terms of subparagraph 1.3(b) shall apply to all participants in such offering. The underwriter shall be selected in the same manner as is set forth in subparagraph 1.2(b). Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. -6- 7 1.5 Lockup Agreement. In consideration for the Company's agreeing to its obligations under this Section 1, each Holder agrees that, effective upon the request of the underwriters managing the Company's initial public offering, such Holder shall be obligated, so long as all executive officers and directors of the Company are bound by a comparable obligation, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of such underwriters, for such period of time (not to exceed one hundred eighty (180) days) from the effective date of such public offering as the underwriters may specify. 1.6 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to paragraphs 1.2, 1.3 and 1.4 shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to paragraph 1.2 or 1.4 if the registration request is subsequently withdrawn, unless the Holders agree to forfeit their right to a demand registration pursuant to paragraph 1.2 or 1.4 as the case may be; and provided, further, that the Holders may withdraw a request for registration upon the occurrence of any event having a material adverse effect upon the Company over which the Holders had no control or no knowledge thereof at the time of the request or in response to receipt of the President's certificate postponing registration pursuant to paragraph 1.2(a)(ii), in which event the Holders shall not be required to pay any of the expenses and shall retain the right to require the Company to register Registrable Securities pursuant to paragraph 1.2 or 1.4, respectively. 1.7 Registration Procedures. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. -7- 8 (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Apply for qualification and use its best efforts to qualify the Registrable Securities being registered for inclusion on the automated quotation system of the National Association of Securities Dealers, Inc. or on a national securities exchange. (g) Afford to each Holder and its representatives an opportunity to make such examination and inquiry into the financial position, business and affairs of the Company and any of its subsidiaries as the Holder or its counsel may reasonably deem necessary to satisfy such Holder and its counsel as to the accuracy and completeness of the registration statement. (h) Otherwise use best efforts to comply with all applicable rules and regulations of the Commission and, as soon as practicable after the effective date of any such Registration Statement, and, in any event, within 16 months thereafter, make generally available to Holders an earnings statement complying with the provisions of Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of such Registration Statement; (i) Use best efforts to cause all Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar securities issued by the Company are then listed (if any), if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) if no similar securities are then so listed, use best efforts to (x) cause all such Registrable Securities to be listed on a national securities exchange or (y) failing that, secure designation of all such Registrable Securities as a National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System ("Nasdaq") "national market system security" within the meaning of Rule 11Aa2-1 of the SEC or (z) failing that to secure Nasdaq authorization for such shares and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such shares with the NASD; (j) Deliver promptly to counsel to the Holders and each underwriter if any, participating in the offering of the Registrable Securities, copies of all correspondence between the SEC and the Company, its counsel or auditors; (k) Use best efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement; (l) provide a CUSIP number for all Registrable Securities, no later than the effective date of the registration statement; and (m) make available its employees and personnel and otherwise provide reasonable assistance to the underwriters (taking into account the needs of the Company's businesses) in their marketing of Registrable Securities. -8- 9 1.8 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities, each of its officers, directors and partners, and each person controlling such Holder, within the meaning of Section 15 of the Securities Act, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter (as defined in the Act), if any, and each person who controls any underwriter, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto), including any of the foregoing incurred in settlement of any litigation or proceeding, commenced or threatened arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, within the meaning of Section 15 of the Securities Act, each such underwriter and each person who controls any such underwriter, for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Holder or underwriter specifically for use therein; and provided, further, that the agreement of the Company to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter as defined in the Securities Act, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto), including any of the foregoing incurred in settlement of any litigation or proceedings, commenced or threatened arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, each of its officers and directors and each person who controls the Company within the meaning of the Securities Act, such -9- 10 Holders, their directors, officers, partners and persons controlling such Holders or such underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein; and provided, further, that the agreement of the Holder to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). Notwithstanding the foregoing, the total amount for which any Holder shall be liable under this subparagraph 1.8(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this paragraph 1.8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; and provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 1.9 Contribution. If the indemnification provided for in paragraph 1.8 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. -10- 11 1.10 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.11 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times after ninety (90) days after the effective date of the first registration filed by the Company for an offering of its securities to the general public to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144. (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) So long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. (d) After its initial public offering, to take whatever actions are necessary in order for it to qualify to use Form S-2 or S-3, or any form subsequently adopted by the SEC to take the place of Form S-2 or S-3 which does not require substantially more disclosure than the form which it replaces. 1.12 Transfer of Registration Rights. A Holder's rights to cause the Company to register its securities and keep information available, granted to it by the Company under paragraphs 1.2, 1.3, 1.4 and 1.10 may be assigned to a transferee or assignee who the Company does not consider to be an existing or potential competitor and (i) receives the lesser of 100,000 shares or all of the Registrable Securities originally acquired by any transferring or assigning Holder, or (ii) is a partner, retired partner or spouse of such partner of a Holder or to any wholly-owned subsidiary or parent of, or to any corporation or entity which is (within the meaning of the Securities Act) controlling, controlled by or under common control with such Holder. Any transfer or assignment permitted by the foregoing sentence shall be effective as long as the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. -11- 12 1.13 Termination of Registration Rights. The registration rights contained in paragraph 1.2 hereof shall terminate on the later of (i) December 31, 2003 or (ii) five (5) years after the effective date of the Company's initial registered public offering; provided, however, that no Holder shall have any such registration rights at such date, commencing immediately after the Company's initial registered public offering, as all remaining Registrable Securities held or entitled to be held by such Holder may be sold under Rule 144 during any three (3) month period. 2. Rights of First Refusal; Right of Co-Sale. 2.1 Right of First Refusal on Company Issuances. The Company hereby grants to each Stockholder and to each Note Holder, if any, (provided, in the case of each Stockholder holding Series A or B Preferred Stock, such Stockholder is then a current holder of at least ten percent (10%) of the shares of such stock originally issued to such Stockholder in the Reorganization or, in the case of each Stockholder holding Series C, D, E or F Preferred Stock, such Stockholder is then a current holder of at least 10% of the shares of Series C, D, E or F Preferred Stock, as the case may be, originally purchased by such Stockholder or, in the case of each Note Holder, such Note Holder is then a current holder of at least 10% of the stock issuable upon conversion of the Convertible Notes originally issued to such Note Holder) (collectively, hereinafter, the "Rights Holders") the right of first refusal to purchase, pro rata, all or any part of New Securities (as defined in this Section 2.1) which the Company may, after the date hereof from time to time, propose to sell and issue. A pro rata share, for purposes of this right of first refusal, is the ratio that the number of Shares then held by each Rights Holder bears to the sum of the total number of Shares then outstanding. (a) Equity Securities. "Equity Securities" shall mean any securities having voting rights in the election of the Board of Directors not contingent upon default, or any securities evidencing an ownership interest in the Company, or any securities convertible into or exercisable for any shares of the foregoing, or any securities issuable pursuant to any agreement or commitment to issue any of the foregoing. (b) New Securities. Except as set forth below, "New Securities" shall mean any Equity Securities, whether now authorized or not, and rights, options or warrants to purchase said Equity Securities. Notwithstanding the foregoing, "New Securities" does not include (i) Common Stock issued or issuable to employees, officers, consultants or directors of the Company pursuant to sales or options granted at any time after the date of this Agreement (plus any of such shares which are repurchased at cost or as to which such options expire unexercised); (ii) securities offered to the public generally pursuant to a registration statement under the Securities Act; (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets or other reorganization whereby the Company or its stockholders own not less than fifty-one (51%) percent of the voting power of the surviving or successor corporation; (iv) shares of Series C and Series D Preferred Stock issuable upon conversion of the Convertible Notes; (v) shares of Common Stock issued upon conversion of the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock or Series F Preferred Stock; (vi) warrant or warrants for the purchase of shares of capital stock of the Company (and stock issued upon exercise of such warrant or warrants) which have been unanimously approved by the Board of Directors of the Company and -12- 13 issued in connection with an equipment lease, equipment financing or bank line financing; (vii) stock issued pursuant to any rights or agreements including without limitation convertible securities, options and warrants, provided that the rights of first refusal established by this Section 2.1 apply with respect to the initial sale or grant by the Company of such rights or agreements, or (viii) stock issued in connection with any stock split, stock dividend, stock combinations, recapitalizations or the like by the Company. (c) Notice. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Rights Holder shall have thirty (30) days from the date of receipt of any such notice to agree to purchase up to its respective pro rata share of such New Securities for the price and upon the applicable terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) Failure to Exercise Right. In the event a Rights Holder fails to exercise the right of first refusal within said thirty (30) day period, the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities not elected to be purchased by Rights Holders at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities in the manner provided above. 2.2 Right of First Refusal on Sales by Stockholders. (a) The Right. If at any time any of the Holders other than Intel Corporation (a "Selling Holder") proposes to sell any of the Shares held by such Selling Holder (the "Offered Securities") to parties other than the Company in a transaction (the "Transaction") not registered under the Securities Act in reliance upon a claimed exemption thereunder, then any other Stockholder (a "Purchasing Holder" for purposes of this subsection 2.2) that notifies the Selling Holder in writing within thirty (30) days after receipt of the Transfer Notice referred to in Section 2.2(b), shall have the opportunity to purchase a pro rata portion of Offered Securities that the Selling Holder proposes to sell to such third party in the Transaction. For the purposes of this Section 2, the "pro rata portion" that the Purchasing Holder shall be entitled to purchase shall be an amount of Shares equal to a fraction of the total amount of Offered Securities proposed to be sold. The numerator of such fraction shall be the number of Shares owned by a Purchasing Holder and the denominator shall be the total number of Shares owned by all Purchasing Holders and the Selling Holder. Each Purchasing Holder shall be entitled to apportion Shares to be purchased among its partners and affiliates, provided that such Purchasing Holder notifies the Selling Holder of such allocation, and provided that such allocation does not threaten the Company's reliance on any exemption from the registration provisions of the Securities Act or the qualification provisions of applicable state securities laws. -13- 14 (b) Transfer Notice. If at any time any of the Holders other than Intel Corporation proposes to sell Shares to one or more third parties pursuant to an understanding with such third parties in a transaction not registered under the Securities Act, in reliance upon a claimed exemption thereunder (the "Transfer"), then such Selling Holder shall give the Company and each other Holder written notice of his or its intention (the "Transfer Notice"), describing the Offered Securities, the identity of the prospective transferee and the consideration and the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall certify that the Selling Holder has received a firm offer from the prospective transferee and in good faith believes a binding agreement for Transfer is obtainable on the terms set forth, and shall also include a copy of any written proposal or letter of intent or other agreement relating to the proposed Transfer. The Company, upon request of the Selling Holder, will provide a list of the addresses of the other Holders. (c) Failure to Notify. If within thirty (30) days after the Selling Holder gives the aforesaid notice to the Holders, the Holders do not notify the Selling Holder that they desire to purchase any or all of their pro rata portions of the Offered Securities described in such notice for the price and on the terms and conditions set forth therein, then, after complying with Section 2.3 below, the Selling Holder may sell such Offered Securities as to which the Holders do not elect to purchase. Any such sale shall be made only to persons identified in the Transfer Notice and at the same price and upon the same terms and conditions as those set forth in the Transfer Notice simultaneous with any Selling Holder's sale. In the event the Selling Holder has not sold the Offered Securities or entered into an agreement to sell the Offered Securities within sixty (90) days of the date of the Transfer Notice, the Selling Holder shall not thereafter sell any Offered Securities without first notifying the Holders in the manner provided above. (d) Limitation on Right. Without regard and not subject to the other provisions of this Section 2.2, any Initiating Holder may sell or otherwise assign, with or without consideration, any Shares or any other securities issued in respect of such Shares, to any other Initiating Holder, and any Holder may sell or otherwise assign, with or without consideration, any Shares or any other securities issued in respect of such Shares to such Holder to any Related Person (as defined below) or any or all of his or her ancestors, descendants, spouse, or members of his immediate family, or to a custodian, trustee (including a trustee of a voting trust), executor, or other fiduciary for the account of his or her ancestors, descendants, spouse, or members of his or her immediate family, provided that each such transferee or assignee, prior to the completion of the sale, transfer, or assignment, shall have executed documents assuming the obligations of the Holder under this Agreement with respect to the transferred securities. 2.3 Right of Co-Sale. (a) The Right. To the extent that the other Holders do not exercise or are not entitled to exercise the Right of First Refusal set forth under Section 2.2 above, then any other Holder (a "Participating Holder" for purposes of this subsection 2.3) that notifies the Selling Holder in writing within thirty (60) days after receipt of the Transfer Notice referred to in Section 2.2(b), shall have the opportunity to sell a pro rata portion of Offered Securities that the Selling Holder proposes to sell to such third party in the Transaction. In such instance, the Selling Holder shall assign to the Participating Holder(s) such of his interest in the proposed agreement of sale as the -14- 15 Participating Holder(s) shall be entitled to and shall request hereunder, and the Participating Holders shall assume such part of the obligations of the Selling Holder under such agreement as shall relate to the sale of the securities by the Participating Holder. Each Participating Holder shall be entitled to apportion the Shares to be sold among its partners and affiliates, provided that such Participating Holder notifies the Selling Holder of such allocation, and provided that such allocation does not threaten the Company's reliance on any exemption from the registration provisions of the Securities Act or the qualification provisions of applicable state securities laws. (b) Failure to Notify. If within sixty (60) days after the Selling Holder gives the aforesaid notice to the Holders, the Holders do not notify the Selling Holder that they desire to sell any or all of their pro rata portions of the Offered Securities described in such notice for the price and on the terms and conditions set forth therein, then the Selling Holder may sell such Offered Securities as to which the Holders do not elect to purchase. Any such sale shall be made only to persons identified in the Transfer Notice and at the same price and upon the same terms and conditions as those set forth in the Transfer Notice simultaneous with any Selling Holder's sale. In the event the Selling Holder has not sold the Offered Securities or entered into an agreement to sell the Offered Securities within sixty (90) days of the date of the Transfer Notice, the Selling Holder shall not thereafter sell any Offered Securities without first notifying the Holders in the manner provided above. (c) Limitation on Right. The co-sale right granted under this Section 2.3 shall not be available to any Holder that is not an Initiating Holder if the Selling Holder is an Initiating Holder. Further, without regard and not subject to the other provisions of this Section 2.3, any Initiating Holder may sell or otherwise assign, with or without consideration, any Shares or any other securities issued in respect of such Shares to any other Initiating Holder, and any Holder may sell or otherwise assign, with or without consideration, any Shares or any other securities issued in respect of such Shares to such Holder to any Related Person (as defined below) or any or all of his or her ancestors, descendants, spouse, or members of his immediate family, or to a custodian, trustee (including a trustee of a voting trust), executor, or other fiduciary for the account of his or her ancestors, descendants, spouse, or members of his or her immediate family, provided that each such transferee or assignee, prior to the completion of the sale, transfer, or assignment, shall have executed documents assuming the obligations of the Holder under this Agreement with respect to the transferred securities. 2.4 Termination. The rights described in this Section 2 shall terminate on the effective date of the registration statement filed by the Company with the SEC in connection with the Company's initial registered public offering. The rights set forth in this Section 2 shall not apply to proposed transfers pursuant to any acquisition or reorganization of the Company requiring approval of the stockholders of the Company or inclusion of shares in a registered public offering by the Company. 3. Repurchase Right. 3.1 The Company's Right. If any Holder listed on Schedule C (an "Employee Holder") ceases to be an employee of the Company or any parent or subsidiary of the Company on or before December 31, 1998 by reason of either (i) the Employee Holder's voluntary resignation -15- 16 from his or her employment with the Company or any parent or subsidiary of the Company or (ii) the termination of such Employee Holder's employment by the Company for cause, then the Company shall have the right to repurchase any or all shares of the Company's Common Stock held by such Employee Holder under the terms and subject to the conditions set forth in this Section 3. 3.2 Exercise of Repurchase Right. The Company may exercise its repurchase right under this Section 3 by written notice to the Employee Holder within thirty (30) days after such termination of employment. If the Company fails to give notice within such thirty (30) day period, the repurchase right shall terminate unless the Company and the Employee Holder have extended the time for the exercise of the repurchase right. 3.3 Payment for Shares and Return of Shares. Payment of the Repurchase Price (as defined below) shall be made in cash in five equal installments. The first payment hereunder shall be due and payable six months after the date specified in the written notice to the Employee Holder delivered to Section 3.2 above (the "Repurchase Date"). Each subsequent payment shall be due and payable six months after the date on which the previous payment became due and payable. Interest at the rate of 6% per annum, compounded annually, shall accrue on the unpaid portions of the Repurchase Price from the Repurchase Date. The shares being repurchased shall be delivered to the Company by the Employee Holder on the Repurchase Date. 3.4 Assignment of Repurchase Right. The Company shall have the right to assign its rights under this Section 3 to any stockholder of the Company other than the Employee Holder whose shares are being repurchased. 3.5 Repurchase Price. The Repurchase Price per each share to be repurchased shall be an amount determined by dividing the greater of (a) the net consolidated assets of the Corporation (as determined in accordance with generally accepted accounting principles) and (b) four times the average annual consolidated net income of the Company (as determined in accordance with generally accepted accounting principles) for the four most recent fiscal years immediately prior to the Repurchase Date by the number of shares of the Company's Preferred Stock (on an as converted basis) and Common Stock outstanding on the Repurchase Date. 3.6 Effect of Repurchase. From and after the Repurchase Date, the shares of the Company's Common Stock to be repurchased shall be canceled and deemed to be part of the authorized but unissued Common Stock of the Company. The Employee Holder shall have no voting or other rights with respect to the shares of Common Stock so repurchased from and after the Repurchase Date except as set forth in this Section 3. 3.7 Termination. This Section 3 shall terminate the effective date of the registration statement filed by the Company with the SEC in connection with the Company's initial registered public offering. 4. Drag-Along Agreement. In the event that the board of directors of the Company submits a proposal for approval by the stockholders of the Company, which if approved by the required vote of stockholders under the Company's Certificate of Incorporation, as then amended and restated, and the applicable law would authorize the board of directors to effect a merger or -16- 17 consolidation of the Company with or into another entity or a sale of all or substantially all of the Company's assets, all parties to this Agreement agree that they will vote in favor of such transaction and will not exercise any rights which would otherwise accrue to dissenting stockholders upon the effectiveness of such transaction if the holders of 75% of the outstanding voting stock of the Company of each class or series entitled to vote on such transaction approve such transaction. This Section 4 shall terminate on the effective date of the registration statement filed by the Company with the SEC in connection with the Company's initial registered public offering. 5. Information Rights. 5.1 Financial Information. As soon as practicable after the end of each fiscal year, and in any event within ninety (90) days thereafter, the Company will mail to Intel Corporation, as long as it remains a stockholder of the Company, and, as soon as practicable after receipt of a written request from any other Information Rights Holder (as defined below), to such Information Rights Holder consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and consolidated statements of changes in financial position of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year all in reasonable detail and audited by independent public accountants of national standing selected by the Company. As used in this Section 5, the term "Information Rights Holder" shall mean any Holder that holds at least the lesser of (a) 75% of the Shares held by it as of the date of this Agreement, as shown on Schedule A attached hereto, and (b) 25,000 shares of Registrable Securities (as adjusted to reflect stock dividends, stock splits, stock combinations, recapitalizations or the like). As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company and in any event within forty-five (45) days thereafter, the Company will mail to Intel Corporation, as long as it remains a stockholder of the Company, and, as soon as practicable after receipt of a written request from any other Information Rights Holder, to such Information Rights Holder a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and consolidated statements of changes in financial condition of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles (other than for accompanying notes), subject to changes resulting from year-end audit adjustments, all in reasonable detail and signed by the principal financial or accounting officer of the Company. The Company also will provide to all members of its Board of Directors, to Intel Corporation and, upon prior written request, to any Information Rights Holder as soon as practicable after the end of each month, and in any event within thirty (30) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such month, and consolidated statements of income and consolidated statements of changes in financial condition of the Company and its subsidiaries for such month and for the current fiscal year to date, prepared in accordance with the Company's standard internal accounting practices. -17- 18 The Company also will provide to all members of its Board of Directors, to Intel Corporation and, upon prior written request, to any Information Rights Holder on or before November 15 or each year a budget, in reasonable detail, setting forth the Company's planned expenditures and operating plans for the following calendar year. 5.2 Additional Information. The Company also will provide to each Information Rights Holder such other information and data, including access (during regular business hours upon at least two (2) days prior written notice) to books, records, officers and accountants, with respect to the Company and its subsidiaries as any such holder may from time to time reasonably request; provided, however, that the Company shall not be obligated to provide any information that it reasonably considers in good faith to be a trade secret or to contain confidential or classified information except that the Company shall provide such information to its directors as may be necessary to perform their duties as directors. 5.3 Assignment of Rights to Financial Information. The rights granted pursuant to Sections 5.1 and 5.2 may not be assigned or otherwise conveyed by any Information Rights Holder or by any subsequent transferee of any such rights without the prior written consent of the Company (which consent shall not be unreasonably withheld); provided, however, that without such consent any Information Rights Holder may assign to any transferee, other than an actual or potential competitor of the Company, and after giving notice to the Company, the rights granted pursuant to Section 5.1 and 5.2 to (i) a transferee who is or upon transfer of shares becomes an Information Rights Holder, or (ii) any partner, stockholder, or person in control of, controlled by or under common control with an Information Rights Holder ("Related Person"); and further provided, however, that the rights of directors pursuant to the third paragraph of Section 5.1 shall not be assignable. 5.4 Termination of Financial Information Rights. The covenants set forth in Sections 5.1, 5.2 and 5.3 shall terminate and be of no further force or effect with respect to all Information Rights Holders on the first to occur of (i) the effective date of the Company's registration of any of its securities pursuant to Section 12(b) or 12(g) of the Exchange Act; (ii) the first date on which quotations for the Common Stock of the Company are reported by the automated quotations system operated by the National Association of Securities Dealers, Inc. or by an equivalent quotations system; or (iii) the first date on which shares of the Common Stock of the Company are listed on a national securities exchange registered under Section 6 of the Exchange Act; provided, however, that notwithstanding the foregoing, Intel's rights under the first and second paragraphs of Section 5.1 with respect to annual and quarterly financial information of the Company and the right of Intel to transfer its rights under Section 5.1 to a Related Person shall terminate on the first date on which Intel holds no shares of the Company's stock. 6. General. 6.1 Waivers and Amendments. With the written consent of the holders of a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), amended or modified, and, with the same consent, the Company when authorized by resolution of its Board of Directors may -18- 19 enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record Holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent otherwise provided in this paragraph 6.1. 6.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware as such laws are applied to agreements between Delaware residents entered into and to be performed entirely within Delaware. 6.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 6.4 Entire Agreement. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and this Agreement shall supersede and cancel all prior agreements between the parties hereto with regard to the subject matter hereof. 6.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by either first class mail, postage prepaid, certified or registered mail, return receipt requested, or overnight courier service addressed (a) if to any Holder, at such Holder's address as such Holder shall have furnished to the Company in writing, and (b) if to the Company, at 131 Albright Way, Los Gatos, California 95030, or at such other address as the Company shall have furnished to the Holders in writing. 6.6 Severability. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 6.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. -19- 20 6.9 Prior Agreement; Waiver. This Agreement supersedes and replaces the Prior Agreement in its entirety, and such Prior Agreement shall be of no further force or effect upon execution of this Agreement by all parties hereto. In addition, the Stockholders hereby waive any and all rights they may have under the Prior Agreement to purchase a pro rata portion of the Series F Preferred Stock of the Company, and any failure by the Company to comply with the terms of Section 2.1 of said Prior Agreement with respect to the issuance of the Series F Preferred Stock. -20- 21 IN WITNESS WHEREOF, the parties hereby have executed this Stockholders' Agreement on the date first above written. COMPANY: SCM MICROSYSTEMS, INC., a Delaware corporation By: ----------------------------------- Steven Humphreys, President -21- 22 SCM MICROSYSTEMS, INC. COUNTERPART SIGNATURE PAGE TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT APRIL 11, 1997 "HOLDER" ------------------------------------------ Print Name of Holder By: --------------------------------------- Signature ------------------------------------------ Print Name of Signatory ------------------------------------------ Print Title Address: -22- 23 SCHEDULE A Schedule of Stockholders and Note Holders Zweite Beteiligungs-Kommanditgesellschaft Telenor Venture AS der TVM Techno Venture Management ITOCHU Corporation Gesellschaft mbH & Co. KG Intellicard Systems Algomquin Trust S.A. The Special Index Fund TVM Eurotech Limited Partnership Jaochim Graf zu Ortenburn Alpinvest International B.V. Per Knudsen Banque SCS Alliance L.B. Finance S.A. Banque SCS Alliance S.A. Merifin Capital N.V. KBL Founders Ventures S.C.A. Murdoch & Company Oscar Gruss Lombard Odier Vertex Investment (II) Ltd. Ken O. Pelton Genevest Consulting Group S.A. Pictet et Cie The Index Special Situations Fund Societe Financiere Mirelis S.A. Vision Capital Partners Societe de Banque Suisse (SBS) Alvet Covo Union de Banque Suisse (UBS) Peter Andersson Candida von Braun British Bank of Middle East Emmeram von Braun Bulk Partners A.S. Leitpold von Braun CERN Pension Fund Dieter Haas Cook & Cie Detlef Jenett Claus Dieckell Ronald Lautenschlager Friedrich Dieckell Torsten Maykranz Faisal Finance (Jersey), LTD Bernd Meier Eric Favre Sonja Meier Fidulex Management Inc. Reiner Prummer Fondation Galba Thomas Rachor The Forum Finance S.A. Robert Schneider The Gifford Fund Ursula Schneider Jay M. Haft Lembit Soobik Hoegh Invest A/S Sigfried Vater Intel Corporation Andreas Wolf Hambrecht & Quist California, Inc. Jean-Yves LeRoux WS Investments 97A Jeffrey Saper Kenneth M. Siegel Joshua M. Rafner Daniel H. Case III Nippon Investment & Finance Co. Ltd. Investment Enterprise Partnership "NIF8" Investment Enterprise Partnership "NIF9" Investment Enterprise Partnership "NIF10A" Investment Enterprise Partnership "NIF10B"
-23- 24 SCHEDULE B Initiating Holders Zweite Beteiligungs-Kommanditgesellschaft WS Investments 97A der TVM Techno Venture Management Jeffrey Saper Gesellschaft mbH & Co. KG Kenneth M. Siegel Algonquin Trust S.A. Joshua M. Rafner TVM Eurotech Limited Partnership Daniel H. Case III Alpinvest International B.V. Nippon Investment & Finance Co. Ltd. Banque SCS Alliance Investment Enterprise Partnership "NIF8" Banque SCS Alliance S.A. Investment Enterprise Partnership "NIF9" KBL Founders Ventures S.C.A. Investment Enterprise Partnership "NIF10A" Oscar Gruss Investment Enterprise Partnership "NIF10B" Vertex Investment (II) Ltd. Telenor Venture AS Genevest Consulting Group S.A. ITOCHU Corporation The Index Special Situations Fund Intellicard Systems Vision Capital Partners The Special Index Fund Alvet Covo Jaochim Graf zu Ortenburn Peter Andersson Per Knudsen British Bank of Middle East L.B. Finance S.A. Bulk Partners A.S. Merifin Capital N.V. CERN Pension Fund Murdoch & Company Cook & Cie Lombard Odier Claus Dieckell Ken O. Pelton Friedrich Dieckell Pictet et Cie Faisal Finance (Jersey), LTD Societe Financiere Mirelis S.A. Eric Favre Societe de Banque Suisse (SBS) Fidulex Management Inc. Union de Banque Suisse (UBS) Fondation Galba Candida von Braun The Forum Finance S.A. Emmeram von Braun The Gifford Fund Leitpold von Braun Jay M. Haft Hoegh Invest A/S Intel Corporation Hambrecht & Quist California, Inc.
-24- 25 SCHEDULE C Employee Holders Dieter Haas Detlef Jenett Ronald Lautenschlager Torsten Maykranz Bernd Meier Sonja Meier Reiner Prummer Thomas Rachor Robert Schneider Ursula Schneider Lembit Soobik Sigfried Vater Andreas Wolf Jean-Yves LeRoux -25- 26 ================================================================================ SCM MICROSYSTEMS, INC. -------------------- AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT -------------------- APRIL 11, 1997 -------------------- ================================================================================ 27 TABLE OF CONTENTS
PAGE 1. Registration Rights....................................................1 1.1 Definitions......................................................1 1.2 Requested Registration...........................................2 1.3 Company Registration.............................................4 1.4 Form S-3.........................................................5 1.5 Lockup Agreement.................................................6 1.6 Expenses of Registration.........................................6 1.7 Registration Procedures..........................................7 1.8 Indemnification..................................................8 1.9 Contribution....................................................10 1.10 Information by Holder...........................................10 1.11 Rule 144 Reporting..............................................10 1.12 Transfer of Registration Rights ................................11 1.13 Termination of Registration Rights .............................11 2. Rights of First Refusal; Right of Co-Sale ............................11 2.1 Right of First Refusal on Company Issuances.....................11 2.2 Right of First Refusal on Sales by Stockholders.................13 2.3 Right of Co-Sale................................................14 2.4 Termination.....................................................15 3. Repurchase Right......................................................15 3.1 The Company's Right.............................................15 3.2 Exercise of Repurchase Right ...................................15 3.3 Payment for Shares and Return of Shares.........................16 3.4 Assignment of Repurchase Right .................................16 3.5 Repurchase Price................................................16 3.6 Effect of Repurchase............................................16 3.7 Termination.....................................................16 4. Drag-Along Agreement..................................................16 5. Information Rights....................................................17 5.1 Financial Information...........................................17 5.2 Additional Information..........................................17 5.3 Assignment of Rights to Financial Information...................18 5.4 Termination of Financial Information Rights.....................18
-i- 28 TABLE OF CONTENTS (CONTINUED)
PAGE 6. General...............................................................18 6.1 Waivers and Amendments..........................................18 6.2 Governing Law...................................................18 6.3 Successors and Assigns..........................................18 6.4 Entire Agreement................................................19 6.5 Notices, etc....................................................19 6.6 Severability....................................................19 6.7 Titles and Subtitles............................................19 6.8 Counterparts....................................................19
-ii- EX-10.16 21 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.16 8/26/93 TFM/RHL/HSz/sz/M 15.000-0393 EMPLOYMENT CONTRACT BETWEEN SCM SCHNEIDER MICROSYSTEMS ENTWICKLUNGS - UND VERTRIEBS GMBH Fraunhoferstr. 11A, 82152 Planegg, represented by [the shareholder committee, which is represented by] [handwritten:] FRIEDRICH BORNIKOEL pursuant to shareholder resolution dated 8/28/93 (hereinafter referred to as the "Corporation") and Mr. Robert Schneider Berta-von-Suttner-Weg 1 82152 Martinsried (hereinafter referred to as the "General Manager") NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 2 - - 2 - Section 1 ACTIVITY 1. The Corporation has appointed the General Manager to the position of General Manager by shareholder resolution dated 3/29/90. This appointment shall not preclude the appointment of additional General Managers. 2. The General Manager shall conduct the transaction of the Corporation conscientiously with the care of an ordinary prudent businessman and shall perform the obligations assigned to him by statue, by-laws or contract in a responsible manner. 3. The primary activity of the General Manager shall consist of the responsibility for managing and supervising the Corporation, including arranging, coordinating and implementing all measures. 4. In the event of appointment of additional General Managers, the functions of the General Managers shall be defined by the shareholder committee. In engaging in his activities, the General Manager shall coordinate with the remaining General Managers. 5. Upon resolution of the shareholder committee, the General Manager shall also undertake other comparable activities. 6. The General Manager shall be exempt from the restrictions set forth in Section 181 BGB [German Civil Code]. 3 - - 3 - 7. The scope of responsibility of the General Manager pursuant to this contract may be restricted or modified only with his written consent. Without such agreement, the restriction or modifications shall be deemed to constitute termination of the employment contract by the Corporation. Section 2 SHAREHOLDER RESOLUTIONS 1. The General Manager shall be bound by resolutions and instructions of the shareholder committee and/or the general meeting of shareholders. 2. The shareholder committee may define general guidelines with regard to the conduct of transactions. 3. The shareholder committee and/or general meeting of shareholders may issue a binding set of by-laws which set forth the delineation of the activities of the General Managers. 4. The General Managers shall require the consent of the shareholder committee for the following management activities: - annual budget - purchase, sale or creation of encumberments on real property or rights equivalent to real property 4 - - 4 - - call for deposits towards the share premium - disposition of industrial property rights and conclusion of patent contracts, license contracts (with the exception of simple product licenses for users), know-how contracts and cooperation contracts - conclusion of exclusive distribution contracts and entering into delivery obligations which substantially restrict the Corporation's freedom to act - establishment, purchase and sales of business operations, divisions or branch offices - formation of Corporations or enterprises, purchase and sale of equity interests in other enterprises - conclusion of business lease and business management contracts - sale of corporate assets as a whole or a substantial portion thereof - drawing and granting of credits in excess of DM 100,000.00 (in the individual instance or in total) - investments which (in the individual instance or in total) are in excess of DM 200,000.00 (including leasing contracts) - initiation of development projects with a volume in excess of DM 200,000.00 (in the individual instance or in total) - submission of guarantees and suretyships; excluded therefrom shall be the usual guarantee for products of the Corporation 5 - - 5 - - hiring of employees if their compensation exceeds 1.5 times the respective premium measurement threshold in the pension insurance scheme - internal organizational changes of substantial importance - all other extraordinary management measures - management measures which the shareholder committee has made subject to its consent. Section 3 TERM 1. This employment contract shall begin when it is signed and is concluded for an indefinite term. However, the provisions in Sections 6 through 10 shall not take effect until 1/1/94. Until that point in time, the provisions in this regard set forth in Section 3 of the General Manager's prior General Manager employment contract dated 5/14/90 shall continue to apply. 2. It shall end no later than upon the expiration of the month in which the General Manager reaches the age of 65. 6 - - 6 - Section 4 TERMINATION/DISMISSAL 1. Regular termination Each party may terminate this contract upon notice of six (6) months effective at the end of any calendar half-year, but no earlier than December 31, 1994. In the case of doubt, the corporate law dismissal of the General Manager shall be interpreted as termination of this contract at the next possible point in time. 2. Extraordinary termination The termination of this contract for good cause shall remain unaffected. Good cause for the Corporation shall exist in particular if the General Manager violates substantial provisions of this contract or substantial restrictions which are imposed upon him inter se with regard to management. 3. Release In each case of termination, the Corporation may release the General Manager independent of the validity of the termination and subject to his other rights. 7 - - 7 - Section 5 REPRESENTATIVE AUTHORITY 1. The General Manager shall represent the Corporation judicially and extra-judicially along with the other General Managers in accordance with his appointment and the by-laws. 2. The General Manager shall observe the limitations imposed upon him by this contract, the by-laws, the statute or a resolution by the shareholder committee or general meeting of shareholders. Section 6 COMPENSATION 1. As compensation for his activity, the General Manager shall receive an annual salary in the amount of DM 180,000.00, payable in 12 monthly installments, each at the end of the month minus the statutory deductions. 2. In addition, the General Manager shall receive an annual bonus, the amount of which shall be calculated from the amount of the result earned for the fiscal year, as shown in appendix 1. However, the bonus shall be at least DM 30,000.00. 3. As an advance towards the bonus, the General Manager shall receive additional salary with his June and November salary installments, each in the amount of one twelfth (1/12) of the annual salary set forth in par. 1. Otherwise, the bonus shall be payable 14 days after the general meeting of shareholders which adopts the annual financial statements. 4. The compensation provided pursuant to this provision shall constitute settlement for the entirety of the activity of the General Manager, including activity for subsidiaries, affiliated companies and other companies, if any, as well as activity on Sundays, holidays and the like. To the extent that the General Manager receives direct compensation for holding such positions, such compensation shall be offset against compensation set forth in this contract first--against the bonus--unless expressly stipulated to the contrary. 8 - - 8 - Section 7 FRINGE BENEFITS 1. For the duration of this contract, a company vehicle of the higher middle class (approximately DM 2,000.00 per month leasing rate excluding maintenance and insurance) shall be provided for the General Manager; the General Manager may use said vehicle for personal purposes as well. The General Manager shall bear income tax which accrues. 2. Direct insurance/retirement pension For the duration of this contract, the Corporation shall bear the premiums for a direct insurance policy in the respective maximum permissible amount from a tax standpoint. The Corporation shall bear the lump-sum income tax and church tax which accrues. In addition, the Corporation may promise the shareholder a reasonable company retirement pension without thereby creating a legal claim on the part of the General Manager. 3. Risk insurance In order to cover the increased risk resulting from the intensive travel activity, the Corporation shall bear the expense of a risk accident insurance policy payable in the event of the death of the General Manager, with an insurance sum in favor of the General Manager or his family members in the amount of DM 400,000.00 in the event of death and DM 1 million in the event of disability. 9 - - 9 - 4. The Corporation shall pay 50% of the premiums of both a private capital life insurance policy with disability protection to be concluded by the General Manager and a voluntary health insurance policy. The taxes allocable to said insurance policies shall be paid by the General Manager. The monthly allowance for life insurance shall be 50% of the respective applicable maximum amount which must be paid into the statutory health insurance system each month for employees liable to contribute to the social insurance; however, said allowance shall not exceed DM 900.00. Section 8 EXPENSES The Corporation shall be obligated to the General Manager to reimburse necessary and reasonable outlays. In individual cases, the outlays shall be documented in accordance with the tax provisions, unless permissible lump-sum amounts are settled in accordance with the tax provision. Section 9 VACATION 1. The General Manager shall have a claim to annual vacation of 25 working days. 2. The timing of the vacation shall be coordinated with the other General Managers and the general meeting of shareholders and shall be in observance of the interests of the Corporation. 3. The vacation right shall lapse no later than 3/31 of the following year. No claim for compensation for unused vacation days shall exist. 10 - - 10 - Section 10 CONTINUED PAYMENT OF SALARY IN THE EVENT OF SICKNESS OR DEATH 1. In the event of sickness or other blameless disability, payment of the monthly compensation (Section 6 par. 1) shall continue for the period of six (6) months. The continuation of payments shall begin in the month which follows the occurrence of the work disability. In addition, the Corporation shall enter into a sick day insurance policy or assume the existing insurance policy which provided DM 10,000.00 in coverage per month starting from the expiration of 6 months through 2 years. 2. Any third-party payments, such as payments on the basis of liability claims, sick day insurance, etc., shall be offset against the payments of the Corporation in such a manner that the aggregate of said miscellaneous payments and the payments of the Corporation reach the net compensation which the General Manager would have, had he been able to work. 3. In the event of the death of the General Manager during the term of his General Manager activity, payment of the monthly compensation (Section 6 par. 1) to his survivors (widow or orphans) shall continue for a period of three (3) months. The continued payments shall begin upon the death of the General Manager. Section 11 DUTIES, ANCILLARY ACTIVITIES 1. The General Manager shall provide the entirety of his work energy and the results thereof, as well as all experience and knowledge, solely and exclusively to the Corporation. 2. All activity focused on gain shall require the prior written consent of the shareholder committee. The General Manager shall be obligated to notify the Corporation of outside employment which requires or may require consent. 11 - - 11 - 3. The written consent of the shareholder committee shall also be required for taking on a seat on a supervisory board, advisory board, administrative board, trade association body, among others. 4. At the end of the employment relationship (or at the time of the release, in the event of early release), the General Manager shall be obligated by resolution of the shareholder committee to relinquish all seats which he assumed or exercised on the basis of or in connection with his activity with the Corporation. Section 12 COMPETITION PROHIBITION 1. During the term of this contract, the General Manager shall not be permitted to work directly or indirectly, professionally or occasionally, for his own account or the account of a third party, independently or dependently, in the business sector of the Corporation; moreover, the General Manager shall not be permitted to acquire an enterprise which engages in transactions in the business sector of the Corporation or obtain an equity interest in, or otherwise support, such an enterprise. 2. The restriction on competition set forth in the preceding paragraph shall likewise apply to the territory of the Federal Republic of Germany and the United States of America for a period of 1 (one) year from the end of this employment contract. As compensation for compliance with this restriction on competition, the General Managers shall receive compensation in the amount of his basic salary set forth in Section 6 section 1, which shall be payable as indicated therein. Everything which the General Manager earns elsewhere through the exploitation of his work energy or maliciously fails to earn during the relevant time period shall be offset against this. 12 - - 12 - Upon request, the General Manager shall be obligated to provide the Corporation with information concerning the amount of his earnings. Prior to the end of the employment relationship, the Corporation may waive the competition prohibition by written declaration, with the effect that the Corporation shall be free from the obligation to pay the compensation. 3. Specifically included in the business sector of the Corporation for purposes of this provision shall be the sector of personal computer memory cards, but not the activity involving Personal Computer Memory Cards Interface Association (PCMCIA). Section 13 BUSINESS AND OPERATIONAL SECRETS The General Manager shall be obligated to maintain unrestricted and complete secrecy with regard to all business and operational secrets, as well as all other confidential information or data relating to the Corporation or its enterprise. The duty of confidentiality on the part of the General Manager under this Section 13 shall apply after the end of the contractual relationship. The General Manager is aware of the special provisions concerning the criminal punishability of violation of business and operational secrets under Section 17 of the Act Against Unfair Competition. Section 14 RELEASE OF DOCUMENTS When this employment relationship ends (or at the time of release, in the event of earlier release,), the General Manager shall be obligated to return to the Corporation--without being requested to do so--all documents, records and other materials which are related to his General Manager activity. 13 - - 13 - Section 15 INVENTIONS, COPYRIGHTS 1. Rights to inventions or technical improvements which the General Manager made or worked out during his activity on behalf of the Corporation, in connection with his activity on behalf of the Corporation, as a result of his experiences arising from his activity on behalf of the Corporation or on the basis of studies of the Corporation shall be held solely by the Corporation. The General Manager hereby assigns all relevant rights at this time. The Corporation shall not be obligated to make any additional compensation in this regard. The Employee Invention Act shall not be applicable in the absence of employee status on the part of the General Manager. 2. Accordingly, the General Manager hereby assigns to the Corporation exclusive use, at no charge, of any copyrights arising through him for works created in connection with his activity, as a result of his experience arising from his activities on behalf of the Corporation or on the basis of studies by the Corporation. Section 16 NO COLLATERAL AGREEMENTS, MODIFICATIONS, WRITTEN FORM This contract contains all agreements of the parties. Unless they are separately mentioned, no collateral agreements exist. Contractual modifications must be in writing in each instance. The General Manager employment contract dated 5/14/90, as well as the previous bonus provision and pension assurance, shall become invalid effective immediately, except as stated in Section 3 par. 1. The General Manager can no longer assert claims arising therefrom. 14 - - 14 - Section 17 SEVERANCE CLAUSE In the event that individual contracts are or should become invalid, this shall not affect the validity of the remaining provisions. In place of the invalid provision, a provision shall be agreed upon which comes as close as possible to the economic intent of the parties. The same shall apply in the event that the contract contains loopholes. Section 18 PLACE OF PERFORMANCE AND PLACE OF VENUE The place of performance and place of venue for all possible disputes arising from this contract shall be the domicile of the Corporation. Martinsried, 8/26/93 s\Friedrich Bornikoel s\Robert Schneider - --------------------------------- ------------------------------ (SCM Schneider Microsysteme (Robert Schneider) Entwicklungs- und Vertrieds GmbH) 15 APPENDIX TO THE GENERAL MANAGER CONTRACT OF MR. ROBERT SCHNEIDER Mr. Robert Schneider shall receive a bonus in the amount of DM 60,000 for 1994 if SCM Schneider Microsysteme Entwicklungs- und Vertriebs GmbH has worldwide sales of at least DM 18.0 million in 1994 and achieves a balanced result from ordinary business activity. In any case, however, he shall receive DM 30,000. For the ensuing years, new agreements shall be concluded through the shareholder committee, for which the consent of the Zweiten Beteiligungsgesellschaft [Second Holding Company] of TVM Techno Venture Management GmbH & Co. KG is necessary. Munich, August 26, 1993 FB/GR 16 MANAGEMENT COMPENSATION 1997 GENERAL GUIDE LINES: - - Robert Schneider, Steven Humphreys and Bernd Meier shall have the same fixed income and target bonus in US-Dollars, since SCM Inc.'s internal currency is US-Dollar. - - The Bonus shall be now and in the future based on: - budget, business model, profit, stock price - internal organization, IPO, investors' relations - strategic goals, strategic partnerships which are relevant not only for the result in 1997, but also in future years. THE PROPOSAL IS: Fix salary incl. BoD fee: US$ 190k Bonus up to US$ 75k The bonus shall be based on the following: I. PROFIT US$ 0 to US$ 15k linear in proportion to a net income before tax (but before interest expense) US$ 10k if the confirmed order backlog (in writing) as of December 31, 1997 which is shipable in Q1 1998 exceeds 70% of the revenues planned in Q1 1998. II: INTERNAL ORGANIZATION, IPO, INVESTORS' RELATIONS US$ 15k if the company has a successful IPO or if the company is ready to go public in Q3 1997 at a price range of US$ 10 -12 per share. US$ 15k for the strategic investment of Intel, NIF, Itochu and Telenor. 17 MANAGEMENT COMPENSATION 1997 - CONTINUED III. STRATEGIC GOALS Robert Schneider: - - US$ 5,000 if the Intel partnership develops fine and US$ 5,000 if this relationship leads to business of US$ 0.5 million in 1997 or up to US$ 3.0 million in 1998. - - US$ 5,000 for a clear strategy to secure SCM's access to chip technology and to integrate SCM's technology in chips, i.e. UART (similar to Oak Technology's strategy) Time frame: July/August Board approval: September - - US$ 5,000 for a strategic paper on SCM's strategy in the security business SCM's options (cooperations, acquisitions) Time frame: July/August BoD Approval: September Steven Humphreys and Bernd Meier - - US$ 3,000 for each strategic new major customer for Smart Card readers in America, the target is three customers Steven Humphreys: - - US$ 10,000 if 30% of revenues in the USA in 1997 is not related to the US government Bernd Meier: - - US$ 3,000 for each new major customer for Smart Card readers (DVB CAM, DVB SWAPBOX, InterNet COMMERCE, InterNet access) in Europe and Asia. Robert Schneider, Steven Humphreys and Bernd Meier: - - US$ 3,000 for each major contract worth US$ 1.0 million for chips plus firmware with SCM' technology inside i.e. UART EX-10.17 22 EMPLOYMENT AGREEMENT-REGISTRANT/JEAN-YVES LEROUX 1 EXHIBIT 10.17 SCM MICROSYSTEMS By this letter which is equivalent to an employment contract as soon as you accept, we hire you Jean - Yves LE ROUX as of: 5/15/95 in the capacity of: Head of French SCM office, position III, level A gross annual salary: 445,000 FF (including 100% Bonus) Fixed salary: 375,000 FF Bonus: 70,000 FF Place of work: Bandol (83) Trial period: 3 months The Bonus plan will be specified in a separate document and [updated] quarterly. Your gross monthly salary will be 31,250 FF paid in 12 monthly installments. Your place of work will be BANDOL. It is understood that the progress of the company may lead to proposing other tasks to you, implying a change of this place of work. This contract, executed for an undetermined term, will become final only after a trial period of three months, and may always be terminated at the initiative of one of the parties, pursuant to legal and contractual provisions. Our Company is governed by the National Collective Bargaining Agreement of Metallurgical Engineers and Executives. Initials: 2 SCM MICROSYSTEMS You promise to inform us immediately of any change in the situations you indicated to us (address, family situation, etc.). Your acceptance of this employment contract formally implies that you will not be linked to any other company and that you will be free of all commitments to your prior employer when you effectively join our Company. For good order, please return this contract as well as its addendum, initialed on each page and bearing on the last page, your signature preceded by the mention "Read and Approved". Sincerely. 3 SCM MICROSYSTEMS ADDENDUM TO EMPLOYMENT CONTRACT By this document, and in my capacity as employee of (hereinafter the Company), I make the following commitments: 1. I commit to immediately inform the Company, pursuant to the provisions of Article 3, Law No. 78-742 of July 13, 1978, and according to the methods set forth in Decree No. 79-797 of September 4, 1979, of any invention, improvement, modification, discovery and development, patentable or not (hereinafter, generically referred to as Developments), made or designed by me or under my management at any time between the date of this contract and its cancellation date. My reporting obligations extend to all Developments without exception, whether or not made or designed (a) in the premises of the company, (b) during normal work hours, (c) during the performance of my tasks, (d) in the field of the activities of the company, (e) by knowing or using techniques or means specific to the Company or data supplied by it. 2. Property rights for all Developments designed or made by me will be attributed pursuant to the provisions of Law No. 78-742 of July 13, 1978. Thus, if my actual tasks include the mission of making inventions, pursuant to said Law, all patented or patentable Developments, made or designed by me or under my management while performing my Employment Contract, will automatically belong to the Company or to any person designated by it without any additional remuneration being owed to me by the Company. 4 SCM MICROSYSTEMS Furthermore, all patented or patentable Developments, made or designed by me or under my management during the performance of studies and research entrusted to me, will automatically belong to the Company or to any person designated by it without any additional remuneration being owed to me by the Company. In the case of Developments which, although not designed or made in the execution of an inventive mission or during the execution of studies and research entrusted to me, and although they consequently constitute personal inventions, would be designed by me or under my management, either in the performance of my functions, or in the field of activity of the company, or by the knowledge or use of techniques or means specific to the company, or data supplied by it, the Company will have the right to receive, under the conditions established in Decree No. 79-797 of September 4, 1979, all or part of the royalties arising from the patents protecting said Developments. In exchange, the Company will pay to me a remuneration in an amount established by taking into consideration my activities in the Company, the circumstances of the design or realization of said Developments, and their industrial and commercial usefulness for the Company. In this case, I must submit proof that the Developments in question constitute personal inventions in the sense of this Article. In addition, concerning the Developments defined in paragraphs 1, 2 and 3 of this Article, I commit to sign at the request of the Company all papers and patent applications and all other documents, to submit them for use in any country at the request of the Company, to fully cooperate with the Company or with any person designated by it for the filing and processing of such patent applications, and in general to make any other effort so that the Company obtains full, complete protection. These commitments taken under this article will continue to be binding for me after the cancellation of this Employment Contract. 5 SCM MICROSYSTEMS 3. I certify that, to date, I am not obligated in any manner to any former employer or any other individual or entity concerning the obligations described in Article 2 above. On the other hand, I am not obligated under any non-competition clause covering my activities in the Company. 4. I commit to transfer to the Company free of charge any copyright on any document prepared by me in the framework of my activities in the Company. Software: I acknowledge that, pursuant to Article 45 of the Law of July 3, 1985, software created by me in the performance of my functions belongs to the Company, which is entitled to all rights recognized for me as author. In addition, I acknowledge that, concerning software: a. My function extends to any activity of the Company, even if unrelated to the nature of the work set forth in my Employment Contract. b. I perform my function both in my place of work and during my work time and outside said work place and time, as long as I use even, partially, computer equipment belonging to the Company. I commit to strictly inform the Company about all my activities related to software. 5. If any of the Developments referred to in Article 2 above is subject to a patent application in the name of the Company, it is understood that my name will be mentioned in said application, which will not create any property right for me concerning said patent. 6. Furthermore, it is understood that, after being informed by me of a Development referred to in Article 2, paragraph 3 above, the Company will not, under any circumstances, be expected to obtain the rights to said Development. In this case, no compensation will be owed to me. 6 SCM MICROSYSTEMS 7. It may occur, during the time I remain employed by the Company, that I will come to know confidential information concerning the Company, related to matters generally unknown to all persons alien to the Company, such as, on the one hand, Developments, improvements, procedures, etc. related to the products and services manufactured, sold or used by the Company and, on the other hand, the general activity of the Company (sales, costs, profits, organization, client lists, pricing methods, etc.). I commit not to disclose any information and not to use it myself, both during the term of my Employment Contract and after its cancellation, whether or not such information was obtained by my own efforts, without expressed written authorization from the Company. Furthermore, it may occur that I become aware of equipment, procedures, or information of any nature, which are known to the public in themselves, but whose use by the Company is generally unknown to the public. I commit not to disclose to anybody, both during the term of my Employment Contract and after its cancellation, the use given by the Company to said equipment, procedures and information, whether or not such use arises from my own efforts. 8. I will not disclose to the Company, and I will not incite the Company to use any confidential information received by me from other individuals or entities, including my former employers. 9. I commit to dedicate all my time to the task entrusted to me under my Employment Contract and to give the necessary care to the performance of said tasks. Unless I obtain the prior written agreement of the Company, signed by the general director or the director of personnel, I commit, for the term of my Employment Contract, not to perform any other professional activity, either directly or indirectly. 7 SCM MICROSYSTEMS 10. If the Company asks me to continue my activities in a branch or affiliate of the Company, as the case may be, such change will not constitute cancellation of my Employment Contract, and the commitments contained in this Addendum will remain in effect for the entire term of my Employment Contract. In addition, I commit in advance to respect the commitments contained in the standard contracts of the Company to which I will be assigned, Siemens, these commitments being similar, in the essential points, to those undertaken by me under this Addendum. If a provision of this Addendum contradicts one of the provisions of the standard contract valid at the Company to which I will be assigned, the latter provision will prevail. 11. At the date of termination of my activities in the service of the Company, except in the event of transfer to an affiliate of the Company, or at any other time if the Company so requests, I commit to deliver to the person designated for this purpose all files, plans, drawings and other documents containing confidential information concerning the Company, made by me or by any other person, as well as all equipment, tools or materials of any type whatsoever, found in my possession at the time and belonging to the Company. This commitment is an integral part of the Employment Contract between myself and the Company. This contract was signed in two copies, SCM: Yves Le Roux [signature] 2/6/95 [signature] 2/6/95 - ------------------------------------ --------------------------------- Signature Date Signature Date NICHOLAS EFTHYMIOU JEAN-YVES LE ROUX - ------------------------------------ ---------------------------------- Name typed or printed Name typed or printed V.P. Marketing/Procurist R and D Manager - ------------------------------------ ---------------------------------- Title Title 8 SCM MICROSYSTEMS ADDENDUM TO CONTRACT It is agreed upon that SCM and Mr. Le Roux consent that all new product developments derived from Mr. Le Roux's employment at SCM wouldn't come under scrutiny of right infringements from Mr. Le Roux's previous employment. SCM will not be held accountable or liable for any future developments derived from Mr. Le Roux's employment that might infringe on rights or trademarks stemming out of his developments during his previous employment activities. EX-10.18 23 COMMITMENT INSTRUMENT DATED AUGUST 7, 1996 1 EXHIBIT 10.18 FRANCE TELECOM National Contracts Department Research and Development Contracts COMMITMENT INSTRUMENT CONTRACT No. 96 6M 753 NOTIFIED ON AUGUST 7, 1996 Please quote the above number in correspondence RE: Design of an external PCMCIA module (Personal Computer Memory Card International Association) for VIACCESS access control supporting the common interface for DVB decoding. Between: France Telecom, a public utility company governed by the law of July 2, 1990, with headquarters at 6, Place d'Alleray - 75505 PARIS Cedex 15 - registered as follows: No. in the Register of Commerce and Companies: PARIS B 380 129 866 SIRET No.: 380 129 866 23 487 APE Code No.: 642 A Domiciled at 7, Boulevard Romain Rolland - 92128 MONTROUGE Cedex, Hereinafter "France Telecom," represented by Mr. Michel DUPIRE, acting with regular power of attorney as Director of Research and Development and External Partners, or by Mr. Georges FALCOU, his assistant, party of the first part, and the 3 companies, 1) MATRA COMMUNICATION, with headquarters at 50, rue du President Sadate - 29562 QUIMPER Cedex 9 - registered as follows: No. in the Register of Commerce and Companies: QUIMPER B 552 150 724 SIRET No.: 552 150 724 00086 APE Code No.: 322 B Domiciled at rue Jean-Pierre Timbaud - RP No. 26 - 78392 BOIS D'ARCY Cedex, represented by Mr. Roger PRAT, acting with regular power of attorney as Director of the Image Division, 2) SCM MICROSYSTEMS, with headquarters at ARGEO ATHELIA III - Voie ATLAS - 2 13705 LA CIOTAT Cedex - registered as follows: No. in the Register of Commerce and Companies: pending SIRET No.: 401 185 350 00030 APE Code No.: 516 G Domiciled at the place of its headquarters, represented by Mr. Jean-Yves LE ROUX, acting with regular power of attorney as Manager of SCM FRANCE, 3) MATRA MHS, with headquarters at route de Gachet - CP 3008-44087 NANTES Cedex - registered as follows: No. in the Register of Commerce and Companies: NANTES B 315 629 246 SIRET No.: 315 629 246 00028 APE Code No.: 321 B Domiciled at the place of its headquarters, represented by Mr. Michel DESBARD, acting with regular power of attorney as CEO, All the companies act as joint co-contractors, MATRA COMMUNICATION being the "representative." They are hereinafter referred to as "the Awardee," party of the second part, it is agreed as follows: 3 PREAMBLE - SHARED FINANCING CONTRACT France Telecom and the Awardee wish to design an external PCMCIA module for VIACCESS access control supporting the common interface for DVB decoding. The total cost of the work is [*] not including taxes ([*] including all taxes). France Telecom participates financially in this operation under the conditions of this contract (see below article 3). ARTICLE 1 - OBJECT OF THE CONTRACT - The object of this contract is the design of an external PCMCIA module for VIACCESS access control supporting the common interface for DVB decoding. The Awardee pledges to France Telecom to produce the items according to the specifications of the Special Technical Clauses enclosed herewith. MATRA COMMUNICATION, designated as representative, is in charge of the management and punctual performance of the project for France Telecom. ARTICLE 2 - GENERAL CONDITIONS - REFERENCE DOCUMENTS - The items are subject to the clauses of the documents listed below, in decreasing order of priority, which the parties declare to know well: This commitment instrument, and its appendix "Detailed items - Prices - Deadlines," - - Special Administrative Clauses (CCAP Edition of March 1994), enclosed, - - Special Technical Clauses (CCTP Ref.: CCETT/AMS/TCA/114/96/AC, Edition of May 15, 1996) also enclosed herewith, with the summary of the answer of the consortium MATRA COMMUNICATION, SCM MICROSYSTEMS and MATRA MHS referenced IMAGE/CH/TB/SO/1978/960 4517 of May 10, 1996, - - General Clauses and Conditions applicable to the contracts of France Telecom concerning Telecommunications Systems and Equipment (CCCG/SBT, Edition of November 1991). * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 4 ARTICLE 3 - AMOUNT - The amount of this contract, itemized in the appendix, is established as follows:
Participant PRICES NOT VAT PRICES INCL. companies INCL. TAXES TAXES [*] [*] [*] [*]
[ * ] This is a fixed amount. ARTICLE 4 - VAT PAYMENT - The above amount includes Value Added Tax at the rate of 20.6%. VAT payment, applied pursuant to current legislation, is: - - payable by the 3 participating companies. Payment requests (deposits or balance) must mention the requirement to pay VAT. ARTICLE 5 - COST ANALYSIS - The provisions of article 7 of CCCG/SET apply to this contract. ARTICLE 6 - CHARACTER OF THE PRICE - The amount of this contract is firm and non-adjustable. ARTICLE 7 - INDUSTRIAL PROPERTY - 7.1. Industrial property status 7.1.a. Preamble The products arising from this contract will include: - - software supported by a hardware module, including a software module for VIACCESS access control, - - a hardware module developed under the contract, with [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5 [*] The software module for VIACCESS access control is developed based on a core software supplied by France Telecom. [*] are developed under this contract, from existing components manufactured with the own funds of the awardees, or benefitting under previous contract from the D option of CCCG/SET. The other software modules and the hardware module are developed under this contract. France Telecom assures [*]% of financing for these new developments. 7.1.b. Applicable option The provisions of Option B, Article 37.2.1 of CCCG/SET apply to this contract concerning the software module for VIACCESS access control. The provisions of Option C, Article 37.2.1 of CCCG/SET apply, under the conditions defined below, to components [*], to the other software developed under this contract and to the hardware module. 7.2. Licenses The awardees may market freely the products studied, including the access control software module. France Telecom grants hereunder, for the access control software module and for its use in the only product design and the only software version described in the CCTP of the contract, a non-exclusive license without right to sublicense. This license concession is made in consideration of the royalties on sales established below. This license concession does not cover the derivative products possibly studied by the awardees subsequently. France Telecom may use the rights to sublicense to a third party contingent upon the occurrence of at least one of the conditions below: - - Failure of the awardees to supply the modules in industrial stage, Failure is understood as the awardee's inability to deliver the modules to France Telecom, or the inability to cover the growth of the demand of France Telecom, established by registered letter sent by France Telecom to the awardees, whereby such inability is not corrected within a term of 90 days of notification. - - After supply by the awardees, or placement of a firm order by France Telecom with the awardees in the quantity of [*] modules, - - In the framework of a tender for the acquisition of [*] modules, of which half are allocated to one or several awardees. If France Telecom uses its right to sublicense to a third party under conditions more advantageous for the third party than those agreed upon with the awardees, the royalties defined in this contract will * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 6 be reviewed accordingly. 7.3 Commercial use by the awardee: royalties of France Telecom on sales The rate of the royalties payable by the awardees to France Telecom pursuant to Article 37.2.2 of CCCG/SET, which applies to sales of products obtained under the contract or derivative products, but with the exception of sales to the parent company of France Telecom, is established as follows: 7 - - Royalty with a fixed portion of [*] by VIACCESS module hereunder, [*], will be paid to France Telecom by the awardees. This amount includes the royalty owed for the concession of the license mentioned above, - - A royalty of X% of the price of the module derived from the VIACCESS product, not including the VIACCESS control, with a maximum of [*] per module, will be paid to France Telecom by the awardees. Derivative products are understood as PCMCIA modules not including the VIACCESS access control, comprising the common interface for DVB decoder, and including all or part of the results of this design contract. - - The value of x is established as follows: [*] ARTICLE 8 - TIME SCHEDULE FOR IMPLEMENTATION - In this contract, the time schedule is indicated in the Appendix, with possibility of completing the items sooner. These deadlines begin from the day following the notification to the awardee of the signing of the contract by France Telecom. They take into account the fact that the awardee's offices may be closed for vacation. ARTICLE 9 - METHODS OF CONTROL AND IMPLEMENTATION OF THE CONTRACT 9.1. Verifications The authority in charge of the verification of the contract is CCETT (Common Center for studies in telebroadcast and telecommunications). The time available to France Telecom for verifications are described below. Each lot will be subject to pre-verification of the first copies supplied, and verifications of the entire lot. France Telecom has one month to complete pre-verifications. This time is included in the term of the contract. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 8 Each lot will be verified after the pre-verification has given positive results. For the verification of each lot under the conditions established in the CCTP of the contract, France Telecom has a term of one month from the presentation of the lot. 9.2. Modification during implementation By derogation from Article 22 of CCCG/SET, any modification causing a change in price must be the object of a rider. In case of minor technical modification not affecting prices, the parties agreed to be represented by: - - Mrs. MONMAUR for France Telecom, - - Mr. HERNANDEZ for the awardee. ARTICLE 10 - PAYMENT UNDER THE CONTRACT - 10.1 Down payment and balance Payments will be made for each company according to the following accounting schedule:
MATRA % SCM % MHS % ------- ----- ----- [*] [*] [*] [*]
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 10.2. Methods Invoices and statements must be issued to France Telecom (SNM/CRD) in one original and two copies. They must be sent to the following address: France Telecom SNM/CRD 38, rue du General Leclerc 92131 ISSY-LES-MOULINEAUX CEDEX The department in charge of making the payments is the Department of Programs and Finances, Accounting Office, Group C1-Operational Accounting - 6, Place d'Alleray - 75015 PARIS Cedex 15. 10.3 Oppositions Oppositions arising from assignments of receivables or liens must be sent to the department in charge of payment mentioned in Article 10.2 above. ARTICLE 11 - PAYMENT TERMS - The provisions concerning payment terms in Article 14 of CCG/SET are replaced by the following: Payment of invoices for deposits, including deposits for orders The awardee indicates on its invoice the date on which payment must be made. This date is at the earliest equal to T + 60 days, T being the date of issuance of the invoice by the supplier, which may not be prior to the cause of the invoice (notification of contract, delivery, production of the items). The awardee sends the invoice within a maximum term of 5 business days after issuance, as evidenced by the postmark. If this term is exceeded, the awardee is informed and, unless otherwise agreed with the latter, the beginning of the 60 day payment term is the date of receipt of the invoice by France Telecom. Payment of the balance For the payment of the balance, the awardee indicates in its invoice the date on which payment must take place. This date is equal to T + 90 days, T being the issuance date of the invoice which may not be prior to the reason for the issuance of the invoice (receipt of the items). Penalties for late payment Penalties for late payment will be paid at the request of the awardee. They are calculated from the first day of arrears until the day of the actual credit to the awardee's account at a rate equal to one 10 and a half the legal interest rate. The rate of legal interest retained is the rate valid on the day of issuance of the invoice. 11 ARTICLE 12 COMMITMENT CONCERNING SELLING PRICES TO FRANCE TELECOM - 12.1. Commitment concerning selling target prices to the France Telecom group Concerning the sales to one of the companies of the France Telecom group, the awardees pledge to charge the ceiling prices (PVP0) established below and the economic conditions valid as of October 1995, not including the royalties owed to France Telecom under the above clauses. PVP0: maximum unit price not including taxes as of October, 1995 [*] 12.2. Penalty [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 12 The awardees pledge that the expected contractual performances will be satisfactory. For this reason any possible modifications in the definition of the product that become necessary in order to satisfy the performance of the contractual functional specifications, will be at the expense of the awardees, or will lead to the application of the maximum penalties for non-compliance with price commitments. The amount of the penalty P is limited to [*]% of the amount of the contract. ARTICLE 13 - WARRANTY - Under the conditions established in Article 28 of CCCG/SET, the term of the technical warranty of the hardware and software is 12 months. ARTICLE 14 - FIRM BID - The awardees guarantee, for 10 years from the receipt of the contract, corrective or progressive maintenance of the software and hardware studied. If not covered by the technical warranty, these services will be rendered under conditions to be defined by mutual agreement of the parties. ARTICLE 15 - DELAY PENALTIES - The penalties applied will be equal to 0.05% of the amount V, by calendar day of delay, counted between the contractual end of the lot and the presentation for acceptance of the items. A delay of more than 6 months entitles France Telecom to cancel the contract under the conditions of Article 42.3 of CCCG/SET. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 13 The representative of each contracting party, undersigned: - - States under penalty of automatic cancellation of the contract or its being taken over by the state, for its exclusive fault (or for the exclusive fault of the company on whose behalf he intervenes) that he is not concerned (or that said company is not concerned) by the prohibition arising from Article 50 of Law No. 52-401 of April 14, 1952, amended by Article 56 of Law No. 78-753 of July 17, 1978, - - Declares on his honor that the work will be done by regular full-time employees as mandated by Articles L.620-3, L.143-3 and L.143-5 of the Labor Code.
The representative The Contractor MATRA COMMUNICATION SCM MICROSYSTEMS Issued in Bois d'Arcy on July 25, 1996 Issued in La Ciotat on July 25, 1996 Read and accepted Read and accepted (written in hand) (written in hand) [Handwritten:] Read and accepted [Handwritten:] Read and accepted Signature Signature [Name] [Name] Director of the Image Division Director of SCM France Signature Signature (Name and title of signatary) (Name and title of signatary) The Contractor France Telecom MATRA MHS Issued in Montrouge on Issued in Nantes on July 29, 1996 8/1/96 Read and accepted Read and accepted (written in hand) (written in hand) [Handwritten:] Read and accepted [Handwritten:] Read and accepted Michel DESBARD Georges FALCOU CEO Assistant Director MATRA MHS of Research and Dev. Signature and Foreign Partnerships (Name and title of signatary) DRAWN UP IN FOUR COPIES
14 APPENDIX TO CONTRACT NO. 96 6M 753 "Detailed Price - Terms - Items"
LOTS DESCRIPTION MATRA SCM MATRA MHS Total amount by Completion of OF THE COMMUNICATION MICROSYSTEMS (Contractor) lot contractual ITEMS (Representative)F/not (Contractor) F/not including F/not including performance (in including taxes F/not including taxes taxes taxes months) ----- ----------- --------------------- --------------------- --------------- --------------- ---------------- [*] [*] [*] [*] [*] [*] [*]
To: Date of notification to the awardees of the signing of the contract by France Telecom * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 15 FRANCE TELECOM National Department of Contracts Research and Development Contracts SPECIAL ADMINISTRATIVE CLAUSES APPLICABLE TO DESIGN CONTRACTS Edition of March 1994 16 TITLE I - PERFORMANCE OF THE CONTRACT ARTICLE 1 - PROGRESS REPORTS Subject to the special provisions contained in the commitment instrument the awardee must submit every three months a detailed report describing the following aspects concerning the contract and, if necessary, the project: - services performed (volumes, amounts, results obtained) since the notification of the contract or since the preceding report, - progress of the contract, - detailed planning of the tasks to be continued or performed, - follow-up of significant indicators during all the stages of the implementation of the contract or project to which the contract contributes, - the name of the project manager. Periodic reports must be sent to the technical director of the contract or to the file manager of DRI. Copy of the cover letter of these documents must be sent at the same time by the awardee to the National Department of Contracts - - Research and Development Contracts (SNM/DRD): 38, rue du General Leclerc - 92131 ISSY-LES-MOULINEAUX CEDEX. A final synthesis report will be delivered by the awardee at the same time as the last invoice under the contract. It will specify in particular for software the significant data of the programs developed (language: number of code lines; size, number and volume of the programs). The procedure is the same for the final synthesis report except that it is sent by registered letter return receipt requested and that the last invoice sent to SNM/CRD is accompanied by a copy of the report. ARTICLE 2 - TERMS The only contractual terms, implying an obligation to show results are those mentioned as such in the commitment instrument. The terms mentioned in the other documents referred to in the contract, especially CCTP, are mentioned as an indication, only to facilitate following up the progress of the work. Extensions of the term or delivery interruptions may be agreed upon pursuant to the provisions of Article 15.3 of CCCG/SET. The request referred to in paragraph 15.3.3 of this Article must be sent to SNM/CRD. 17 Under the provisions of Article 16 of CCCG/SET, the formula to be applied for the calculation of penalties enforced in the event of late performance is the following: P = V x R ----- 2000 where the parameters P, V and R have the same definition as in Article 16.1 CCCG/SET. ARTICLE 3 - SUBCONTRACTING In the event of joint contracting or sub-contracting by several entities, the company designated as representative is responsible toward France Telecom for the performance and punctual completion of the project. ARTICLE 4 - DEFAULT PENALTIES In the event that the contract is cancelled by the fault of the awardee as set forth in Article 42.3 CCCG/SET, and pursuant to Article 41 CCCG/SET, France Telecom reserves the right to apply to the awardee default penalty in a maximum amount equal to 50% of the amounts paid under this contract. ARTICLE 5 - CANCELLATION In addition to the "other cases of cancellation" set forth in Article 42.4 CCCG/SET, France Telecom may cancel the contract in the event of significant changes in capital structure, organization of the group or identity of the majority shareholder of the awardee. In this case the awardee shall receive the amount due for items already delivered, in exchange for results obtained. 18 TITLE II - VERIFICATION OF THE ITEMS ARTICLE 6 - VERIFICATION OPERATIONS The items hereunder are subject to verifications under the conditions possibly set forth in CCTP and in their absence in Chapter 5 CCCG/SET. The authority in charge of verification is either the Centre National d'Etudes des Telecommunications (CNET), or the entity indicated in the commitment instrument. The awardee must notify the technical director of the contract, by registered letter with return receipt requested about the date at which the items will be presented for such verifications. A copy of the notice of presentation must be sent at the same time to the project manager of DRI and to the SNM/CRD Department. The date of receipt of the presentation notice, or on the presentation date indicated in such notice, if later, has a twofold effect: - As date of delivery of the items, to be used for calculation of delay penalties, if any, - As starting date of the term(s) available to France Telecom to make the verifications and notify its decision: * This term is two months, in the absence of special provisions set forth in the commitment instrument. It replaces the terms set forth in Article 26.2 CCCG/SET, * However, concerning contracts including verifications of correct operation (VABF) and or a verification of regular service (VSR), the terms available to France Telecom for such verifications are those appearing in Article 27 CCCG/SET, in the absence of special contractual provisions specified in instrument. TITLE III - PAYMENTS ARTICLE 7 - DEPOSITS Deposits are paid at the request of the awardee. A first deposit may be paid when the contract is notified. In the absence of exceptions set forth in the commitment instrument, this deposit is 5% of the total price of the items to be produced in the first twelve months after notification. The following deposits will be paid, after France Telecom accepts the service rendered, and taking into the consideration the periodic statements referred to in Article 1 above. Except if otherwise set forth in the commitment instrument, the total amount of the deposits may 19 not exceed 80% of the amount of the contract. If the latter contains independent contractual lots, each of them may be subject to payment of a deposit within the limit of 80% of the amount; acceptance by France Telecom of all items in such lots allows total payment of the lot. An independent contractual lot is herein understood as that mentioned in the commitment instrument with its object, amount and contractual delivery term. ARTICLE 8 - BALANCE After receipt of the items under the contract, the awardee shall send a report for the balance of the contract to SNM/CRD. In the event of a dispute concerning the items produced, a balance statement will be sent to he awardee, which may object within one month after receipt of such statement. After this term, it shall be considered that the awardee accepted it. ARTICLE 9 - PAYMENTS TO THE CONTRACTORS OR SUBCONTRACTORS PAID DIRECTLY As a complement to article 3.2 CCCG/SET, it is specified that only service suppliers which executed a performance contract with the awardee of the contract may be considered subcontractors. In the event that the contract does not regulate them, payments to individual contractors shall be made to a single account, and payments to joint contractors to separate accounts. Concerning contractors and subcontractors paid directly, deposits and statements shall be itemized in a number of lots equal to the number of persons to be paid separately. The representative is the only party authorized to submit requests for deposits and statements for itself and co-contractors: only claims issued or transmitted by it shall be accepted. In the event of subcontracting with the direct payment of the subcontractor, the awardee is the only party authorized to submit requests for deposits and statements concerning the subcontracted items: only claims issued or transmitted by it shall be accepted. In the event of co-contracting, requests for deposits and statements concerning the subcontracted items must be submitted by the subcontracting co-contractor and transmitted by the representative. PAYMENTS TO SUBCONTRACTORS Payments owed to a subcontractor are made based on backup documents accepted by the awardee as set forth in this article, and transmitted by it or by the representative to France Telecom. Upon receipt of the documents referred to in the preceding paragraph, France Telecom shall notify directly the subcontractor about the receipt date indicating the amounts accepted as payable by the 20 awardee. The awardee shall have a term of fifteen days from receipt of the backup documents based on which direct payments must be made, to accept them or to notify the subcontractor of its motivated refusal. If the awardee does not answer within this term, it shall be considered that it accepted. In the event of default of the awardee which did not send a motivated refusal, nor transmitted to Telecom the request for deposit or statement within 15 days, the subcontractor shall send directly a copy of these documents to France Telecom (SNM/CRD). It shall enclose a copy of the acknowledgment of receipt for its shipment of backup documents to the awardee. France Telecom shall immediately request the awardee to prove within fifteen days that it sent a motivated refusal to the subcontractor. As soon as it becomes aware of the receipt of this request, France Telecom shall inform the subcontractor. At the end of this term, if the awardee cannot bring proof of its motivated refusal, France Telecom shall have the terms set forth in Article 14, CCCG/SET to pay the amounts owed to the subcontractor. 21 TITLE IV - MISCELLANEOUS PROVISIONS ARTICLE 10 - COMMUNICATIONS AND PUBLICATIONS 10.1. Contracts referring to option A, Article 37.2.1 CCCG/SET The work referred to in the contract and the new materials obtained from such work may not be communicated or published in any manner whatsoever without prior written agreement of France Telecom concerning the project submitted to it. 10.2. Contracts referring to option B, Article 37.2.1 CCCG/SET The provisions of paragraph 10.1 apply as long as France Telecom did not grant an exploitation or non-exclusive use license. Subsequently they shall continue to apply unless France Telecom decides otherwise. 10.3. Contracts referring to options C and D, Article 37.2.1 CCCG/SET 10.3.1. Until the receipt of the contract, any communication concerning the work covered by the contract must be submitted to the prior agreement of France Telecom. 10.3.2. After receipt of the contract, the awardee shall be free to make communications but only on the results of the contract. 10.4. - Methods Any communication or publication made on behalf of the awardee of the contract under the conditions set forth in Article 10.1, 10.2 and 10.3 above must obtain the agreement of France Telecom to mention the latter's contribution in these actions. ARTICLE 11 - OWNERSHIP OF MATERIALS PURCHASED AND PRODUCED 11.1. Materials purchased The materials and software purchased by France Telecom for the implementation of the contract remain its property. Materials purchased by the awardee for the implementation of the contract are property of France Telecom if financed under the contract. 11.2. Materials produced and software developed Unless otherwise set forth in the commitment instrument, or if not governed by CCTP, the materials, modes or prototypes produced under the contract shall become property of France Telecom, which may either receive them or entrust them to the awardee for the continuation of the studies or industrialization, whereby the awardee assumes the responsibility of depository. Software included in these materials, models or prototypes or necessary for their operation, shall be made available to France Telecom under the same conditions. 22 When the contract refers to the specific development of software, a copy of the software developed shall be made available to France Telecom under the same conditions mentioned above. ARTICLE 12 - INDUSTRIAL PROPERTY The provisions of Chapter VII CCCG/SET (industrial or intellectual property clauses) apply to the contract, and therefore the various declarations or communications of documents and information referred to in this chapter shall be sent to France Telecom DRI/SEDE-Industrial Property group - 7, Boulevard Romain Rolland - 92123 MONTROUGE Cedex with copy to the ... department of "Patents and Invention Exploitation" (BVI) - 38/40, rue du General Leclerc - 92131 ISSY-LES-MOULINBAUX Cedex In the event of assignment or transfer of rights or know-how concerning the results obtained form the contract, the awardee must preserve the rights of France Telecom on such results: it must include any clause useful for this purpose in the assignment transfer or know-how transfer contract. The awardee pledges to cause its subcontractor(s) if any, to comply with industrial property clauses applicable to this contract. ARTICLE 13 - ROYALTY OF FRANCE TELECOM ON SALE 13.1. Application conditions The provisions of Article 37.2.2. of CCCG/SET, which constitute a contractual obligation hereunder, apply to the contract provided the first sale contract of a product obtained by using the results obtained under the contract was executed by the awardee less than 10 years after the receipt of the items under the contract. The awardee must inform France Telecom within one month about the execution of the first sale contact. Subsequently, it must send to it, in the first month of each calendar year, a statement, even if containing nothing, of the sale contracts executed during the preceding year and the amounts to be taken into account during such period for the calculation of the royalty owed. Sales shall be itemized separating: - those made to the parent company of France Telecom, - to the affiliates of the France Telecom group, - to third parties. The awardee must offer the qualified representative of France Telecom facilities to verify the exactness of the statements sent. If the awardee does not send said statements within the established terms, it shall pay a delay penalty on the amounts owed, calculated at legal interest rate. The provisions of this Article apply to any co-contractor, designated or not, as representative. 23 France Telecom reserves the possibility, concerning individual co-contractors in the event of default by one of them, to question the other contractors and in particular the representative. 13.2 Assignment of industrial of intellectual property rights In the event that the awardee assigns its industrial or intellectual rights, the provisions of Article 37.2.1 CCCG/SET, options C and D, paragraph 4, shall apply. The awardee must communicate to France Telecom the amount of the assignment, if not specified in the contract. If the contract established the methods of the assignment of industrial or intellectual property rights, the awardee must take all measures to preserve in full the rights of France Telecom, regardless of the consideration received for the assignment. 13.3 Know-how transfer If the awardee transfers know-how or part of the know-how arising from this contract to any industrialist, the contract for assignment of know-how must indicate that, in the event of sale of all or part of the products manufactured using the results of the contract, the awardee shall owe France Telecom a royalty calculated under the same conditions as the royalty owed by the awardee pursuant to the provisions of Article 37.2.2 CCCG/SET. 13.4 Licenses and sublicenses If the awardee sells, under licenses and/or sublicenses, of all or part of the products manufactured using the results of the contract, the awardee is responsible towards France Telecom: - to declare the income obtained by it through such licenses and or sublicenses, including income arising from sales of such licenses and/or sublicenses sold to the awardee, - payment to France Telecom of royalties on income received under such licenses and or sublicenses. 13.5 Subcontracting Pursuant to the provisions of 3.2.2.1 CCCG/SET, in its request for acceptance and approval of the subcontractor, the awardee must specify the obligations entrusted to the subcontractor that would allow paying royalties to France Telecom on the sales made by the latter of all or part of the products using the results of the contract. The absence of these elements in such a request, given if the request is accepted, does not exempt the awardee from the aforementioned obligation. 13.6 Payment term The amounts owed shall be paid within 30 days from the receipt of the payment issued by France Telecom. NOTE: The obligations arising from the application of this article shall survive even if, after the receipt of the contract, the awardee transfers its activities (related to the object of the contract) to another 24 company. Such transfer must be immediately communicated in writing to France Telecom within the next month. France Telecom shall have the choice: - either to require the awardee to continue with the obligations arising from the contract, - or to release the awardee from the obligation arising from the contract: o by signing a contract between the awardee and the transferee, covering the same obligations, o by commercial agreement with France Telecom. 25 CONTRACT No. 96 6M 753 * * * * SPECIAL TECHNICAL CONDITIONS OF CONTRACT 26 May 15, 1996 Reference: CCETT/AMS/TCA/114/96/AC SPECIAL TECHNICAL CONDITIONS OF CONTRACT "Development of an external PCMCIA module for VIACCESS access control which supports the DVB decoder common interface." 1. SUBJECT OF THE CONTRACT This set of Special Technical Conditions of Contract concerns the design of an external PCMCIA module for VIACCESS(1) access control which supports the DVB decoder common interface. This document refers to the technical conditions of consultation no. 95 PE 3060. Its purpose is to furnish precise information regarding the various functionalities required. It indicates the departures from the technical conditions of the consultation. 2. CONTRACTUAL DOCUMENTS Awardees shall be held to accomplish the services set out in the Contract in compliance with the following technical reference documents in descending order of priority: a. This CCTP: CCETT/AMS/TCA/114/96/AC; b. The technical conditions of consultation (CCTC), Appendix D of the referenced consultation file FT/DRI/SEDE/1SD/95/331/HC of 08/31/95; c. The synthesis of the response of the Consortium (MATRA Communication, SCM and MATRA MHS) to the referenced consultation: IMAGE/CH/TB/SO/1978/960-4517. Awardees shall undertake to realize the VIACCESS module [*] according to the solutions and choices presented in that latter document (c) for which they shall be solely responsible. The constraints which result from that document shall not be opposable to the obligations which result from documents (a) and (b) cited above. 3. REFERENCE DOCUMENTS Awardees shall be held to comply with the following documents: [1] PCMCIA PC Card Standard - February 1995, Personal Computer Memory Card International Association; [2] prEN50221, Common Interface Specification for Conditional Access and other Digital Video Broadcasting Decoder Applications, version CENELEC, April 1996, Draft D or more recent; * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. - -------- (1) New name for the Eurocrypt access control system for MPEG2-DVB type signals. 27 [3] Information Technology, Generic coding of moving pictures and associated audio: Systems Recommendation H.222.0 ISO/IEC 13818-1 DIS. ISO/IEC JTC1/SC79/WG11 N0801, November 13, 1994 [4] prETS 300 468: Digital broadcasting systems for television, sound and data services; specification for Service Information (SI) in Digital Broadcasting (DVB) Systems, version of February, 1996, Final Draft; ETR 211: Guidelines on implementation and usage of service information, February 1996. [5] ISO 7816-1, 2, 3: card couplers, 1989 Version plus Amendment 2 of ISO 7816 (1994), management. [6] Access Control System for Digital Broadcasting Systems, Software Interface Specification, Version 0.74. [7] UTE 90 007: "Conditional Access System for Digital Broadcast Systems. [8] Implementation Guide for the DVB Common Interface Specification. [9] Implementation of the VIACCESS system within the framework of MPEG2-DVB specifications. AMS/05/102/95/VL (Version 1.2 or later) [10] Technical Conditions of Consultation, Development of an integrated MPEG2 decoding system (System, Video, Audio) with video overlay in a PC environment. [11] European directives 89/336/EEC and 92/31/EEC. [12] Digital TV Assistance Service (TMS/THO/366/95/BA, rev. 1.6). [13] France Telecom private descriptor coding (AMS/MPS/416/95/FG). 4. SPECIFIC INFORMATION ON THE GENERAL SPECIFICATIONS In this section are to be found the general operational specifications and the performance to be achieved for the [*]. The specification and performance restrictions of the [*] are listed in the document (c: Section 5), (intermediate step in the fulfillment, lot 1). The module created shall be able to be connected to PCMCIA interfaces in the computer world (PC's or others). Such a connection must not degrade either the module itself or the receiving equip ment. 4.1 PHYSICAL INTERFACE These functions are to be installed on a card of PCMCIA extended Type II format. The module developed shall comply with the mechanical properties set out in PC card standard [1]. 4.2 TSI (TRANSPORT STREAM INTERFACE) 4.2.1 ELECTRICAL PROPERTIES This interface is defined in document prEN50221 [2]. It corresponds to the transport layer of the MPEG-2 system. The carried data are organized into transport packets of 188 or 204 bytes, including the 16 Reed-Solomon bytes processed upstream. The module shall be able to process both data * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 28 formats, taking the associated control signals into account. If the terminal should cause a break in the data stream within a packet and indicate such by means of a MIVAL envelope signal, the VIACCESS module must process same without errors and limit the jitter in the output signal, in conformity with the rules of specification document prEN50221. [*] 4.3 CI (COMMAND INTERFACE) 4.3.1 ELECTRICAL PROPERTIES The management of this interface shall conform to the electrical properties and timing stipulated in the PC Card standard (section 4) (1). Only an 8 bit parallel bidirectional bus (D0-D7) associating the various control signals shall be used. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 29 This interface is used in the memory mode during the configuration phase of the module described in the PC Card standard, then in I/O mode in the utilization phase, according to the DVB common interface specifications. Appendix A of the DVB common interface specification sets out the electrical and physical properties which are to be implanted during development. Module input voltage shall be 5 V. During data transfer, the rate supported in read or write mode shall be at least 3.5 Mbit/sec. 4.3.2 EXCHANGE PROTOCOL [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 30 4.4 DEMULTIPLEXING The demultiplexing component must analyze the PSI and SI tables necessary for the essential access control functions and to construct a rich man-machine dialog from the various SI tables. It must also process the private stream of the various programs viewed, in particular to supply to the user the information for access to future programs (private VIACCESS descriptors). The component used in the module must be the 16 PID demultiplexer. 4.5 DESCRAMBLER Program providers may broadcast their programs in clear or in scrambled mode. The scrambling logarithm is defined by DVB. [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 31 the BCM's). [*] 4.6 PROGRESSIVE SCRAMBLING The progressive scrambling procedure is described in the document [9]. This functionality enables the program provider to present a broadcast in a degraded mode--alternatively scrambled and in clear, for a period of several minutes, so as to suggest buying the program to the user. The conditional access module shall process this functionality with an ECM. 4.7 CONDITIONAL ACCESS MESSAGING The VIACCESS access control system specifications are described in document UTE 90 007: "Systeme d'acces conditionnel pour systemes de diffusion numerique [7]" [Conditional Access Control System for Digital Broadcast Systems]. The document "Mise en oeuvre du systeme VIACCESS dans the cadre des specifications MPEG-2- DVB" [9] [Implementation of the VIACCESS System within the Framework of the MPEG-2-DVB Specifications] stipulates the contents of certain private data fields (CA_descriptor, access control message formats, etc.). The module must process an ECM broadcast rate of between 100 and 500 ms, support a renewal of control words of between 5 and 10 seconds, to the extent that the processing time required by the security module to consecutively calculate 8 ECM's does not exceed 4 seconds. The notion of phase (lifespan of a CW) is directly linked to the component. Each elementary stream has its own tempo and its own instants of CW change. The maximum stream rate of EMM's broadcast is 500 Kbit/sec. The module must be capable of filtering and extracting all the messages addressed to the user [from] among all the EEM's broadcast according to the rules in effect in the VIACCESS access control system. The module shall accomplish a "hardware" filtering of the messages received as a function of the type of EEM (toggle bit filtering the for EMM-GA's and EMM-GH's, unique address (UA) filtering for EMM-U's or shared address (SA) for EMM-S's). It shall be capable of receiving the four types of EMM's simultaneously. [*] 4.8 ACCESS CONTROL MODULE SOFTWARE (ACS) France Telecom shall supply a software kernel for the ACS module managing all the functions (ECM processing, PMM consultation, enumeration of consumption [usage counter/log], etc.) linked to the VIACCESS conditional access [6]. The size of the code and size of the data are furnished in the specifications document (page 6). This kernel software conforms to documents [7] and [9]. It meets * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 32 the functional requirements expressed in documents (a), (b) and (c) and [1] through [13]. Awardees shall commit themselves to not preserve the source code of this software beyond the date of closure of the contract. Within the framework of this development, the manufacturing firm shall develop a software layer for calling the entry primitives of this kernel and adapting the messages linked to the man/machine dialog or to a modem toward the objects defined in the common interface specification. The CCETT will answer any questions concerning the problems that the manufacturing firm might encounter during the implementation of this software. Any modifications to this software that the manufacturing firm may deem necessary shall be at its expense. However, possible functional modifications rendered necessary in order to satisfy the requirements expressed in documents (a), (b) and (c) and [1] through [13] shall be at France Telecom's expense. 4.9 CARD-MEMORY INTERFACE The interface card shall accomplish the function of transferring card orders between the access control software module (ACS) and the security module PC2. This shall be a dedicated function. 33 The card memory interface must comply with the ISO 7816 specifications [5], using the T-0 protocol. The module must accept the components of the PC2 E-PROM family, using a programming voltage of 5 V (VPP connected). Data exchanges at the I/O contact may be accomplished at 115 Kbits if the memory card so requests in its reply to the request to reset to zero. In this framework, the PTS procedure shall be incorporated. The physical support used by the PC2 security component shall be a format 7816 plastic card. 4.10 VIACCESS ASSISTANCE DATA These are contained in the private descriptors of the SI DVB stream and enable a module to reply to the host on the conditions of access to future events. The precise use of these data shall be discussed at the beginning of the contract. See documents [12] and [13]. 4.11 ENUMERATION OF CONSUMPTION [usage] [*] The types of bidirectional communication, via modem or cable return route, may be requested according to the list proposed in the common interface specification, Section 3.1.1. [or possibly 8.1.1]. The specific functions (error correction, return management, P1.6., etc.) associated with the modem link used shall be processed by the receiver. The modules shall log on to this resource in function of the possibilities offered by the receiver. To date, if a receiver is used on the national [French] territory, it may offer two types of resource: a V23 modem (1200/75 bits/sec) or a private type to identify a V23 bis modem. Eventually, modem resources V27 ter and V29 may be offered by receivers. 4.12 CAM_LOCK FUNCTION This function enables a terminal to verify that the connected module is authorized to process the signal received by the terminal. Recognition of the module by the terminal is to be provided for. Such may be accomplished by the loading in the terminal of a specific program contained in the module. This procedure shall use private objects on the CI interface and shall be specified at the beginning of the contract. 4.13 PCMCIA AUTHENTIFICATION MODULE - SECURITY MODULE The PCMCIA authentification module-security module is introduced so as to enable linking the descrambler and the PC2 card. It is required in the framework of the contract to implant reciprocal PC2 card-module authentification according to a plan using public key cryptography which shall be communicated by the CCETT as soon as possible. In order to assist the development, the CCETT undertakes to supply the software kernel in ANSI C and/or in assembler (80C51 family) implementing the calculations to be initiated by the module. The CCETT will answer any questions concerning the problems that the manufacturing firm might encounter during the implementation of this software. All constraints imposed (due to the environment chosen) by the manufacturing firm must be mentioned to the CCETT before T0 + 1 month so as to facilitate the implementation of this software. Such constraints must not lead to a diminution in performance of the calculation kernel. The manufacturing firms may request, at France Telecom's expense, any modifications of the software deemed necessary to satisfy the requirements expressed in * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 34 documents (a), (b) and (c) and [1] through (13]. 4.14 DOWNLOADING OF THE SOFTWARE For the needs of development and tests, software downloading facilities shall be specified at the beginning of the contract. A highly secure protocol shall be discussed between the CCETT and the manufacturing firm. This functionality shall be validated or not in the beginning of the life of the module, but may not be used for other purposes during the utilization phase. 4.15 IDENTIFICATION OF THE MODULE A permanent marking enabling identification of the module is required on all modules supplied under this contract (inscription of the "VIACCESS" logo, version number, series number to be specified). 35 5. PROGRESSION OF THE CONTRACT The services required break down into two lots: - LOT 1: - definition of the functional and detailed specifications of the hardware and software, including the options (downloading, modem dialog); - test book; - development of[*] - creation of satellite-borne software and tests of the whole; - [*] - LOT 2: - test book - development of [*] - porting and creation of satellite-borne software linked to the interfaces of that new component and tests of the whole; - [*] 6. CONTROL OPERATIONS The verification operations shall comprise two phases: - pre-verification which shall consist in verifying the design services for lots 1 and 2; - verification of the modules supplied under each lot. 6.1 METHODS OF CONTROL All of the functionalities described above shall be tested separately and within the framework of actual use. The tests conducted shall be described in a detailed fashion in the test book proposed by the awardees and approved by France Telecom. The basic principle is that it shall be up to the awardees to prove a functioning which complies with the specifications. The control operations do not have the objective of debugging the supplied material. France Telecom reserves the right to reject a[ny given] control without having to perform the entirety of the tests foreseen. Without either France Telecom's written approval or its request, awardees shall not make any alterations in the supplied material during a control operation. The various versions used shall be listed and preserved by the awardees. They shall be re-implantable at any time upon request of either France Telecom or the awardees. The pre-verification operations shall be conducted on the awardee's premises. The test means developed or supplied by the awardees shall be put at France Telecom's disposition according to rules to be established and stipulated in the test book, prior to the realization of the pre-series of 50 units for each of the lots. The verification operations shall be explicitly written down in the test book. Their objective shall be to verify the proper functioning of the various accomplished items supplied under lots 1 and 2. 6.2 ENVIRONMENTAL BEHAVIOR The module shall comply with the European standards in effect in order to obtain the mandatory "CE" label. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 36 For such, it must comply with European directives 89/336/EEC and 92/31/EEC: - limited electromagnetic disturbances; - adequate level of intrinsic immunity to electromagnetic disturbances and electrostatic discharges. Awardees undertake to present the certificates issued by the specialized organizations having authorized use of the "CE" label. Moreover, it [the module] must also comply with the operational conditions set out in the PC Card Standard specifications, volume 3 (Physical Specifications) (mechanical properties, multiple insertions, behavior at ambient temperature and humidity conditions). Test reports shall be furnished to France Telecom upon request. 37 6.3 TEST TOOLS During the development phase, the awardees must supply the proof that they have available to them the testing tools which will enable verification of the ensemble of functionalities prior to presentation of the products to France Telecom for acceptance. France Telecom will not make available to awardees the testing tools it has developed for its own needs, such not being a part of this contract. However, such may possibly be negotiated in the course thereof. 6.4 CONTRACT LANDMARKS - Lot 1: [*] - Lot 2: [*] 6.5 DOCUMENTATION The documentation shall be supplied in French in hard copy and in electronic files (Word 6). It shall comprise in particular: - the external [user] specifications files of the hardware, - the external [user] specifications files of the software, - the cahiers de recette (pre-verification and verification). The industrial file shall comprise in particular: - the fabrication files, schematics, nomenclature, - the software and hardware validation files, - the source code of the software developed or modified. This industrial file shall be supplied only if France Telecom makes use of its option to sub-license a third party according to the conditions cited in the Industrial Property Section - applicable options of the awarded contract. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 38 7. MONITORING OF THE PROGRESSION OF THE CONTRACT IMPLEMENTATION The awardees shall draw up and present the general project schedule. This general schedule shall consist of a collection of documents which clearly outline: - the tasks and operations involved in the realization of the various items to be supplied under the contract; - the services to be rendered by the various project participants and their interlocutors (the departments of France Telecom concerned by the project, represented by the Technical Contract Representative, the awardee's teams, the co-contractors and sub-contractors are examples of "participants"); - the logistics, infrastructure or environment and supplies procurement tasks; - the activities of testing, trials and durability verification of the performance objectives; - the activities of quality assurance, control and approval; - the logical sequencing of these elements; - the identified phases of development, such being in compliance with the development and quality plans; 39 - the key points of the project (organizational and decisional techniques); - the critical points of the technical strategy adopted; - the project tasks highly sensitive with respect to the final result, especially in the matter of timing; - the provisions implemented within the context of the prevention of identified risks. This general plan and schedule is to be established by the titular agent in cooperation with the various participants in the project in order that its content may be validated by them. Acceptance of the schedule by the participants will thus engage them to comply therewith within the limits of the contractual commitments. The level of detail of the schedule is to be defined by mutual agreement among the participants in order to allow control of progress and impart the visibility expected by France Telecom. On the one hand, the objective of the general plan is not to replace the detailed scheduling of each participant and, on the other hand, the scheduling of each participant may not substitute for or go against the general plan, which shall constitute the sole reference for the project within the limits of compliance with contractual obligations. The titular agent shall ensure that the general plan remains valid for each participant in the project. Resource management shall not be governed by the general plan, but rather the detailed plans and schedules of each participant. Each participant shall designate a planning correspondent, duly authorized to represent him, who shall be the interface with the planning manager. Such planning correspondent shall have as a mission to: - report regularly on the state of progress of the tasks the participant he represents is responsible for; - make known any element of a nature as to necessitate a modification of the general plan; - guarantee the coherence with the general plan of the eventual detailed schedule implemented within the participant's establishment; The general plan shall be presented and commented upon at each work progress meeting and shall reflect the progress of the project. The keeping up to date of this document shall consist of only two sorts of operation: - the updating of progress which, within the framework of regular follow-up on the project, shall consist of recording at least once a month the tasks terminated and updating the duration of the tasks under way; - the updating of the plan which, in exceptional conditions, may necessitate revision of the initial work of scheduling when the plan has become obsolete or unusable owing to serious perturbing events (addition, elimination or modification of tasks). Such updates, as with the initial plan, shall require the participation of a representative of each participant in the project. Each update shall also be signed off on by each project participant. The titular representative shall systematically distribute a copy of each new edition of the general plan to each participant. Each new edition of the plan shall be accompanied by a document which presents and justifies the changes from the preceding edition. A procedure shall be implemented for the distribution of minor updates not requiring a new edition. A procedure shall be implemented for the regular gathering of information on progress which each participant shall furnish to the planning manager. 40 Monthly and quarterly progress reports shall refer to the current edition of this document. By its set format (PERT network, e.g.), the planning document shall display for each task: - its precise label; - its effective duration (expressed in business days, weeks or months); - its total margin [time overallowance] and free margin [overallowance remaining] (expressed in business days); - if necessary, its implementation calendar (the calendar for each task is the sum of the working days and non-working days in the period in which it can be accomplished); - its estimated workload (expressed in man-days); - its logical dependency links with the other project tasks; - its projected beginning and ending dates (ddmmyy); - its current status (a task is either terminated, in course, or not yet begun); - possibly, its actual beginning date and the time remaining (for tasks in course); - possibly, its actual beginning and ending dates (for tasks terminated). Lists of tasks (for example, sorted by persons in charge) as well as representations of schedules in the form of Gantt graphs (bar graph schedules) may be requested. 41 8. DESIGNATION OF LEAD TECHNICIANS [engineers] For France Telecom, the lead technician shall be Mr. Andre CODET (CCETT/AMS/TCA); For the titular agent, the technical representative of MATRA Communication is Mr. Charles HERNANDEZ. 42 MATRA [LOGO] COMMUNICATION VIACCESS SYNTHESIS OF THE [ILLEG] CONSULTATION MATRA [ILLEG] 43 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/960-4517 COMMUNICATION - 2 -
CONTENTS -------- 1. INTRODUCTION 4 2. SPECIFICATIONS OF THE MODULE 4 2.1 DESCRIPTION OF THE HARDWARE 4 2.1.1 Architecture 4 2.1.2 Mechanical 5 2.1.3 Electronic 2.1.3.1 Specific circuit "Conditional Access Processor [*] 6 2.1.3.1.1 Descrambler 6 2.1.3.1.2 Demultiplexer 6 2.1.3.1.3 TSI/TSO interface 9 2.1.3.1.4 CI interface 10 2.1.3.1.5 PC2 interface 10 2.1.3.2 V80C52 micro-controller "Conditional Access Controller (CAC)" 10 2.1.3.3 Flash memory program "Conditional Access Flash Memory (CAP)" 11 2.1.3.4 Time base 11 2.2 DESCRIPTION OF THE SOFTWARE 11 2.2.1 Architecture 11 2.2.2 "VIACCESS" task 14 2.2.3 "PCMCIA" task 14 2.2.4 "PC2" task 14 2.2.5 "TSI/TSO" task 14 2.2.6 "DVB_CI" task 15 2.2.7 "Hardware environment" task 15 3. ENVIRONMENTAL BEHAVIOR 15 4. CHARACTERIZATION AND COMPLIANCE TESTS 15 5. INTERMEDIATE STEP: [*] 15 5.1 DESCRAMBLER 16 5.2 DEMULTIPLEXER 16 5.3 TSI/TSO INTERFACE 17 5.4 CI INTERFACE 17 5.5 PC2 INTERFACE 17
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 44 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/960-4517 COMMUNICATION - 3 - 5.6 INFLUENCE ON THE SOFTWARE 17 5.6.1 "VIACCESS" task 17 5.6.2 "TSI/TSO" task 17
45 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/960-4517 COMMUNICATION - 4 - 1. INTRODUCTION This document describes the offer made to France Telecom by the consortium of MATRA Communication, SCM Microsystems and MATRA MHS for the development of the Viaccess external access control PCMCIA module. 2. SPECIFICATIONS OF THE MODULE 2.1 DESCRIPTION OF THE HARDWARE 2.1.1 ARCHITECTURE The Viaccess DVB module, hereinbelow called the "module," is an electronic card in the PCMCIA format, compatible with the DVB standard as described in the document CENELEC prEN 50221, "Common Interface Specification for Conditional Access and other Digital Video Broadcating Decoder Applications." This module operates on +5 volts and physically interfaces with a chip card in the ISO 7816 format. It is constituted of the following functions: "Conditional Access Processor [*]" "Conditional Access Controller (CAC)" "Conditional Access Flash Memory (CAF)" collected together as in the block diagram below. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 46 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 5 - [SEE SOURCE DOCUMENT] FIGURE 1: SYSTEM BLOCK DIAGRAM The "Conditional Access Processor [*]" circuit is specific. It is to be developed within the framework of this program. [*] The "Conditional Access Controller (CAC)" function is to be provided by an eight bit 80C52 micro-controller (Intel architecture) with a rate of 28.6 MHz. This circuit is the engine which executes the program in reaction to high level events. The "Conditional Access Flash Memory (CAF)" block enables storage of the program. A one Mbit flash memory has been selected to provide that function. It allows gene ralizing the uploading of the software to the base version of the module. 2.1.2 MECHANICAL The module shall be realized in the [*] format. It shall accept a chip card in the ISO 7816 format. The PCMCIA connector selected has a single row of pins. That row is [*]. [*] 2.1.3 ELECTRONIC * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 47 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 6 - 2.1.3.1 SPECIFIC CIRCUIT "CONDITIONAL ACCESS PROCESSOR CAP54" 2.1.3.1.1 DESCRAMBLER [*] 2.1.3.1.2 DEMULTIPLEXER [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 48 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 7 - [*] ACQUISITION OF THE ECM: [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 49 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 8 - EMM ACQUISITION: [*] ACQUISITION OF THE PSI/SI'S AND ASSISTANCE DATA: [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 50 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 9 - [*] 2.1.3.1.3 TSI/TSO INTERFACE [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 51 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 10 - 2.1.3.1.4 CI INTERFACE The DVB control interface is implemented on the PCMCIA type interface. [*] 2.1.3.1.5 PC2 INTERFACE The circuit enables direct management of all types of chip cards in [*] 2.1.3.2 V80C52 MICRO-CONTROLLER "CONDITIONAL ACCESS CONTROLLER (CAC)" The micro-controller selected is the type 80C52. Its usable resources are: 8 kb of program memory, 256 bytes of RAM, and three timers. Its maximum operational frequency is above 30 MHz. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 52 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 11 - 2.1.3.3 FLASH MEMORY PROGRAM "CONDITIONAL ACCESS FLASH MEMORY (CAF)" The external program memory shall have a capacity of 128 kbytes (divided into two 64 kb pages). This memory is erasable by sectors and shall be seen by the micro-controller as a space for executable code and/or data. One of the advantages of flash memory is to enable downloading software. 2.1.3.4 TIME BASE The time base selected for the chip card is based on ISO standard 7816: 9600 x 372 x 8 = 28.57 MHz It is to be obtained from a CMS resonator connected to the terminals of the micro-con troller's internal oscillator and is to be redistributed to the [*] circuit. That frequency allows processing of the "PTS" protocol at 115.2 kbaud. 2.2 DESCRIPTION OF THE SOFTWARE We shall retain the following terminology which is used in the chapters to follow: MULTICRYPT module: physical module, the subject of this response; Software task: function or group of software functions of the same type; VIACCESS: software task constituted by the ACS and its high level man/machine interface portion (high level MMI). 2.2.1 ARCHITECTURE * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 53 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 12 - FIGURE 2: MODEL IN LAYERS [SEE SOURCE DOCUMENT] ----------------------- Hardware Environment Flash management ITA management ----------------------- The layer model defined by figure 2 allows effective hierarchization of the various soft ware tasks and to comprehend their interfaces. This diagram shows the organization and arrangement of the tasks and functions: - The interface with the external environment is made via task DVB-C1 which implements the software portion of the DVB Common Interface, as described in the consultation document [2]. This task communicates with the PCMCIA and TSI/TSO tasks, Hardware Environment and VIACCESS; - The PCMCIA task is linked to the common portion between the PCMCIA inter face (documents [1], [2], [7] and [9] of the consultation) and the DVB Common Interface; - [*] (documents [2], [3], [4], [7], [9] and [11] of the consultation); - The Hardware Environment task is linked to the hardware implementation of the module: management of the flash memory and management of the various software and hardware interrupts. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 54 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 13 - - The task which corresponds to the access control per se is called the VIACCESS task (documents [6] and [9]). This integrates the MMI scenarios. It is in communication only with tasks DVB-C1 and PC2. - The task which effects the interface with the security processor is called the PC2 task (documents [6] and [9]). It is in direct communication only with tasks ISO7816-8 and VIACCESS. - And finally, task ISO7816-8 mplements the software portion of the interface with the chip cards which meet the ISO 7816 standard (document [5]). This is the low est level function associated with the access control function. ---------------------- TSI/TSO EMM/ECM extraction CW management ---------------------- - ---------------------- ---------------------- Hardware Environment Flash Management PCMCIA IT Management - ---------------------- ---------------------- ---------------------- DVD-CI ---------------------- ---------------------- VIACCESS ---------------------- ---------------------- PC2 ---------------------- ---------------------- ISO 7816-8 [OR 3?] ----------------------
FIGURE 3: SOFTWARE ARCHITECTURE [See source document for flow relationships.] The architecture and organization of the software layers are defined in figure 3. The entire program is articulated around the DVB-C1 function, the unique point of access to the MULTICRYPT module by the DVB decoder. 55 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 14 - 2.2.2 "VIACCESS" TASK The VIACCESS task issues from the France Telecom ACS kernel. It shall be adapted to take account of the hardware environment, in particular the memory space management. The VIACCESS task also comprises the elements corresponding to the specific MMI scenarios in the document "Access Control System for Digital Video Broadcasting Software Interface Specification." The VIACCESS task can be interrogated by the DVB decoder only by way of the DVB- C1 software interface. 2.2.3 "PCMCIA" TASK The PCMCIA task shall have the role of carrying messages from the physical layer of the control interface in conformity with the DVB standard. This task is divided into three parts: - [*] 2.2.4 "PC2" TASK The PC2 task must manage the dialogs with the PC2 card according to the 7816-3 standard. It includes the management of the PTS protocol. This task is divided into five parts: - [*] After the response to the reset of the card, this procedure shall, in a systematic fashion, engage the PTS request to the card. Following that response, the transmission stream may attain 115.2 kbaud (enabling eventual use of PC2-8 cards). 2.2.5 "TSI/TSO" TASK The TSI/TSO task has the job of managing the MPEG2 transport stream to the descrambler. In particular, it shall effect the operations of PSI/SI data retrieval necessary to its opera tion, management of the EMM/ECM messaging acquisition filters, the retrieval thereof, and the loading of the control words into the descrambler portion of the [*]. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 56 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 15 - The ECM message addresses, which depend on the program selected, are to be furnished by the DVB decoder by way of the DVB-C1 task (CA_PMT object management). 2.2.6 "DVB_CI" TASK The DVB-C1 task corresponds to the implementation of the software part of the DVB common interface as specified in the document [2]. It has the job of transmitting information between the DVB decoder (via the control interface (CI and the PCMCIA task) and the VIACCESS access control task. The DVB-C1 has the job of information exchanges between the "hardware environment" task and the various other tasks concerned (e.g.: extraction from the PC2 card). 2.2.7 "HARDWARE ENVIRONMENT" TASK It is this task which manages, among others, the function of loading the software by means of the control interface. It enables updating the code resident in the flash memory by downloading to it. Following reception of messages carrying the update data, there is an activation of the task which will transfer the new code into the flash memory. 3. ENVIRONMENTAL BEHAVIOR The module shall conform to the standards in effect relative to the safety of the user, to climatic conditions, mechanical behavior and to the TESD/CEM to the extent that such are applicable to the module. 4. CHARACTERIZATION AND COMPLIANCE TESTS Qualification of the hardware and software necessitate the creation and exploitation of a large number of operational scenarios (several hundred). Use of the stream generators and analyzers developed and marketed by MATRACOM and SCM within the framework of the France Telecom design contracts will enable exhaustive exploitation. 5. [*] In order to have modules quickly available, development of an [*] is provided for, including the descrambler/demultiplexer coming from the MATRA * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 57 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 16 - Communication "Mer de Portes" study and the PCMCIA interface from SCM. The [*]. At the hardware level, all the rest of the module will conform to chapter 2 of this document. 5.1 DESCRAMBLER [*] - processing at the PES and transport levels. However, the maximum stream rate is [*]. 5.2 DEMULTIPLEXER The [*] shall comprise a group of registers, comparitors and acquisition buffers enab ling the acquisition of the ECM's, EMM's, PSI/SI's and assistance data. The acquisition buffers shall be the following: - [*] ECM acquisition: Four registers are available, each containing: - [*]. EMM acquisition: Two registers are available, each containing: - [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 58 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 17 - - one address value for type U or S EMM's. Acquisition of the PSI/SI's and assistance data: Two registers are available, each containing: - [*] 5.3 TSI/TSO INTERFACE The [*] shall have a transport stream I/O interface identical to that of the [*], both from the point of view of protocol as from the point of view of I/O signals. The MICLK and MOCLK clocks shall have a maximum frequency of at least 6.75 MHz, which corresponds to a maximum stream rate of at least [*]. 5.4 CI INTERFACE [*] 5.5 PC2 INTERFACE [*] 5.6 INFLUENCE ON THE SOFTWARE 5.6.1 "VIACCESS" TASK The VIACCESS task shall integrate an unoptimized version (at the level of the memory fields) of the ACS kernel. It shall use a RAM with a 32 kbyte capacity, external to the [*] component and shall meet the actual needs of the VIACCESS ACS kernel supplied by France Telecom. 5.6.2 "TSI/TSO" TASK * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 59 Bois d'Arcy, May 10, 1996 MATRA [LOGO] IMAGE/CH/TB/SO/1978/9604517 COMMUNICATION - 18 - The TSI/TSO shall take account [*] as concerns the ECM, EMM and PSI/SI acquisition routines and the buffer management. [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.22 24 TECHNOLOGY DEVELOPMENT AND LICENSE AGREEMENT 1 EXHIBIT 10.22 TECHNOLOGY DEVELOPMENT AND LICENSE AGREEMENT THIS AGREEMENT is made and entered into on and as of September 27,1996 by and between SCM Microsystems, Inc., a Delaware corporation, (hereinafter called "SCM") and Sun Microsystems, Inc., a Delaware corporation (hereinafter called "Sun"). WHEREAS, Sun is an industry leader in the design, development and manufacture of computing hardware platforms and related software, and WHEREAS, SCM Microsystems has the technical and professional capability, qualifications and existing technology required to perform hardware development and systems integration tasks. NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows: 1. DEFINITIONS 1.1. "Acceptance Criteria": A set of criteria developed to determine if the S-bus Card Adaptor delivered to Sun conforms to the Statement of Work and the Specifications. 1.2. "Enhancement" means a work which is based upon one or more pre-existing works, such as a revision, modification, translation, abridgement, condensation, expansion, collection, compilation or any other form in which such pre-existing works may be recast, transformed or adapted. 1.3. "Loaned Equipment": Equipment either (i) owned by Sun and loaned to SCM Microsystems, or (ii) purchased by SCM Microsystems and paid for by Sun, which is used in the performance of the Services. Such equipment shall be listed in Exhibit A, attached hereto, as the same may be amended from time to time. 1.4. "Loaned Software": Software either (i) owned by Sun and licensed to SCM Microsystems, or (ii) licensed by SCM Microsystems from a third-party licensor, the fees for which are paid by Sun, and which is used in the performance of the Services. Such software shall be listed in Exhibit A, attached hereto, as the same may be amended from time to time. 1.5. "New Technology": Technology, ideas, methods and inventions designed or implemented in the performance of this Agreement by SCM Microsystems and resulting from the NRE, as that term is defined in paragraph 4.1, paid to SCM Microsystems by Sun for the Services. 1.6. "S-bus Card Adaptor": A dual slot drive bay accessed S-bus to PC card adapter extended over a flat ribbon or other cable to an available drive bay on a computer, utilizing SCM Microsystems' bus extension technology to ensure compatibility with current and future PC cards and conforming to Sun's specifications for S-bus to PCMCIA ASICs developed by Sun. 2 1.7. "SCM Microsystems Base Enhancements": Enhancements in or to the SCM Microsystems Base Technology made or conceived in the performance of this Agreement. 1.8. "SCM Microsystems Base Technology": Technology owned by SCM Microsystems and developed outside the performance of this Agreement, including technology that existed prior to the date of this Agreement as well as technology that is developed concurrently with the term of this Agreement. 1.9. "Specifications": The electrical, mechanical and functional specifications for the S-bus Card Adaptor as set out in the Statement of Work. 1.10. "Services": The services to be performed by SCM Microsystems under this Agreement to design, develop and deliver to Sun the S-bus Card Adaptor as described in the Statement of Work, as the same may be amended from time to time. 1.11. "Statement of Work": The description of services to be performed and specific product(s) to be developed pursuant to this Agreement and delivered to Sun. The Statement of Work, as modified from time to time as permitted by this Agreement, shall be attached hereto as Exhibit B. 1.12. "Sun Base Enhancements": Enhancements in or to the Sun Base Technology made or conceived in the performance of this Agreement. 1.13. "Sun Base Technology": Technology owned by Sun and developed outside this Agreement, including technology that existed prior to the date of this Agreement as well as technology that is developed concurrently with the term of this Agreement. 2. SCOPE OF SERVICES 2.1. SCM Microsystems shall design, develop and manufacture the S-bus Card Adaptor conforming to the Specifications and within the schedule set out in the Statement of Work. 2.2. The Statement of Work includes certain preliminary specifications which may, during the term of this Agreement, be modified as the design and development effort is undertaken. The Statement of Work may only be modified as set out herein, in which case the Statement of Work as so modified shall become the new Exhibit B and become part of this Agreement. 2.3. On or before the commencement of the term of this Agreement, each party shall designate in writing a project manager who shall have overall responsibility for the coordination of the development and implementation of the Statement of Work. The project managers shall coordinate the joint responsibilities of the parties as required hereunder, act as the communication point for their respective companies, confer regularly and shall have responsibility and authority for resolving any disputes that may arise with respect to the Statement of Work or Specifications. The project managers shall serve as the initial point of contact for the resolution of problems and shall be -2- 3 responsible for devising and implementing problem management procedures with respect to any dispute that may arise with respect to the scope or direction of the development. 2.4. At the time(s) set out in the Statement of Work, SCM Microsystems shall deliver to Sun ten (10) prototypes of the S-bus Card Adaptor conforming to the Specifications. 2.4.1. Prior to the scheduled delivery of the prototypes, the parties shall agree upon the final Specifications and the Acceptance Criteria to determine if the prototype conforms to the Specifications. 2.4.2. SCM Microsystems shall demonstrate to Sun that the prototype conforms to the Acceptance Criteria. Thereafter if Sun notifies SCM Microsystems in writing and demonstrates to SCM Microsystems that the prototypes do not substantially meet the Acceptance Criteria, SCM Microsystems shall make corrections and modifications to the design of the S-bus Card Adaptor, the manufacturing process or otherwise as necessary, to cause the S-bus Card Adaptor to conform to the Specifications. Upon delivery of new prototypes, Sun shall repeat the acceptance test as soon as reasonably requested by SCM Microsystems and Sun shall notify SCM Microsystems within five (5) days of such request if and when the new prototypes are accepted. 2.5. Upon notification from Sun that the prototypes described in 2.4.2 above conform to the specifications, SCM Microsystems shall deliver to Sun fifty (50) pre-production prototypes of the S-bus Card Adaptor to verify that the S-bus Card Adaptor can be manufactured in quantity. 2.6. Support. SCM Microsystems shall, from time to time at Sun's request, provide to Sun, support and maintenance services for the S-bus Card Adaptors. The fees, if any for such support shall be negotiated prior to any services being performed. In addition, SCM Microsystems shall provide enhancements to keep current with each Sun operating system (OS) release, chosen for Sun's IR production usage, provided that porting of the covered software to the then new OS requires no or minimal source code changes. Porting efforts requiring substantial source code changes shall be done on a time and materials basis. SCM Microsystems shall use its best efforts to make such new releases available within ninety (90) days after Sun delivers a copy of the latest OS version to SCM Microsystems. 2.7. During the term of this Agreement, SCM Microsystems and each of its contractors and suppliers who will perform any work hereunder, shall become and remain compliant with ISO 9002 standards. 3. PURCHASE OF PRODUCTION QUANTITIES 3.1. From time to time Sun may purchase from SCM Microsystems, and SCM Microsystems shall sell to Sun, the S-bus Card Adaptor (herein the "Product"). The prices to be paid by Sun for the Product shall be as set out in Exhibit C, attached hereto and incorporated herein. For purchases by Sun of the Product for release or other distribution, from time to time Sun shall deliver -3- 4 to SCM Microsystems a one hundred eighty (180) day forecast (herein the "Forecasts") of anticipated purchases of Product. An updated Forecast will be provided to SCM Microsystems by Sun on or about the first calendar day of each month. Purchase and delivery of products shall be made pursuant to purchase orders and purchase order change notices that are issued in writing or electronically by Sun. Individual purchase orders shall identify the quantities of products ordered, the price, shipping schedule and destinations. A purchase order for Products will be placed in accordance with the schedule from the Forecast. The schedule will be comprised of three categories as defined below. Sun may submit orders for incremental or advance delivery according to the definitions set forth in each of the forecast zones. Each Forecast shall be divided into three (3) periods: Fixed, Firm and General, as further defined herein, below, and the quantities of Product to be purchased within each period. Each period and applicable quantities shall commence anew for each updated Forecast. A. The Fixed Quantity shall mean the forecasted demand for calendar days one through sixty (60) (herein the "Fixed Period") of the then current Forecast. Sun shall purchase and take delivery of that Fixed Quantity of Products specified in Sun's purchase orders for delivery within the Fixed Period. SCM Microsystems shall sell and deliver Product to Sun consistent with such schedule. (i) Sun may request, and SCM Microsystems shall deliver, subject to availability of component materials and labor, quantities of Products in excess of the Fixed Quantity in an amount up to ten percent (10%) of the Fixed Quantity in the then current Forecast. (ii) In addition, if directed by Sun, SCM Microsystems shall deliver, subject to availability of component materials and labor, a quantity of Products of up to ten percent (10%) of the Fixed Quantity for the then current Fixed Period that had originally been scheduled for delivery in the then current Firm Period. The purchase and sale of such quantity of Products in the Fixed Period shall not increase the overall quantity of Products set forth in the Forecast. B. The Firm Quantity shall mean the forecasted demand for calendar days sixty-one (61) through ninety (90) (herein the "Firm Period") of the then current Forecast. In the event Sun fails to purchase such quantity of Product, Sun shall purchase from SCM Microsystems, at SCM Microsystems' cost, long lead time component parts and materials (as defined by SCM Microsystems and agreed to by Sun, which agreement shall be in writing signed by both parties and made a part hereof). Sun shall not be required to purchase any long lead time materials or components that SCM Microsystems is able to readily and in a timely manner divert to use in other products or Products sold to third parties. SCM Microsystems shall plan its material, labor and manufacturing capacity to produce no more than the Firm Quantity for delivery within the Firm Period. On or before the first business day of each month, Sun may increase or decrease the Firm Quantity by no more than twenty percent (20%). -4- 5 C. The General Quantity shall mean the forecasted demand for calendar days ninety-one (91) through one hundred eighty (180) (herein the "General Period") of the then current Forecast. Sun shall not be required to purchase nor take delivery of any Product comprising the General Quantity and shall have no liability to SCM Microsystems for labor or materials purchased by SCM Microsystems for Products to be delivered in the General Period. 3.2. The terms of purchase and sale of the S-bus Card Adaptor are set out in Exhibit D, attached hereto and incorporated herein by reference. In the event of a conflict between the terms set out in Exhibit D and the terms of this Agreement, this Agreement shall govern. 3.3. In the event SCM Microsystems must make commitments to AT&T to procure ASIC chips ("AT&T Chips") in quantities in excess of those ultimately needed to satisfy the requirements of Sun, Sun shall reimburse SCM Microsystems the price paid by SCM Microsystems for such excess AT&T Chips that SCM Microsystems is unable to use or resell to others. Prior to making any commitment to AT&T for the purchase of AT&T Chips, SCM Microsystems shall first notify Sun and obtain Sun's written approval as to the quantity of AT&T Chips that SCM Microsystems may purchase hereunder. Sun shall not be liable to reimburse SCM Microsystems for any AT&T Chips in excess of the quantity approved by Sun. For those AT&T Chips for which SCM Microsystems receives reimbursement from Sun, SCM Microsystems shall deliver the same, and transfer all right title and interest therein, to Sun. 3.4. SCM Microsystems shall not sell the S-bus Card Adaptor to third parties without the express written consent of Sun, provided, however, such consent shall not be withheld so long as SCM Microsystems is satisfying Sun's demand for the S-bus Card Adaptor, and remains capable of doing so. For each S-bus Card Adaptor sold, or otherwise conveyed for value, by SCM Microsystems to third parties as permitted hereunder, SCM Microsystems shall pay to Sun the amount equal to [ * ] Within ten (10) business days after the end of each calendar quarter, SCM Microsystems shall provide Sun with written reports indicating the number of S-bus Card Adaptors sold by SCM Microsystems to third parties [ * ]. Payments hereunder shall be made with, and at the time of, such report. 4. CONSIDERATION 4.1. In consideration of SCM Microsystems' performance of the Services and the delivery of the Deliverables and the other rights, licenses and obligations herein set out, Sun shall pay to SCM Microsystems the amount of [ * ] (herein, the "NRE") payable as follows: [ * ] [ * ] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -5- 6 [ * ] 4.2. Payment terms are net-30 days after receipt of a correct invoice. Late payments shall accrue interest at the prime rate plus one percentage point. The prime rate shall be the prime rate quoted by the Bank of America on the date that the payment becomes past due. Before such late charges may be assessed against Sun for late payments, SCM Microsystems shall have notified Sun in writing of said late payment and Sun has not, within ten (10) days after receipt of such notice, made such payment. 4.3. All payments shall be made in U.S. dollars. 5. LOAN OF EQUIPMENT/SOFTWARE 5.1. On or before execution of this Agreement, Sun shall have delivered to SCM Microsystems the Loaned Equipment and Loaned Software. SCM Microsystems shall be responsible for the care and maintenance of the Loaned Equipment from the time it is delivered to SCM Microsystems until it is returned to Sun. SCM Microsystems shall reimburse Sun for any damage to the Loaned Equipment sustained during the period it is in SCM Microsystems' possession, reasonable wear and tear excepted. SCM Microsystems shall insure the Loaned Equipment against loss or damage during the term of this Agreement, and shall deliver to Sun, upon request, proof of such insurance. If applicable, upon return of the Loaned Equipment, Sun shall provide SCM Microsystems with an invoice for damage to the equipment, payable by SCM Microsystems upon receipt. Failure by Sun to provide such an invoice within sixty (60) days following return of the Loaned Equipment by SCM Microsystems shall constitute acceptance of the equipment by Sun "as is" and no reimbursement by SCM Microsystems shall be required. SCM Microsystems shall maintain the Loaned Equipment used in either production or test capacity consistent with ISO 9002 standards. 5.2. Sun hereby grants to SCM Microsystems a nontransferable, nonexclusive, limited right and license to use the Loaned Software in machine-readable form on the Loaned Equipment at SCM Microsystems' facilities in California, Singapore, and Germany, subject to SCM Microsystems obtaining any necessary export and import licenses. Title to all copies of the Loaned Software remains in Sun or in third parties from whom Sun has acquired license rights. No license is granted for use of the Loaned Software on other than the Loaned Equipment or for use on any work other than in the performance of the Services. Loaned Software is the confidential and proprietary information of Sun or its licensors and shall be subject to the obligations of Article 18. Confidentiality, SCM Microsystems shall not disassemble, decompile, or reverse engineer the Loaned Software. 5.3. THE LOANED EQUIPMENT AND LOANED SOFTWARE ARE PROVIDED "AS IS." SUN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF DESIGN, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE LOANED EQUIPMENT AND/OR SOFTWARE. IN NO EVENT SHALL SUN BE LIABLE FOR ANY DIRECT, SPECIAL, INDIRECT, INCIDENTAL * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -6- 7 OR CONSEQUENTIAL DAMAGES RELATED TO THE USE OF THE LOANED EQUIPMENT AND/OR LOANED SOFTWARE, EVEN IF SUN HAS BEEN ADVISED OF OR OTHERWISE HAS REASON TO KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 5.4. Upon the expiration or earlier termination of this Agreement, SCM Microsystems shall return to Sun, at Sun's facility in Palo Alto, California, or such other location in Northern California as Sun may designate, the Loaned Equipment and return all copies of the Loaned Software and related documentation. Upon such return, SCM Microsystems shall certify to Sun that it has returned or, with the approval of Sun, destroyed all copies of the Loaned Software. SCM Microsystems shall, at its cost and expense, de-install the Loaned Equipment and package the same for return to Sun. The costs of shipping the Loaned Equipment to Sun shall be borne by Sun. 6. INTELLECTUAL PROPERTY RIGHTS 6.1. Ownership of Technology 6.1.1. SCM Microsystems is and shall remain the sole owner of the SCM Microsystems Base Technology and SCM Microsystems Base Enhancements. 6.1.2. Sun is and shall remain the sole owner of the Sun Base Technology and Sun Base Enhancements. 6.1.3. SCM Microsystems shall, subject to the limitations hereinafter set forth, be owner of the New Technology. 6.2. Designation of Technology. During the performance of the Services, Sun and SCM Microsystems shall designate whether any designs, discoveries, inventions, product, computer programs (including source code, if applicable), procedures, improvements, developments, drawings, specifications, data, memoranda, notes, documents, manuals, information, and other materials, made, conceived, or developed hereunder are SCM Microsystems Base Enhancements, Sun Base Enhancements or New Technology. Such designation shall be evidenced by a writing signed by an authorized representative of each party. In the event the parties are unable to agree upon the correct designation of such technology, such disagreement shall be resolved in the manner provided in Article 16. Arbitration. 6.3. Protection of Intellectual Property Rights 6.3.1. Each party shall disclose in writing to the other, all designs, discoveries, inventions, product, computer programs (including source code), procedures, improvements, developments, drawings, specifications, data, memoranda, notes, documents, manuals, information, and other materials, made, conceived, or developed by such party which result from or relate to the Services and which are either SCM Microsystems Base Enhancements, Sun Base Enhancements or New Technology. Sun shall cooperate with and assist SCM Microsystems, at SCM Microsystems' -7- 8 expense, as necessary to allow for the application for, and execution of, any patent, copyright, trademark or other statutory protection for the New Technology. 6.3.2. SCM Microsystems shall obtain from its employees such agreements as will permit SCM Microsystems to full comply with the provisions of this Article 6, and Article 15. Confidentiality. 6.4. Grant of License to Sun. SCM Microsystems shall, and does hereby, grant to Sun a worldwide, nonexclusive, royalty free, right and license to (i) use the New Technology and to make, have made, sell, transfer or otherwise convey products incorporating the New Technology and (ii) sublicense the New Technology to others, provided, however that the same is incorporated into, or is a part of, other technology owned by Sun. 7. NO REVERSE ENGINEERING Except as specifically provided in this Agreement, and then only to the extent necessary to perform the Services, neither party shall, either directly, or through a third party, reverse engineer, disassemble or decompile any software provided by the other, or make any attempt in any fashion to obtain the source code to any software of the other not delivered under this Agreement or a separate license granted pursuant to this Agreement. 8. TERMINATION 8.1. SCM Microsystems may terminate this Agreement: (a) Upon thirty (30) days prior, written notice in the event Sun, its officers or employees violate any material provision of this Agreement, including, but not limited to, Article 4. Consideration and Article 15. Confidentiality, provided that SCM Microsystems is in substantial compliance with the terms of this Agreement. In the event a material breach occurs, SCM Microsystems shall provide written notice of the breach to Sun. Sun shall have thirty (30) days from the receipt of notice to remedy the breach to the satisfaction of SCM Microsystems. If Sun is unable to correct the breach within such period, SCM Microsystems may terminate this Agreement, unless the breach is one which, by its nature, cannot be fully remedied in thirty (30) days, and Sun has undertaken reasonable, good faith efforts toward remedying the breach within such thirty (30) days, and continues to use reasonable, good faith and diligent efforts to promptly remedy the breach. In the event of termination pursuant to this Section 8.1 (a), Sun shall cease use of the Licensed Technology, except such Licensed Technology for which all license fees or other consideration have been paid. As for any Licensed Technology for which the license fees or other consideration have been paid, Sun's right to use the same shall continue notwithstanding the termination of this Agreement. -8- 9 (b) In the event Sun (i) terminates or suspends its business, (ii) becomes subject to any bankruptcy or insolvency proceeding under federal or state statute, or (iii) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority. Without limiting the foregoing, in the event SCM Microsystems terminates this Agreement for Sun's material breach that remains uncured as provided above, Sun shall continue to be obligated for any payments due prior to the termination date. 8.2. Sun may terminate this Agreement: (a) Upon thirty (30) days prior, written notice in the event SCM Microsystems, its officers or employees violate any material provision of this Agreement, including, but not limited to, Article 15. Confidentiality, provided, however, that Sun is in substantial compliance with the terms of this Agreement. In the event a material breach occurs, Sun shall provide written notice of the breach to SCM Microsystems. The default notice must be clearly identified as such and specify in detail the basis for the alleged material breach(es). SCM Microsystems shall have thirty (30) days from the receipt of notice to remedy the breach to the satisfaction of Sun. If SCM Microsystems is unable to correct the breach within such period, Sun may terminate this Agreement, unless the breach is one which, by its nature, cannot be fully remedied in thirty (30) days, and SCM Microsystems has undertaken reasonable, good faith efforts toward remedying the breach within such thirty (30) days, and continues to use reasonable, good faith and diligent efforts to promptly remedy the breach. (b) in the event SCM Microsystems (i) terminates or suspends its business; (ii) becomes subject to any bankruptcy or insolvency proceeding under federal or state statute; or (iii) becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority. (c) for Sun's convenience. In the event of termination for Sun's convenience Sun shall give SCM Microsystems ninety (90) days prior written notice. Upon receipt of notice of termination for Sun's convenience SCM Microsystems shall immediately cease all work and Services and attempt to terminate any subcontracts or contracts for the acquisition of goods or services related to the performance of the Services by SCM Microsystems. Within ninety (90) days after the effective date of termination SCM Microsystems shall submit to Sun a final invoice for costs incurred by SCM Microsystems (which may include payments made for professional services) and paid or payable to third parties which could not be avoided and resulted from the early termination of this Agreement. SCM Microsystems shall be entitled to recover, in addition to the other costs described herein, the amount equal to (i) the development costs described in paragraph 4.1 divided by (ii) the Commitment, multiplied by the sum of (ii) the Commitment less the total number of S-bus Card Adaptors actually purchased by Sun and the third parties described in paragraph 3.4, hereof, prior to termination. Such invoice, if not contested by Sun, shall be payable as provided in Article 4.0. Consideration, above. (d) for Sun's good faith dissatisfaction with either the progress of the work or the quality of the work product delivered by SCM Microsystems. In the event Sun is dissatisfied -9- 10 with the progress or quality of the work Sun shall advise SCM Microsystems in writing of Sun's dissatisfaction. Such notice shall specify the reasons for such dissatisfaction. SCM Microsystems shall have thirty (30) days from receipt of such notice to correct the work to the satisfaction of Sun. If SCM Microsystems is not able to correct the work to the satisfaction of Sun within such thirty (30) day period Sun may terminate this Agreement on ten (10) days written notice. Upon termination for Sun's dissatisfaction SCM Microsystems shall immediately cease all work and Services and attempt to terminate any subcontracts or contracts for the acquisition of goods related to the performance of the Services by SCM Microsystems. Within ninety (90) days after the effective date of termination SCM Microsystems shall submit to Sun a final invoice for costs incurred by SCM Microsystems (which may include payments made for professional services) and paid or payable to third parties, that could not be avoided and resulted from the early termination of this Agreement. Such invoice, if not contested by Sun shall be payable as provided in Article 4.0. Consideration, above. 8.3. Effect of Termination (a) Upon early termination of this Agreement for any reason SCM Microsystems shall be entitled to receive payment only as provided herein. (b) As a condition to receiving any payment under this Article, SCM Microsystems shall deliver to Sun, within fifteen (15) days from the date of termination of this Agreement or otherwise as stated in this Agreement: (i) Any property of Sun, including, but not limited to Loaned Equipment and Loaned Software, in the possession or control of SCM Microsystems in good condition, reasonable wear and tear accepted; and (ii) All documentation and files and all copies thereof related to Sun Base Technology or Sun Base Enhancements whether finished or unfinished, prepared or produced by SCM Microsystems for the benefit of Sun under this Agreement. (iii) Copies of all documentation and files related to New Joint Technology whether finished or unfinished, prepared or produced by SCM Microsystems for the benefit of Sun under this Agreement. (c) Except as provided in clauses 8.2 (c) and 8.2 (d), above in no event shall Sun be responsible for payment for Services or expenses of SCM Microsystems provided or incurred after the effective date of termination of this Agreement. Sun reserves the right to audit the relevant books, time sheets, or other records of SCM Microsystems prior to any payment to SCM Microsystems under this Article 8. -10- 11 9. WARRANTY 9.1. SCM Microsystems warrants that, subject to the terms of the SCM Microsystems warranty, attached hereto as Exhibit D, for a period of three (3) years after delivery, the S-bus Card Adaptor as purchased by Sun will substantially conform to the Specifications. 9.2. SCM Microsystems warrants that (i) it is the exclusive owner of all right, title and interest in the SCM Microsystems Base Technology and, (ii) with respect to third party proprietary rights incorporated into the S-bus Card Adaptor, it has the necessary rights to manufacture and sell the same to Sun as provided in this Agreement. 10. COMPLIANCE WITH LAW This Agreement is subject to all laws, regulations, orders or other restrictions on the export of the Deliverables, or information about the Deliverables, which may be imposed at any time or from time to time by the U.S. Government. The parties (i) shall comply with all such laws, regulations, permits, orders and other restrictions to the extent that they are applicable and (ii) shall not, directly or indirectly, export or re-export (as defined in the United States Export Administration Regulations) the Deliverables or any information about the Deliverables to any country for which the U.S. Government, or any agency thereof, requires an export license or other governmental approval without first obtaining the same. 11. APPLICABLE LAW The laws of the State of California, as applied to transactions to be carried out wholly within California by California residents, applies to this Agreement and the rights, duties and obligations of the parties hereto. The United Nations Convention on Contracts for the International Sale of Goods is excluded from application hereto. 12. PROPRIETARY RIGHTS INDEMNITY 12.1. SCM Microsystems shall defend, indemnify and hold harmless Sun with respect to any claim, demand, cause of action, debt, or liability, including attorneys' fees, to the extent that it is based upon a claim that the SCM Microsystems Base Technology or the products derived therefrom and purchased by Sun pursuant to this Agreement infringes any patent, copyright, or any trade secret protected under federal or state law; provided that SCM Microsystems is immediately notified in writing of such claim and provided further that SCM Microsystems shall have the exclusive right to control such defense. Sun shall not settle or compromise any claim, lawsuit or proceeding without SCM Microsystems' prior written approval unless SCM Microsystems has failed to defend and indemnify or is unable to defend and indemnify Sun. In the event of any such claim, litigation or threat thereof, SCM Microsystems, at its sole option and expense, shall either (i) procure for Sun the right to continue to use the Deliverables, or (ii) replace or modify the Deliverables with functionally compatible software and materials. If such settlement or such modification is not reasonably practical and Sun is required to remove the S-bus Card Adaptor from its systems or is otherwise prohibited -11- 12 from using the same, SCM Microsystems may, upon fifteen (15) days' written notice to Sun, refund to Sun the purchase price paid for the S-bus Card Adaptor The foregoing states the entire liability of SCM Microsystems with respect to the infringement of any third party proprietary rights by the S-bus Card Adaptor or any of its parts. 13. GENERAL INDEMNITY The parties acknowledge that it may be necessary for the employees of each to be present at the facilities of the other for extended periods of time. The parties agree to provide the employees of the other with all reasonable facilities and services to assure that the Services may be properly performed. Each party shall instruct its employees to conform with the internal regulations and procedures of the other party while on such party's premises. In addition, each party agrees to indemnify, defend, and hold harmless the other party, its officers, agents and employees from any and all claims, demands and causes of action arising out of or resulting from any personal injury or tangible property damage suffered by a third party (which term shall include the employees, agents and contractors of each party hereto) by reason of the sole negligence of the party against whom indemnification is sought (the "Indemnitor"), provided that the Indemnitor is immediately notified in writing of such claim and provided further that the Indemnitor shall have the exclusive right to control such defense. The indemnified party shall not settle or compromise any claim, lawsuit or proceeding without the Indemnitor's prior written approval unless the Indemnitor has failed to defend and indemnify or is unable to defend and indemnify the indemnified party. 14. LIMITATION OF LIABILITY Except as otherwise provided, neither party shall be liable to the other for incidental, consequential or special damages regardless of whether the party was made aware of the possibility of such damages. 15. CONFIDENTIALITY 15.1. During the term of this Agreement each party (the "Disclosing Party") may disclose to the other (the "Receiving Party") certain information which the Disclosing Party deems to be the proprietary and confidential information of the Disclosing Party, including, but not limited to, documents and discussion of its technology, strategy, operations, internal corporate information, sources of supply, and methods and procedures. The Receiving Party agrees that all oral communications, which at the time of the oral disclosure are identified as confidential or are identified as such in a writing delivered to the Receiving Party within thirty (30) days after the oral disclosure, and written materials received by it bearing an appropriate legend indicating the confidential nature of the material, or to which it may gain access, during or in connection with the performance of Services will be deemed the Proprietary Information of the disclosing Party, unless and until such time as: -12- 13 (a) Such information is generally available to the public, through no fault of the Receiving Party and without breach of this Agreement, (b) Such information was already in the possession of the Receiving Party without restriction and prior to any disclosure hereunder, (c) Such information is or has been lawfully disclosed to the Receiving Party by a third party without obligation of confidentiality upon the Receiving Party, (d) The Receiving Party can prove that such information was developed independently by employees of the Receiving Party. 15.2. The Receiving Party agrees that for a period of five (5) years from the date of disclosure to it will: 1. not copy, sell, disclose, make public, or authorize any disclosure or publication of any Proprietary Information; 2. take all reasonable and necessary steps to assure that all principals, officers, agents, employees, representatives, or any other persons affiliated in any manner with SCM Microsystems are given Proprietary Information on a need-to-know basis only, and they in turn do not disclose, or make public, or authorize any disclosure or publication of any Proprietary Information; 3. not use the Proprietary Information for any purpose other than for the purpose of performing the obligations under this Agreement; 4. return all such Information to the Disclosing Party no later than fifteen (15) days after the date of termination or expiration of this Agreement unless otherwise directed in writing by the Disclosing Party; and 5. require each individual assigned by the Receiving Party to perform Services hereunder to execute a Confidential Disclosure Agreement conforming to the requirements of this Article. 15.3. SCM Microsystems and Sun admit for all purposes that monetary damages for any breach or threatened breach of this Article are inadequate and that any breach or threatened breach shall constitute an irreparable injury to the party whose information has been improperly disclosed. In addition to all other rights provided by law to which a party shall hereby be entitled, Sun or SCM Microsystems, as the case may be, shall have the right to have an injunction issued against the other to prevent any further breach. In the event that a party seeks an injunction hereunder, the non-moving party hereby waives any requirement for the posting of a bond or any other security. -13- 14 15.4. Nothing herein shall convey to the Receiving Party any right or license to the confidential information disclosed to the Receiving Party. 15.5. Either party and its Subsidiaries that receive Proprietary Information of the other shall be free to use the residuals of such party's Proprietary Information, for any purpose including use and distribution in the development, manufacture, marketing and maintenance of the using party's products and services, subject to the obligation of confidentiality for the period specified in Section 15.2, above, and provided that such use does not violate any patent rights (including rights under any patent applications filed and patents pending during the term of this Agreement) or copyrights of the Disclosing Party and provided, further that such residual information was not gained with the intent to use such information to compete against the other party. As used herein the term "residuals" means information, data, ideas and concepts in non-tangible form which may be retained by the employees of the Receiving Party or its Subsidiaries who have had access to the Proprietary Information of the Disclosing Party disclosed pursuant to this Agreement. 16. ARBITRATION 16.1. Resolution of Disputes In the event of any dispute between the parties hereto, the matter(s) in dispute shall first be brought to the attention of the project manager of each party for resolution. If the project managers are unable to resolve the dispute the matter shall then be brought to the attention of a Sun's Vice President of Information Resources and SCM Microsystems' President for resolution. Such individuals shall meet at a mutually convenient location to attempt to resolve such dispute. If such parties are unable to resolve the dispute the matter shall be subject to arbitration as provided in this Article 16. 16.2. Notice to Arbitrate. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration held in Palo Alto, California, and in such event either party may serve upon the other a written notice demanding that the dispute be submitted to arbitration pursuant to this Article 16. 16.3. Appointment of Arbitrators 16.3.1. After the giving of a notice to arbitrate pursuant to Section 16.1 hereof, each party within fifteen (15) days of such notice shall nominate and appoint an arbitrator and shall, within the fifteen (15) day period, notify the other party in writing of the name and address of the arbitrator so chosen. Upon the foregoing appointment of the two (2) arbitrators, such arbitrators shall forthwith, and within fifteen (15) days after their appointment and before exchanging views as to the question at issue, jointly appoint in writing a third arbitrator and give prompt written notice of such appointment concurrently to each of the parties. 16.3.2. If either party fails to appoint an arbitrator within fifteen (15) days of a notice to arbitrate or if the two (2) arbitrators appointed by the parties shall fail to appoint or agree upon such third arbitrator within fifteen (15) days after their appointment and in the latter case if the parties do not agree upon such third arbitrator, then either party on behalf of both parties in -14- 15 the latter case, may request such appointment by the then President of the San Francisco chapter of the American Arbitration Association (or any organization successor thereto) or any person or committee designated by such President. Thereafter, the arbitration shall proceed as set forth in this Article 16. 16.3.3. The arbitrators appointed pursuant to this Section 16.3 need not be selected from any list of the American Arbitration Association, but may not be employees, affiliates or contractors of either party. All arbitrators selected hereunder shall have at least five years experience in distributed data processing systems. 16.4. Arbitration Proceedings. 16.4.1. The arbitrators chosen in accordance with Section 16.3 hereof shall, after affording to both parties a reasonable opportunity to undertake discovery, take depositions and then submit evidence and to otherwise be heard, make their determination in writing and shall give prompt written notice thereof concurrently to both parties. In conducting such proceedings, the arbitrators shall be governed by the commercial Arbitration Rules of the American Arbitration Association then in effect in San Francisco, California. The concurring determination of a majority of said arbitrators shall be binding upon both parties, or, in case a majority of the arbitrators shall not render a concurring determination, then the determination of the third arbitrator appointed pursuant to Section 16.3, above, as the case maybe shall be binding upon the parties and, in either case, such determination shall not be appealable. Judgment upon the determination rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. The arbitrator or arbitrators shall have no power to award punitive or consequential damages. 16.4.2. The fees and expenses of the arbitrators shall be borne equally between both parties hereto. If either party (hereinafter in this sentence referred to as the "defaulting party") shall fail to pay its share of any fees or expenses of the arbitrators, then the other party (hereinafter in this sentence referred to as the "creditor party") may pay the share of the defaulting party on behalf of the defaulting party and the defaulting party shall, upon demand, reimburse the creditor party for such payment together with interest thereon at the prime rate (as quoted by the Bank of America on the date the obligation to make payment arises). Each party shall bear its own expenses arising from such arbitration, except as may be otherwise determined by the arbitrators. 16.4.3. Each party shall have the right to obtain discovery and, upon leave of the arbitrators, to take depositions, of the scope and in the manner provided in Sections 1283.05 and 1283.1 of the Code of Civil Procedure of the State of California, whether or not the California Arbitration Act is deemed to apply to said arbitration. 17. NOTICES Any notice, request, or other communication to be given in writing under this Agreement shall be deemed to have been given by either party to the other party: -15- 16 (a) Five (5) days after the date of mailing thereof, as shown on the post office receipt, if mailed to the other party by registered or certified mail at the applicable address specified by the other party in writing; or (b) Upon the date of the receipt thereof by such other party, if not so mailed by registered or certified mail. The mailing addresses for the parties are as follows: For Sun: Sun Microsystems, Inc. 2550 Garcia Ave Mountain View, California 94043 M/S UMIL09-03 Attn: Carol Borgardt, Commodity Manager With a copy to the Office of the General Counsel, M/S: UPAL 01-521 For SCM Microsystems: SCM Microsystems, Inc. 131 Albright Way Los Gatos, CA 95030 Attention: John Lynch with copy to William Kelly, Chief Financial Officer 18. ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the parties' respective successors and permitted assigns. Neither party may assign this Agreement and/or any of its rights and/or obligations hereunder without the prior written consent of the other party and any such attempted assignment shall be void, except that either party may assign this Agreement and/or any of its rights and/or obligations hereunder, upon written notice to the other party or to another entity in that party's merger or consolidation with another entity, without the consent of the other party, provided that the assignee is capable of fulfilling and intends to fulfill the obligations of the assigning party under this Agreement. 19. GENERAL 19.1. Audit Rights. During the term of this Agreement and for a period of three (3) years after the termination or expiration hereof, Supplier shall keep proper books of record and account in accordance with generally accepted accounting practices consistently applied. Upon five (5) business days notice Supplier shall permit Sun or an independent accounting firm designated by Sun to examine and inspect, at Supplier's facility and during normal business hours, the books and financial records of Supplier and make copies therefrom for the purpose of determining Supplier's -16- 17 compliance with the terms of this Agreement, including, but not limited to paragraph 3.4, and the correctness of any bills or invoices for costs and expenses for which Supplier has sought reimbursement or payment under this Agreement. 19.2. This Agreement constitutes the complete and exclusive statement of the agreement between the parties as relates to the subject matter and supersedes all proposals, oral or written, and all other representations, statements, negotiations and undertakings relating to the subject matter. 19.3. No change in, addition to, or waiver of any of the provisions of this Agreement shall be binding upon either party unless in writing signed by an authorized representative of such party. No waiver by either party of any breach by the other party of any of the provisions of this Agreement shall be construed as a waiver of that or any other provision on any other occasion. 19.4. In the event any one or more of the provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, the remaining provisions of this Agreement shall remain in effect and the Agreement shall be read as though the offending provision had not been written or as the provision shall be determined by such court to be read. 19.5. Upon termination or other expiration of this Agreement, each party shall forthwith return to the other all papers, materials and other properties of the other held by it for purposes of the performance of this Agreement. 19.6. The captions used in this Agreement are inserted for the convenient reference of the parties and in no way define, limit or describe the scope or intent of this Agreement or any part hereof. 19.7. Except as otherwise permitted herein, neither Sun nor SCM Microsystems shall disclose the contents of this Agreement to third parties unless required to do so by legal proceedings. 19.8. This document, its contents, Exhibits, Attachments, and Amendments, and any and all correspondence and Deliverables related thereto shall be considered and treated as "Confidential Information" of each party. 19.9. Dates or times by which SCM Microsystems is required to make performance under this license shall be postponed automatically for so long as SCM Microsystems is prevented from meeting them by causes which are Sun's responsibility. 19.10. The prevailing party in a controversy or claim shall have the right to collect its reasonable expenses incurred in enforcing this Agreement, including reasonable attorney's fees. -17- 18 19.11. This Agreement may be executed in two original counterparts, which together shall constitute the same Agreement, but only one of which need be produced to evidence the Agreement. 19.12. The parties further agree that the rights and obligations set forth in Sections 2.5, 3.1, 3.3, 3.4, 8.3 and 19.5 and Articles 5, 6, 7, 10, 12, 13, 14, 15, 16 and 17 shall survive the completion or termination of this Agreement for any reason and enforcement thereof pursuant to this article shall not be subject to any conditions precedent. IN WITNESS WHEREOF, each party has caused counterpart originals of this Agreement to be executed as of the date first above written, by its authorized representative. SUN MICROSYSTEMS, INC. SCM MICROSYSTEMS, INC. By:________________________ By:________________________ ___________________________ ___________________________ (Print Name) (Print Name) Title:_____________________ Title:_____________________ Date: _____________________ Date:_____________________ -18- 19 EXHIBIT A LOANED EQUIPMENT & SOFTWARE 20 EXHIBIT B STATEMENT OF WORK & SPECIFICATIONS SCOPE SCM Microsystems shall design, manufacture, test and deliver to Sun, S-bus Card Adaptors fully compatible with Sun's SS-5; SS-20, Ultra 1 and Ultra 2 products. SCM Microsystems shall study the SBus specifications (IEEE 1496 standard), the specifications of the proprietary S-Bus to PCMCIA ASIC developed by Sun, as well as the existing rear--access S-Bus PC Card adapter (X1030) design currently sold by Sun to determine what additional technical challenges might present themselves in the development and system-level qualification of their product. SCM Microsystems will use Sun's supporting software for testing and demonstrating the functionality of their product. SCM Microsystems will perform all necessary tests and evaluations to determine the electrical conditions that exist within Sun workstation products in which the S-bus Card Adaptor will be installed to determine what design precautions will be required to ensure system safety, EMI compliance to Class B, and functional compatibility. Sun shall provide SCM Microsystems with information regarding Sun's products and their components as necessary to allow SCM to make the S-bus Card Adaptor fully compatible with the Sun products. FIRST ARTICLE INSPECTION Mechanical Fit - SMCC D/T Mechanical Engineering Functional Compatibility - SMI IR Installation - SMI IR Documentation - SMI IR QUALITY REQUIREMENTS TBD ACCEPTANCE CRITERIA Mechanical Fit - SMCC D/T Mechanical Engineering Functional Compatibility (SSQA PCMCIA Test Suite) - SMI IR Installation Process Review - SMI IR Documentation Review - SMI IR 21 Each S-bus Card Adaptor shall be packaged in a single box to allow Sun to assign a single part number to the S-bus Card Adaptor. SHIPPING INSTRUCTIONS Detailed in Purchase Order. WARRANTY See Section 9 of this Agreement. HARDWARE DELIVERABLES Qty. Description Due Date ---- ----------- -------- 10 ea Prototype Units [ * ] 50 ea Pre-production Units [ * ] DOCUMENTATION DELIVERABLES Qty. Description Due Date Mechanical Design Drawings yes, tbd SCM Microsystems Electrical (DVT) Test Report yes, tbd SCM Microsystems EMI Test Report yes, tbd SCM Microsystems Functional Test Plan yes, tbd SCM Microsystems MILESTONE SCHEDULE Event Due Date Preliminary Schematic [ * ] Schematics, Layout & 1st Prototype [ * ] Electrical Testing [ * ] Delivery of 10 Prototypes [ * ] Pre-production Units [ * ] US, FCC, CE and CSA Approvals [ * ] Ship production units [ * ] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 22 EXHIBIT C PRODUCTION UNIT PRICES The purchase price of S-bus Card Adaptors shall be as follows: [ * ] The foregoing notwithstanding, Sun acknowledges that certain mechanical and enclosure design specifications in its Ultra2 machine may require modifications to the S-bus Card Adaptor by SCM Microsystems, which modifications may affect the unit price to be paid by Sun for such product. The parties shall negotiate in good faith the affect of the same on the unit price. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 23 EXHIBIT D PRODUCTION UNITS TERMS AND CONDITIONS OF SALE 1. Definitions: Award Letter shall mean that document delivered by Sun to, and accepted by, SCM Microsystems setting out the particular commitments of the parties with respect to specific Products, prices, Product Leadtimes, and other terms relative to the purchase of specific Products. Leadtime shall mean the number of days from placement of a Purchase Order to the date of delivery to the F.O.B. point. Leadtimes shall be set out in the Award Letter. Notice shall mean the giving of notice in the following manner: notices or communications made in writing and hand delivered, or sent by registered mail return receipt requested, or sent by overnight courier service to the receiving party at the address specified in the Award Letter, or such other address as a party may specify. Product(s) shall mean those component parts, materials or finished goods offered for sale by SCM Microsystems and as further described in the Award Letter. Purchase Order shall mean an offer from Sun received by SCM Microsystems, whether in written or other form, or in electronic form pursuant to Exhibit 1, attached hereto and incorporated herein, to purchase or schedule delivery of a particular amount of Products. The Purchase Order shall specify the relevant information such as quantity, price and proposed delivery dates of the Products. When acknowledgment of receipt and acceptance thereof is made by SCM Microsystems the Purchase Order shall be deemed a commitment to purchase and sell the Products pursuant to the terms of this Agreement and the Purchase Order. Specifications shall mean the applicable product specifications for Products from SCM Microsystems Sun shall issue and deliver to SCM Microsystems Purchase Orders setting out the agreed upon schedule of deliveries. SCM Microsystems shall accept Sun's Purchase Order to the extent that such Purchase Order is consistent with Sun's forecast and SCM Microsystems' Leadtimes. 2. Purchase of Product(s): In the event that Sun elects to purchase Products from SCM Microsystems Sun shall issue and deliver to SCM Microsystems Purchase Orders setting out the agreed upon schedule of deliveries. SCM Microsystems shall accept Sun's Purchase Order to the extent that such Purchase Order is consistent with Sun's forecast and SCM Microsystems' Leadtimes. 3. [ * ] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 24 4. Payment Terms: Sun shall make payment to SCM Microsystems in the manner and at the times set out in the Award Letter. 5. Delivery: Unless otherwise set out in the Award Letter delivery shall be F.O.B. point of manufacture. 6. Cancellation/Rescheduling. Sun may cancel or reschedule all or any part of a Purchase Order prior to Product shipment. Sun shall pay a cancellation or rescheduling charge, as the case may be, as follows: Cancellation notice given more than sixty (60) days of original scheduled delivery date.... No cancellation fee. Cancellation notice given more than thirty (30) but less than sixty (60) days of original scheduled delivery date...cancellation fee equal to...percent of the purchase price of Products cancelled. Cancellation notice given more than ten (10) but less than thirty (30) days of original scheduled delivery date...cancellation fee equal to...percent of the purchase price of Products cancelled. Cancellation notice given more than one (1) but less than ten (10) days of original scheduled delivery date...cancellation fee equal to...percent of the purchase price of Products cancelled. No rescheduling fee shall be payable if the Product is to be delivered within thirty (30) days of the original scheduled delivery date. Rescheduling notice given more than thirty (30) days of original scheduled delivery date.... A rescheduling fee of...if the Product is to be delivered more than thirty (30) days of the original scheduled delivery date. Rescheduling notice given more than ten (10) but less than thirty (30) days of original scheduled delivery date.... A rescheduling fee of...if the Product is to be delivered more than thirty (30) days of the original scheduled delivery date. Rescheduling notice given more than one (1) but less than (10) days of original scheduled delivery date.... A rescheduling fee of...if the Product is to be delivered more than thirty (30) days of the original scheduled delivery date. 7. Upside Support: When requested by Sun from time to time, SCM Microsystems shall use best efforts to sell and deliver to Sun Product(s) (i) in excess of the then latest forecast or (ii) at an accelerated delivery schedule (collectively "Upside Support"). The particulars of SCM Microsystems' obligation to provide Upside Support shall be set out in the Award Letter. -2- 25 8. Allocation: If SCM Microsystems is unable to deliver the quantities set out in a Purchase Order, due to shortages of Product, raw materials or SCM Microsystems' capacity, SCM Microsystems shall allocate Product to Sun under whichever of the following formulas would give Sun the greatest amount of Product: a. In proportion to Sun's percentage of all of SCM Microsystems' customer orders and forecast for such Products in effect at the time of the shortage; or b. The most favorable allocation formula used with any of SCM Microsystems' customers. 9. Product Discontinuance: SCM Microsystems shall provide Sun with one (1) year's written notice prior to discontinuing the manufacture or sale of a Product. 10. Subsidiaries. All current and future subsidiaries of Sun Microsystems, Inc., and contractors of Sun, designated by Sun, may purchase Product pursuant to this Agreement. 11. Attorney's Fees: In the event of any litigation arising out of this Agreement or its enforcement by either party, the prevailing party shall be entitled to recover as part of any judgment, reasonable attorneys' fees and court costs. -3- EX-10.23 25 COOPERATION CONTRACT DATED MARCH 25, 1996 1 EXHIBIT 10.23 [logo] SCM MICROSYSTEMS COOPERATION CONTRACT between SCM Microsystems GmbH Luitpoldstrasse 6 85276 Pfaffenhofen - hereinafter referred to as SCM - and STOCKO Metallwarenfabriken Henkels und Sohn GmbH & Co Simonshofchen 31 42327 Wuppertal (Vohwinkel) - hereinafter referred to as STOCKO - PREAMBLE SCM has extensive know-how and experience in the area of the development and manufacture and the distribution of electronic devices, computer hardware and software, as well as silicon, particularly in the area of PCMCIA cards (so-called PC, Smart or Chip Cards). STOCKO has extensive know-how in the area of the development, manufacture and distribution of housing, connectors and mechanical requirements for electronic devices. SCM and Stocko have extensive customer contacts in the area of PCMCIA and Smart Card technology (such as, for example, national telecom companies, manufactures of electronic components, etc.). SCM is also a member of industrial consortia which deal with future applications of this technology. 1. PURPOSE The purpose of this contract is the joint research and development of reader devices on the basis of PCMCIA housings for Smart Cards and other modules for an undetermined number of already existing and future applications (for example, Pay TV, DVB, DAB, banking, online services, patient cards, etc.) and the joint exploitation of the research and development results. Page 1 2 logo] SCM MICROSYSTEMS 2. DEFINITIONS The following terms shall have the following meanings: o Research and development: Acquisition of technical knowledge, theoretical and practical analyzes, tests, including the test manufacture and testing of products and processes, the establishment of the installations and facilities necessary therefor. o Contract processes: Processes which arise from research and development. o Contract products: Products or services which arise from research and development or are manufactured or rendered using the contract processes; parts of such goods or services shall also be deemed to constitute contracts products. o Results of research and development: Industrial property rights and know-how which contribute substantially to technical and economic progress and which are critical for the manufacture of contract products or the application of the contract processes. o Exploitation of the products: Manufacture of contract products and use of the contract processes, assignment of industrial property rights, issuance of manufacturing and/or use licenses to said rights and the dissemination of know-how with the goal of permitting such manufacture or use. However, the term "exploitation" shall not include the distribution of the contracts products. o Technical knowledge: Knowledge of which an industrial property right exists or which is not obvious (know-how). 3. JOINT RESEARCH AND DEVELOPMENT 3.1 DEVELOPMENT PROGRAM AND GOAL It is intended that the joint research and development be carried out in the area of reader devices for Smart Cards and other reader devices in the form of a PCMCIA card or combined solutions and that said joint research and development pursue the goal of bringing customer-specific and standard products to serial readiness. SCM's contribution shall be the overall concept and the development of electronic components and software; Stocko's contribution shall be the entire housing mechanics, including connectors. Development work shall not begin until each contracting party has signed the respective project plan set forth in appendix 1. Research and development shall be divided between the contracting parties on the basis of their respective specialization in such a manner that the contracting parties perform the development work independently and at their own expense and risk in accordance with the project plan and in accordance with their receptive know-how; in each instance, STOCKO shall be responsible for the development of housings and connectors and for the mechanical requirements and assembly technology of the reader device, SCM shall be in charge of the development of hardware, software and, if applicable, silicon, as well as for the test procedures and test software for service fabrication. Page 2 3 [logo] SCM MICROSYSTEMS 3.2 DEVELOPMENT PROJECTS 3.2.1 CUSTOMER-SPECIFIC DEVELOPMENT PROJECTS The details concerning the respective specific customer-specific development project shall be agreed upon between the contracting party who acquires the order and the respective contractor or purchaser; the other contracting party shall be included in the negotiations with the contractor as early as possible and to the extent necessary. A duty to provide complete information shall exist between the contracting parties. Following the conclusion of, and in accordance with, the negotiations with the respective contractor or purchaser, the contracting parties shall create precise project plans for each development project in accordance with the model attached as appendix 1 to this contract; said plan shall define the technical specifications for the reader device which is to be developed--any licenses for the proprietary rights of third parties which must be acquired in connection with the development project, other technical details, scheduling, including the setting of milestones, testing parameters for prototypes, key financial data, including the projected development cost through serial readiness, as well as the intended return on investment (Rol), etc.--for the respective development project. The individual project plans shall be binding upon the contracting parties and shall, in each instance, constitute a component of this contract. 3.2.2 DEVELOPMENT PROJECTS FOR STANDARD PRODUCTS For each development project for standard products, the contracting parties shall jointly create a precise project plan in accordance with appendix 1, which shall be binding upon the contracting parties, and shall in each instance, constitute a component of this contract. 3.4 PROTOTYPES Following the successful conclusion of the respective development work, the contracting parties shall jointly manufacture the number of prototypes established in the project plan, test them with the help of the specification and release them following successful testing. The delivery of prototypes to the contractor or purchaser can only take place following release by the two contracting parties. 3.5 COMPETITIVE RESTRICTION During the implementation of the program, no contracting party may conclude agreements concerning research and development in the program area, or in an area closely related thereto, with third parties which are in competition with the other contracting party, unless the other contracting party consents thereto in writing. 3.6 RESULTS OF RESEARCH AND DEVELOPMENT All rights to the results of the respective development work, including the right to apply for relevant industrial property rights, shall be held by the contracting party in whose purview the development work was performed and which is responsible for the development. Industrial property rights for joint inventions shall be applied for jointly. However, all results of joint research and development shall be accessible to both contracting parties. Page 3 4 [logo] SCM MICROSYSTEMS 4. JOINT EXPLOITATION OF THE RESULTS The results of joint research and development shall be exploited by the contracting parties jointly in such a manner that the manufacture of the contract products and the application of the contract processes is divided among the contracting parties in such a manner that STOCKO manufactures the housing and connectors, and SCM manufactures the electronics, hardware, software and, if applicable, silicon. Each contracting party shall be solely responsible for the contract products which it manufactures and shall release the other contracting party from any and all claims of third parties in this connection. Each contracting party shall supply the other with the other with the contract products which it manufactures. If one of the contracting parties suspends production of the contract products which it is manufacturing in connection with this contract, the other contracting party shall be entitled to take over manufacturing. If the other contracting party has no interest in doing so, the contracting parties shall assign the manufacturing to a third-party enterprise. The contracting party which suspends production shall grant all manufacturing and/or use licenses necessary for manufacture by the other contracting party or a third-party enterprise. The additional issuance of manufacturing and/or use licenses to industrial property rights (to outside third parties) held individually or jointly by the contracting parties shall be possible at any time by mutual agreement. 5. DELIVERY OBLIGATIONS/PURCHASE OBLIGATIONS OF THE CONTRACTING PARTIES Each contracting party shall fill orders of the other contracting party for delivery of contract products which it manufactures; they shall do so on the basis of individual orders in which delivery quantities, delivery times, prices and other terms and conditions are defined. The contracting parties shall be obligated to purchase contract products exclusively from the contracting partner, joint installations or enterprises or third-party facilities or enterprises which are jointly entrusted with manufacture. Joint or third-party enterprises which are entrusted with the manufacture of contract products shall be obligated to supply said products exclusively to the contracting parties. 6. TERRITORY RESERVATIONS 6.1 TERRITORIES The territory of the U.S. and Japan shall be [handwritten interlinear insertion:] non-exclusively reserved for SCM. The contracting parties may also reserve territories within the European Union by mutual written agreement. Page 4 5 [logo] SCM MICROSYSTEMS 6.2 MANUFACTURE The manufacture of contract products and/or the use of contract processes in [crossed out text] a territory reserved for one of the contracting parties shall require an agreement between the contracting parties. 6.3 DISTRIBUTION 6.3.1 OUTSIDE OF THE EUROPEAN UNION If a territory outside of the European Union is reserved for one of the contracting parties, the other contracting party may distribute contract products there only with the prior written consent of the former. 6.3.2 WITHIN THE TERRITORY OF THE EUROPEAN UNION If middlemen and consumers are able to acquire the contract products from other suppliers as well, neither of the contracting parties may conduct an active distribution policy in the territory which is reserved for the other contracting party for a period of five years from the date of the first marketing of the contract products in the European Union; specifically, they may not engage in specifically focused advertising in such territory, establish any branch focused on the contract products or maintain a supply warehouse there. However, neither contracting party may, without an objectively justified reason, refuse orders from consumers and resellers which are established in its territory and wish to market the contract products in other parts of the European Union; neither contracting may make it difficult for the consumers or middlemen to purchase the contract products from other resellers or the marketing of the contract products within the European Union. After the end of the aforementioned five-year period, neither contracting party shall be prevented from marketing the contract products in the territory of the European Union which is reserved for the other contracting party or engaging in an active distribution policy there with respect to such products. 7. NO QUANTITY, PRICE AND CUSTOMER RESTRICTIONS If a contracting party is permitted to manufacture the contract products and/or use the contract processes, that party shall not be restricted from determining the quantity of contract products to be manufactured or sold and the number of acts of use with respect to the contract processes, setting the prices, price components or discounts for the contract objects or selecting its customers. If it turns out that certain sales projects which arise from the business activity of a contracting party in individual countries and/or regions cannot be successfully concluded by that party alone, the contracting parties shall jointly establish a strategy which ensures the respective project and leads it to success. Page 5 6 [logo] SCM MICROSYSTEMS 8. LICENSING OF KNOWLEDGE AND EXCHANGE OF EXPERIENCE The contracting parties shall reasonably support one another to the extent necessary. In this connection, the parties shall mutually grant one another non-exclusive licenses for protected or technical knowledge which is necessary in order to implement the program and manufacture the contract products or use the contract process. The contracting parties shall inform one another of their experiences in the manufacturing of the contract products and in the use of the contract processes and shall mutually grant one another non-exclusive no-fee licenses to improvement and application inventions. 9. CONFIDENTIALITY Neither contracting party may use the know-how of the other contracting party for purposes other than the implementation of the program and the use of the results. The contracting parties shall preserve the confidential nature of the know-how which they convey to one another or which arises in the course of the implementation of the program; this obligation shall remain in effect following the expiration of this agreement. The exchange of such confidential information shall be made in each instance on the basis of a confidentiality agreement to be concluded separately for each development product in accordance with the model attached as appendix 2 to this contract. 10. REGISTRATION AND MAINTENANCE OF THE INDUSTRIAL PROPERTY RIGHTS The contracting parties shall be obligated to create and maintain industrial property rights for the contracts products or processes to the extent legally possible; this shall also apply to joint proprietary rights as well as industrial property rights to which one of the contracting parties is entitled. Each contracting party shall inform the other concerning infringements of joint proprietary rights and the industrial property rights of a contracting partner. The contracting party which discovers the infringement of joint industrial property rights may initiate legal action against the infringer and demand that the other contracting party support it in the judicial proceeding and share in the cost. Page 6 7 [logo] SCM MICROSYSTEMS 11. ATTACK UPON INDUSTRIAL PROPERTY RIGHTS During the implementation of the research and development program, neither contracting party may attack industrial property rights of the other contracting party which are connected with the implementation of the program. During the term of this agreement, neither contracting party may attack industrial property rights which are held individually by the other contracting partner, held jointly by the contracting parties or which protect the results of the research and development. 12. COMPENSATION Compensation which the contracting parties receive from third-party enterprises for the transfer or licensing of joint commercial rights or know-how in connection with the exploitation of research and development results shall be divided between them on a pro rata basis in accordance with their respective contribution to development. A contracting party shall be exclusively entitled to compensation which it receives from third-party enterprises for the transfer or licensing--entered into by mutual agreement with the other contracting party--of its commercial rights or know-how in connection with the exploitation of research and development results. Any inequality in the contributions of the contracting parties to the joint research and development shall be reflected in the setting of the prices for the contract products to be purchased from the other contracting partner. If the contracting partners exploit the results unequally, this shall be settled by means of compensation to be negotiated between the contracting parties. 13. CONTRACT TERM This contract shall take effect when signed by the two contracting parties. It shall be concluded for an indefinite term and may be terminated in writing by either contracting party upon compliance with a notice period of six (6) months--however, said termination may not be noticed earlier than June 30, 2000, effective December 31, 2000. The provisions concerning confidentiality, rights to the development results, manufacturing and distribution shall remain in effect following the end of the contract until they expire in accordance with their purpose and intent. The right to extraordinary termination shall remain unaffected. 14. MISCELLANEOUS CONTRACT TERMS An assignment of rights and/or delegation of duties arising from this contract shall be effective only with the prior written consent of the other contracting party. Each contracting party shall remain an independent entrepreneur which is responsible only for its own acts. This agreement shall establish no corporate law relationship between the contracting parties. The law of the Federal Republic of Germany shall apply. The exclusive place of venue for all disputes arising from this contract and the performance thereof shall be in Munich. Page 7 8 [logo] SCM MICROSYSTEMS If a provision of this contract or a portion of a provision is or should become invalid, the remaining provisions of the contract or the remaining portion of the provision shall remain valid. In lieu of the invalid provision or portion thereof, the contracting parties shall agree upon a valid provision which comes as close as possible to the economic content of the invalid provision or invalid portion of a provision. Neither contracting party may communicate the existence or the content of this contract to third parties or the general public without the prior written consent of the other contracting party. This obligation shall also remain in effect after the end of this contract. This contract contains all agreements between the contracting party relating to the subject matter of the contract; no collateral agreements exist. Modifications of or addenda to this contract must be in writing and must be signed by both contracting parties. Wuppertal, 3/25/96 Pfaffenhofen, 2/23/96 [stamp] SCM MICROSYSTEMS SCM Microsystems GmbH Luitpoldstrasse 6 . 85276 Pfaffenhofen Tel. 03441/896 - 0 . Fax 08441/8 28 84 [signature] [signature] - ---------------------------------- -------------------------------------- STOCKO Metallwarenfabriken SCM Microsystems GmbH Page 8 EX-10.24 26 FRAME ORDER AGREEMENT DATED DECEMBER 20, 1996 1 EXHIBIT 10.24 The following AGREEMENT is hereby concluded by and between BetaDigital Gesellschaft fur digitale Fernsehdienste mbH, represented by General Manager, Mr. Gabor Toth, Betastr. 1, 85774 Unterfohring and SCM Microsystems GmbH, represented by General Manager, Mr. Bernd Meier, Luit- poldstr. 6, 85276 Pfaffenhofen: I. DEVELOPMENT CONTRACT 1. BetaDigital hereby engages SCM to develop a Conditional Access Module (module) in accordance with the specification, construction plans and bill of material attached as appendices 1 through 3; express reference is hereby made thereto. A component of the development order shall be the delivery of 10 prototypes of the module. Half of the prototypes shall, in addition to the foregoing description, be equipped with sockets for EEPROM 8 Pin, EPROM 64 K x 8 and for the Micro Controller ST 90 R 52. For this purpose, BetaDigital shall provide 30 chips descrambling ASIC in the TQFP housing (Euro-I Chip); the 20 Euro-I Chips which have already been delivered shall be offset against this amount. Upon availability of a new version of the descrambling chip, BetaDigital shall provide such new version; SCM shall be obligated to incorporate the newest version of the descrambling chip into the development of the module and later serial fabrication. BetaDigital shall supply the software download files for the 64 K X 8 EPROM and the EEPROM 8 pin or for derivative storage building blocks. Each module shall be provided with the label "BetaDigital" in accordance with the description set forth in appendix 4. 2. SCM shall deliver to BetaDigital the development documentation, which must be fully created, as well as all other documents in connection with the development for the hardware (such as electric circuit diagrams, mechanical plans, PCB layout) and the software for the 2 development and testing tools, to the extent that these are created by SCM or in joint collaboration with BetaDigital. 3. SCM shall transfer to BetaDigital the right to use the copyright arising in connection with the development of the module, including the developmental tools and test tools; said use right shall be exclusive, chronologically unrestricted, not unilaterally revokable and transferrable. 3 The provisions of SectionSection 69 a and 69 b UrhG [German Copyright Act] and SectionSection 69 d through 69 g UrhG shall remain unaffected. 4. It shall be responsibility of SCM that the services rendered by SCM do not infringe upon the proprietary rights of third parties. SCM shall defend BetaDigital in its own name against all claims which are asserted by a third party on the grounds of alleged infringement of industrial property rights (patents, patent applications, copyrights, trademarks, rights to masks and semiconductor topologies, etc.) as a result of the delivered or licensed products and shall compensate BetaDigital for all judicially imposed costs and compensatory damage, provided that BetaDigital - informs SCM promptly and in writing concerning the assertion of such claims, - provides SCM with all necessary information, - provides reasonable support and - provided that the authority to decide whether such claims shall be defended or settled shall remain exclusively with SCM. 5. It shall be the responsibility of BetaDigital that the hardware and software provided by BetaDigital does not infringe upon proprietary rights of third parties. BetaDigital shall defend SCM in its own name against all claims which are asserted by a third party on the grounds of alleged infringement of industrial property rights (patents, patent applications, copyrights, trademarks, rights to masks and semiconductor topologies, etc.) as a result of the delivered or licensed products and shall compensate SCM for all judicially imposed costs and compensatory damage, provided that SCM - informs BetaDigital promptly and in writing concerning the assertion of such claims, - provides BetaDigital with all necessary information, - provides reasonable support and - provided that the authority to decide whether such claims shall be defended or settled shall remain exclusively with BetaDigital. 6. SCM promises that it shall develop the module set forth in paragraph 1 by no later than 10/15/96 and shall do so in such a manner that serial fabrication shall be possible starting November 1996. 7. Acceptance of the prototypes shall take place with the help of the performance description in section 1, above, within a period of 2 months following delivery of the prototypes. 8. The descrambling chips which are delivered shall remain the property of BetaDigital. If a loss of ownership occurs as a result of combination, mixture or processing, BetaDigital shall receive a co-ownership share of the overall object in accordance with the chips provided. The delivery of chips shall not include a right on the part of SCM to utilize, use or transfer any existing copyrights. 4 9. The development, manufacture and delivery of prototypes shall be carried out without compensation. 5 10. In the event of default in performance by SCM, BetaDigital shall be entitled to withdraw from the entire agreement following the imposition of a deadline and the threat of refusal. Claims for compensatory damages for failure to perform shall be barred. Default in performance shall not occur to the extent that BetaDigital fails to perform in a timely manner a duty to supply to which it is subject. Otherwise, the statutory regulations shall apply; specifically, the right of termination set forth in Section 649 BGD [German Civil Code] shall remain unaffected. II. PILOT SERIES PRODUCTION 1. BetaDigital shall order [ * ] units of the pilot series of the modules in accordance with the performance description in section 1 of the development order. If, during the development phase, the parties mutually agree to modify the performance description, delivery shall be made in accordance with the modified specification. The release of the pilot series production shall be carried out by BetaDigital. It shall take place in writing within 10 business days following acceptance of the prototypes. 2. The components supplied by BetaDigital shall remain the property of BetaDigital. If a loss of ownership occurs as a result of combination, mixture or processing, BetaDigital shall receive a co-ownership share of the overall object in accordance with the components provided. The delivery of components shall not include a right on the part of SCM to utilize, use or transfer any existing copyrights. 3. The delivery of the pilot series lot shall take place by no later than 10/31/96. 4. The per module price of the pilot series shall be DM [*]. It shall be understood that this price does not include the descrambling chip to be provided by BetaDigital. 5. Delivery shall be made at the expense and risk of SCM to Nokia Satellite Systems AB, Manvagen, 59183 Motala, Sweden. 6. Acceptance shall be carried out by Nokia in the capacity of representative of BetaDigital. Checking shall be done by means of random samples (5% of the delivery). If the receiving inspection reveals a projected defect ratio of [ * ] or more, BetaDigital--represented by Nokia, if applicable--shall be entitled to return the entire delivery at SCM's expense. SCM shall be obligated to provide prompt replacement in the event of a return. In the event of failure or delay of the replacement delivery, BetaDigital shall be entitled to cancellation. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 6 III. ORDER QUANTITY GUARANTEE 1. BetaDigital shall be obligated to order [ * ] modules (less the pilot series) [ * ] and [ * ]. The following shall fall within said order quantity guarantee: - orders of a further developed Conditional Access Module based on a separate development contract (concerning software and/or hardware) and/or conditional access module with Common Interface, and - all orders by third parties, to the extent that they use the module in connection with the d-box technology. BetaDigital shall be entitled to hire an auditor to inspect the orders of third parties at SCM. For the first [ * ] units in connection with the order quantity guarantee, the parties hereby agree among themselves upon a price per module of DM [ * ]. It shall be understood that this price does not include the descrambling chip to be provided by BetaDigital. 3. SCM shall be obligated to supply at least [ * ] modules during [ * ]. BetaDigital shall order [ * ] units for delivery by [ * ] and an additional [ * ] units for delivery by no later than [ * ]. To the extent that BetaDigital does not call for the second 25,000 units for delivery in the [ * ], an advance toward material costs in the amount of [ * ] of the module price shall be paid by [ * ], for the difference in unit number. The residual price shall be paid according to the usual payment rules. 4. For the following [ * ] units in connection with the order quantity guarantee, the parties hereby agree among themselves upon a price determination by BetaDigital as follows: [ * ] - It is intended that the price determination [ * ] be exercised in advance by BetaDigital--one month after sending the cost lists, if possible. 5. If the order quantity guarantee is not satisfied within the stipulated period of time, BetaDigital shall be obligated to pay [ * ](in lieu of stipulated performance) for the order quantity not purchased. 6. To the extent that components are delivered by BetaDigital for the production of the modules, SCM shall check them for their functionality prior to use. The components shall remain the property of BetaDigital. If a loss of ownership occurs through combination, mixture or * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 processing, BetaDigital shall receive a co-ownership share of the overall object in accordance with the components provided. 8 The delivery of components shall not include a right on the part of SCM to utilize, use or transfer any existing copyrights. In the case of orders by third parties in connection with the order quantity guarantee, SCM shall be obligated to obtain consent in advance from BetaDigital concerning the use of the components. IV. DELIVERY TERMS FOR DELIVERIES IN CONNECTION WITH THE ORDER QUANTITY GUARANTEE 1. The lot size shall be [ * ] units. 2. The delivery times shall be a maximum of 16 weeks from the time of the order. Order and delivery time provisions shall be made by BetaDigital or Nokia in its capacity as representative upon presentation of a power of attorney. 3. Delivery shall be made at the expense and risk of SCM to Nokia Satellite Systems AB, Manvagen, 59183 Motala, Sweden. 4. The described delivery deadline shall be binding with the exception of the delivery of the first [ * ] units. If SCM defaults with regard to a delivery or portions thereof, SCM shall be obligated to pay lump-sum compensatory damages in the amount of 0.5% of the invoice amount of the delivery affected by the defaults or portion thereof for each week which is started as of the beginning of the default. The lump-sum compensatory damage claim, however, shall be limited to a maximum of 10% of the relevant invoice amount. SCM shall be entitled to provide documentation of lower or an absence of damages; in such a case, compensation shall be made therefor. Default shall not take place to the extent that BetaDigital does not provide the descrambling chip a timely manner. Acceptance shall be carried out by Nokia in the capacity of representative of BetaDigital. Checking shall be done by means of random samples (0.5% of the delivery). 5. If the receiving inspection reveals a projected defect ratio of [ * ] or more, BetaDigital--represented by Nokia, if applicable--shall be entitled to return the entire delivery at SCM's expense. SCM shall be obligated to provide prompt replacement in the event of a return. In the event of failure or delay of the replacement delivery, BetaDigital shall be entitled to cancellation. If a projected total of less than 4% of the delivered modules are defective, BetaDigital shall be entitled to a reduction on a percentage basis. Otherwise, guarantee shall be barred. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9 V. LIABILITY 1. SCM shall be liable without restriction for damages--regardless of the legal grounds therefor--to the extent that such damages were caused by intentional conduct or gross negligence or are attributable to the absence of a promised attribute, or to the extent that the Product Liability Act provides for mandatory liability. 2. Unless otherwise provided in section I.4, I.5, IV.4 or V.1, SCM shall be liable up to a maximum of DM 2,000,000.00 (in words two million German marks) for personal injury and property damage and up to a maximum of DM 1,000,000.00 (in words one million German marks) for other damage, but not for lost profits or damages whose occurrence was typically not foreseeable at the time of the conclusion of the contract. 3. Otherwise, further liability shall be barred. VI. PAYMENT TERMS Unless expressly agreed to the contrary, payments shall be due 10 days after invoicing. VII. MISCELLANEOUS 1. This agreement shall replace the contractual relationship concerning the fabrication and order of Conditional Access Modules with Common Interface order letter dated [ * ] in its entirety. 2. In accordance with the non-disclosure agreements already stipulated on 12/15/95, the parties shall be obligated to treat information and knowledge arising from the collaboration in a strictly confidential manner. The parties hereby agree to pay a contractual penalty in the amount of DM 100,000.00 for each instance of violation (the defense of a single continuing offense shall be barred). 3. The appendices to this contract shall constitute substantial components thereof. 4. This contract shall be governed by the law of the Federal Republic of Germany. 5. The place of venue for all disputes concerning the validity and performance of this agreement shall be Munich. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 10 6. No oral collateral agreements exist. The parties hereby agree that modifications of this contract and its appendices must be made in writing; this shall also apply to modification of the written form clause. 11 7. If individual provisions of this contract or portions thereof are or should become invalid or void, the validity of the remaining provisions shall not be affected. Unterfohring, 10/9/96 s/Bernd Meier [signature] SCM Microsystems GmbH BetaDigital, Gessellschaft fur digitale Fernsehdienste mbH General Manager General Manager EX-10.25 27 CONTRACT-SEIMENS NIXDORM & REGISTRANT 1 EXHIBIT 10.25 FRAMEWORK CONTRACT concerning the creation/conversion of software products for Siemens Nixdorf Informationssysteme AG between Siemens Nixdorf Informationssysteme AG [Region] GE TELECOM, 64347 Griesheim, Im Leuschnerpark 3 - hereinafter referred to as SNI - and SCM Microsysteme GmbH, 85276 Pfaffenhofen - -------------------------------------------------------------------------------- - - Contractor - 1. SUBJECT MATTER OF THE CONTRACT 1.1 SNI shall be entitled, but not obligated, to give the Contractor orders concerning the creation of programs, program specifications or studies or concerning the conversion of programs. 1.2 Contract subject matters, delivery deadlines, prices and other details shall be agreed upon in each of the individual contracts. Otherwise, the following provisions shall apply. 2. COLLABORATION BETWEEN THE CONTRACTING PARTIES 2.1 SNI shall provide the Contractor with the information necessary to perform the individual contracts. If the Contractor does not believe that the information is adequate, it shall communicate this promptly. 2.2 The Contractor shall do the following for SNI at any time upon request: - report in writing concerning the status of work on the subject matter of the contract, - indicate the computer time used, - provide access to its records concerning the work on the subject matter of the contract, - facilitate an exchange of ideas with its employees on the subject matter of the contract at a place to be agreed upon. 2.3 In its work on the subject matter of the contract, the Contractor shall attempt to utilize the state of the art in science and technology to achieve the best possible result. The Contractor shall follow the instructions of SNI in connection with the contract. However, SNI shall not be entitled to give instruction directly to employees of the Contractor. 2.4 Each contracting party shall identify for the other a knowledgeable employee who can provide necessary information concerning the implementation of this contract and either make or initiate decisions. 2.5 If the individual contract is to be viewed as an indirect public contract, SNI shall notify the Contractor in writing at the time of the conclusion of the contract. In such a case, the Contractor shall subject itself to the provisions of NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 2 public price law (VO PR [Price Law Regulations] 30/53) and the price audit. [3. COMPUTER TIME *) 3.1 SNI shall provide the Contractor with computer time to the extent stipulated in the individual contract on an appropriate data processing facility for testing the subject matter of the contract. 3.2 Required computer times shall be agreed upon with SNI in writing as early as possible.] *) Not applicable if no computer time is required *) Not applicable if no computer time is required H37-D4744-N31 Framework contract conc. creation/conv. of software products for SNI A'090 9 90 507 NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. 3 4. RIGHTS TO THE SUBJECT MATTER OF THE CONTRACT 4.1 When created and in their respective state of processing, the subject matter of the contract and the appurtenant records shall be the property of SNI. The Contractor shall retain the records for SNI until their delivery. SNI shall hold the exclusive transferrable right to modify the subject matter of the contract and the appurtenant records as well as to use them or publish or exploit them in a form which it has processed. 4.2 In contracts with its employees, the Contractor shall ensure that the rights set forth in section 4.1 are held exclusively and without chronological limitation by SNI and are not affected by an end to the contracts between the Contractor and its employees. The Contractor shall impose an obligation in accordance with sentence 1 upon other third parties participating in the implementation. 5. ACCEPTANCE, GUARANTEE 5.1 After all records belonging to the subject matter of the contract have been properly delivered to SNI, SNI shall perform the acceptance test for the subject matter of the contract. If defects are detected, the Contractor shall promptly remedy them at no charge and make the subject matter of the contract available once again for acceptance. SNI shall then perform the acceptance test again. 5.2 The Contractor shall announce the making available of the subject matter of the contract for acceptance in writing no later than one week in advance. If, after it is made available, SNI does not accept the subject matter of the contract for a reason other than a defect, the subject matter of the contract shall be deemed to be accepted two months after being made available for acceptance. 5.3 Defects complained of in writing by SNI within a guaranteed period of 12 months following acceptance of the subject matter of the contract shall be remedied promptly at no charge by the Contractor. 5.4 If defects in the subject matter of the contract are attributable to circumstances for which SNI is responsible, the Contractor shall remedy them at SNI's request at reasonable prices and terms to be agreed upon. 6. COMPENSATION 6.1 The stipulated compensation shall constitute settlement of all services to be rendered by the Contractor. 6.2 If compensation on a time basis is agreed upon, the proof of performance shall be provided on the basis of records which the Contractor shall coordinate with SNI in each instance in advance. 6.3 The Contractor's travel and lodging expenses shall be refunded if employees of the Contractor take trips for reasons for which the Contractor is not responsible and at the express request of SNI or if the computer time stated in section 3.1 of the contract is made available on a data processing facility which is over 30 kilometers from the location named therein. In such cases, the following shall be refunded following deduction of possible prepaid value-added tax sums: federal railway system in consultation with SNI and upon presentation of appropriate records
4 aircraft tourist class, in each instance upon presentation of appropriate records mileage reimbursement in accordance with the guidelines set by the tax authorities lump-sum lodging allowance in accordance with the guidelines set by the tax authorities (in consultation with SNI, higher lodging costs will also be reimbursed upon presentation of appropriate records).
In each instance, the Contractor shall coordinate the details of trips and events with SNI, for example, scheduling and the use of an automobile in lieu of the federal railway systems or aircraft. 6.4 The Contractor shall send SNI invoices in a timely manner in advance for the respective payments which are due; the invoices shall list the travel costs/lodging costs and the respective value-added tax. 5 7. IMPOSSIBILITY OF PERFORMANCE OF CONTRACT BY CONTRACTOR, INCREASE IN PAYMENT 7.1 If the Contractor believes that it is prevented from performing the individual contract as a result of circumstances (regardless of the type), it shall promptly notify SNI in writing. If the Contractor is not responsible for the circumstances which prevent performance, the contracting parties shall agree upon a reasonable postponement of the stipulated deadlines. If prompt notification is not made, the Contractor may not later invoke such circumstances. 7.2 If the Contractor believes that instructions by SNI pursuant to section 2.3 or other circumstances for which SNI is responsible will lead to an increased expenditure of labor or computer time, it shall notify SNI promptly in writing. The parties shall then agree upon a reasonable increase in the compensation or the computer time which is made available. If prompt notification is not made, the Contractor may not later claim an increase in compensation or increase of computer time which is made available. 8. INTRODUCTION AND MAINTENANCE OF THE SUBJECT MATTER OF THE CONTRACT *) At the request of SNI, the Contractor shall provide support in preparing for use of the subject matter of the contract and shall assume maintenance of the subject matter of the contract. To the extent that such services are not included in the services to be rendered under the contract without separate compensation, the contracting parties shall agree upon reasonable compensation. 9. ISSUANCE OF SUBCONTRACTS, CONFIDENTIALITY, DATA PROTECTION 9.1 The Contractor shall assign the contractual services to freelance employees or other third parties only with the prior written consent of SNI; otherwise it shall perform using its own employees. In the case of non-German employees, the Contractor shall document the existence of the necessary work permit. 9.2 The Contractor shall use all information, documents and other aids which it receives in connection with the contract solely for the purpose of performing the contract. As long as and to the extent that they have not become generally known or SNI has not consented to dissemination in writing in advance, the Contractor shall treat the information and records, the conclusion of the contract and the subject matter and contents of the duties assumed confidential vis-a-vis parties other than the third party participating in the performance of section 9.1. These duties shall remain in effect after the end of the contract. 9.3 Any exchange of opinions concerning the subject matter of the contract between the Contractor and customers of SNI shall, in each individual instance, require the prior written consent of SNI. 9.4 To the extent that, in its work on the subject matter of the contract, the Contractor has to process personal data, the Contractor shall observe the data confidentiality protection statutes, agree upon measures with SNI concerning data security and enable SNI to inform itself concerning compliance with its agreement. 9.5 The Contractor shall impose an obligation in accordance with sections 9.2 through 9.4 on those employees from its operation who participates in the implementation of the contract and on third parties participating in the implementation of the contract. 6 10. SURRENDER OF DOCUMENTS The Contractor shall surrender all records and other aids, including copies, which it received or created in connection with the contract by no later than acceptance or, to the extent that it needs them in order to satisfy any guarantee duties, promptly after the end of the guarantee period. 11. ASSIGNMENT OF CLAIMS The Contractor may assign its claims against SNI only if SNI has consented in writing. SNI shall refuse consent only for good cause. *) Inapplicable in the case of program specification/studies 7 12. TERMINATION [This framework contract shall take effect on ..... and may be terminated in writing by either contracting party upon notice of three months effective at the end of the calendar month. The provisions of the framework contract shall remain valid after the end thereof with regard to individual contracts which were previously concluded in the scope of applicability of the framework contract.] 13. COLLATERAL AGREEMENTS Collateral agreements must be in writing. Siemens Nixdorf Informationssysteme AG Pfaffenhofen 12/23/96 Siemens Nixdorf Informationssysteme AG SCM MICROSYSTEMS GmbH Im Leuschnerpark 3 64347 Griesheim /s/ /s/ - --------------------------------------- ------------------------------------ Bernd Meier General Manager NOTE: Language indicated as being shown by strike out in the typeset document, or manually struck-through, is enclosed in brackets " [ " and " ] " in the electronic format. EX-10.27 28 LICENSE/CONTRACT-DEUTSCHE TELEKOM AG & REGISTRANT 1 EXHIBIT 10.27 B1 TRADEMARK LICENSE AND KNOW-HOW CONTRACT BETWEEN Deutsche Telekom AG, D-53105 Bonn - hereinafter referred to as the Licensor - AND SCM MICROSYSTEMS GmbH D-85276 Pfaffenhofen - hereinafter referred to as the Licensee - CONCERNING the use of the trademark and know-how "B1 TECHNOLOGY" [logo] B1 TECHNOLOGY 2 I. PREAMBLE 1. In the course of its research and development activity, the Licensor has developed the intelligent ship card interface "B1" and related know-how (hereinafter referred to as "contract know-how"). In this connection, the Licensor has established the title "B1" in the market as a statement concerning standards and quality and has the "B1-TECHNOLOGY" logo (hereinafter referred to as the "trademark"), concerning which an application has been made with the German Patent Office for registration as a trademark (reference number of the DPA [German Patent Office] 395 51 647.1, 395 51 649.8, 396 00 838.0). 2. The Licensee is interested in using the trademark, related know-how and B1 standardization information held by the Licensor for the Licensee's development of PCMCIA card reader. II. DEFINITIONS 1. THE CONTRACT COMPONENTS SHALL BE THE FOLLOWING: > The Telesec B1 controller software B1 KLC v4.0 in the source code, > the Telesec B1 driver software B1 KLT v4.0 in the source code for the MS-DOS operating system and the MS-WINDOWS 3.xx user interface, > the Telesec B1 programmer handbook (B0/B1 HTSI); contained therein is a description of the interfaces - B1pc between the card access device B1 and the host (PC), - B1api of the B1 driver in the host (PC) to application programs, - B1icc between the card access device B1 and the chip card (ICC), > the description of layers one and two of the B1pc interface, > the "B1-TECHNOLOGY" trademark in the form described in point III. Section 9. 2. THE FOLLOWING SHALL BE INCLUDED IN CONTRACT KNOW-HOW: > the contract component "B1 KLC" (Source Code) and "B1 KLT" (Source Code) defined under point II.1 of this contract, their comments--including oral comments--as well as the technical ideas, principles and methods contained therein. > the contract component "Telesec B1 programmer handbook" defined under point II.1 of this contract, its comments--including oral comments--as well as the technical ideas, principles and methods contained therein. This technical knowledge is secret and substantial, fundamentally usable and of interest to the Licensee. 3 "Secret" shall mean that the contract know-how, either in its entirety or in the precise structure and composition of its components, is not generally known or easily accessible, such that part of its value lies in the head start which the Licensee will gain if it is communicated to the Licensee. The term "secret" shall not be limited to the narrow meaning, according to which each individual component of the contract know-how must be completely unknown or may not be available outside of the operation of the Licensor. The contract know-how is "substantial" because it consists of information which is important for the entirety or a significant portion a) of a manufacturing process, b) a product or service or c) for the development thereof and excludes everyday information. This information is useful, i.e., at the time of the conclusion of the contract, it is expected with regard to said information that it will help, for example, to advance into a new market or provide the Licensee with a competitive advantage vis-a-vis other manufacturers or service providers which have no access to the secret disseminated information or other comparable secret information. 3. USE SHALL MEAN: Permitted use (use, sale, rent, lease, or marketing) of B1 components of any type, including for in-house use by the Licensee, unless the Licensee proves that neither the contract components nor parts thereof nor the licensed know-how (including services in connection with the interface maintenance) were used. 4. NET SALES PRICE SHALL BE: the price which the Licensee has charged its customer, less packaging, freight and insurance, as well as taxes and other fees associated with the sale (commissions are not deductible). In the case of use in the in-house needs of the Licensee, the respective cost price shall constitute the net sales price. III. CONTRACT CONTENT SECTION 1 SUBJECT MATTER OF THE CONTRACT (1) For the duration of the contract, the Licensor shall grant the Licensee the non-exclusive and geographically unrestricted right to use the contract component and the contract know-how in accordance with the following terms, either personally or through the American SCM corporation SCM Microsystems Inc. In the case of use by the aforementioned American SCM corporation, the Licensee shall be liable to the Licensor with regard to compliance with all obligations arising from this contract. (2) When this contract is signed by both contracting parties, the contract shall take effect and the Licensee shall be permitted to use the contract components. Following the conclusion of the contract, the contracting parties shall define by mutual agreement the form in which the contract components shall be delivered. 4 SECTION 2 SCOPE OF USE (1) The Licensee shall have the following use rights with respect to the contract components: > the right to use the Telesec B1 controller software or portions thereof without restriction for its own development of PCMCIA card readers (modification, integration, further development, etc., but not dissemination in the source code), > the right to use the Telesec B1 driver software or portions thereof without restriction for its own development of PCMCIA card reader (modification, integration, further development, etc., but not the dissemination in the source code), > the right to use the Telesec B1 programmer handbook (B0/B1 HTSI) in all of the Licensee's own development, duplicate said handbook or cause the duplication thereof (in the form in which it was given for use) or make it available to the purchasers of B1 components in a form which discourages additional copying (for example on "DO NOT COPY" paper) (the Licensee shall have the same right for the acquisition of potential purchasers). Overall authority over the interface shall remain without exception with the Licensor;Section3 paragraph 3 shall be observed. > the right to use the trademark "B1-Technology" in accordance with the conditions defined in Section 9, > the right to use the description of the layers one and two of the interface B1pc, duplicate said description or cause the duplication thereof (in the form in which it was given for use) or make it available to the purchasers of B1 components in a form which discourages additional copying (for example on [original in English] "DO NOT COPY" paper) (the Licensee shall have the same right for the acquisition of potential purchasers). Overall authority over the interface shall remain without exception with the Licensor; Section 3 paragraph 3 shall be observed. (2) The list set forth in paragraph 1 is exhaustive. Further use rights shall require a separate agreement. The Licensee shall specifically not be entitled to grant sub-licenses to an extent beyond that defined in Section 9 paragraph 1. SECTION 3 CONSULTING AND INFORMATION SERVICES BY THE LICENSOR (1) If the Licensor needs instructive oral explanations in the case of substantial problems with respect to the contract components which it has been permitted to use by the Licensor, the Licensor shall provide such explanations to a reasonable extent for a reasonable introduction period. (2) The Licensor shall inform the Licensee early and in an appropriate manner concerning B1 standardization efforts and expected changes in the B1 interface descriptions. (3) At regular intervals, the Licensor shall invite the Licensee to standardization discussions of the B1 licensees. If the Licensee makes proposals for the modification, supplementation or further development of the B1 interfaces at such discussions, the Licensor shall examine them and, if appropriate, cause them to be introduced into the standardization discussion. 5 If the Licensee wishes to memorialize modifications, supplements or further developments of the B1 interfaces in writing and make them available to third parties before they are taken into consideration by the Licensor, the Licensee shall only be permitted to do so in the form of its own documentation which unmistakably points out that the modification, supplementation or further development of the B1 interfaces is its own and has not yet been cleared by the Licensor; mixture with the B1 interface descriptions of the Licensor shall not be permissible. (4) Additional consulting or information shall be provided by the Licensor only in connection with separate consulting contracts. SECTION 4 PROTECTION OF THE CONTRACT COMPONENTS AND CONTRACT KNOW-HOW, CONFIDENTIALITY (1) Subject to the use rights granted pursuant to Section 2, the Licensor hereby reserves all rights to the information, contract know-how and contract components (including potential copyrights and the right to apply for patents and other industrial property rights) communicated during the term of the contract. Beyond the licensed trademark, the Licensor shall have no duty to apply for industrial property rights (Section 10). (2) The contracting parties shall be obligated to maintain confidentiality with respect to all information exchanged or to be exchanged before and during the term of this contract, to the extent that such information can be ascertained from the contract component and is not fundamentally free under the provisions of this contract or has been designated as secret by the contracting parties. This shall also apply to knowledge concerning principles, working methods, manufacturing, new developments and improvements acquired in connection with this contract. To the extent that they are not already required to do so on the basis of their employment contract, employees of the contracting party shall be obligated to maintain confidentiality. (3) The restrictions set forth in paragraph 2 shall not apply to information > which can be documented to have been in the rightful possession of the recipient contracting party prior to the conclusion of the contract, > which became available to the general public on the basis of the publications by third parties without any actions on the part of the recipient contracting party, > which a contracting party is required to communicate to governmental authorities or other third parties pursuant to legal provisions (in such a case, prompt notice to the other contracting party shall be provided), > which was legally made accessible to the recipient contracting party by a third party which is subject to no duty of confidentiality vis-a-vis the conveying contracting party in this connection, > which can be documented to have been worked out independently by the recipient contracting party. (4) The foregoing obligations shall remain in effect following the end of the contract of the term for a period of three years. 6 SECTION 5 LICENSE PAYMENTS (1) For the use of the rights which are the subject matter of the contract, the Licensee shall pay the Licensor a license fee of [ * ] per use, but not to exceed [ * ]. (2) The basis of calculation for the license fee shall be the net sales price. (3) The Licensee shall give the Licensor semiannual license fee settlement statements in duplicate in a form recommended by the Licensor and acceptable to the Licensee. The statements shall include at least the type, quantity and sales price of the licensed components and the license fees. The settlement statement shall be given within 30 days after March 31 and September 30 of each year. (4) All payments which are to be made by the Licensee pursuant to this contract shall be remitted to the "booking office of the Telekom," into the account at Postbank Frankfurt/Main, account no. 76700-607, bank wire no. 500 100 60, in German marks--net without deduction of taxes or charges, which shall be borne by the Licensee--within 14 days after the settlement closing dates named in paragraph (3); the purpose of the use TSECE22AO4A shall be indicated. License fees which are denominated in currencies of other countries shall be converted into German marks at the listed exchange rate most favorable to the Licensee at the Bundesbank in Frankfurt on the date on which the payment is due. The Licensee may only offset against claims which are undisputed or established by final judicial adjudication. (5) If the license fees paid to the Licensor by the Licensee do not exceed [ * ] per half year in two successive half years, the contracting parties shall have the right to terminate the contract without notice. The contracting parties may exercise this right no earlier than 6/1/98. (6) In the event of late payment, penalty interest in the amount of 4% above the prevailing re-discount rate shall be due. (7) A disclosure of information given to the Licensee by third parties shall have no effect on the payment obligations of the Licensee and specifically shall not result in an obligation to repay already paid license fees. (8) For the delivery of B1 components to the Licensor, the Licensee shall be released from the obligation to pay license fees. The average license fee paid for the B1 components in question in the half year preceding the delivery shall serve for purposes of the calculation according to paragraph 5 (right of termination in the event of failure). To the extent that the Licensor requests B1 components from the Licensee, the Licensee shall be obligated to grant the most favorable terms and conditions to the Licensor for B1 components which have been granted to other customers to date. SECTION 6 BOOKKEEPING DUTY (1) The Licensee is in agreement that the Licensor may hire a certified public accountant independent of the two contracting parties to audit the license fee settlement statements presented to the Licensor. The Licensee shall make it possible for such certified public accountant to inspect the relevant books and documents of the Licensee to the extent necessary for such an audit; books and documents shall be maintained by the Licensee and held ready for inspection for a period of six years, with the exception of those years for which audits have been performed and a settlement has been achieved to the satisfaction of the Licensor. All information which the Licensor obtains as a result of such audit shall be treated confidentially. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7 (2) The Licensor shall bear the expense of the audit. The Licensee shall bear the expense of the audit if errors are detected which increase the current license fee payment by more than 5% above the obligation reported by the Licensee of for two successive calendar quarters. SECTION 7 MAINTENANCE, GUARANTEE AND LIABILITY (1) The Licensee is aware that the use of the B1-KLC and B1-KLT software (each in the source code) shall serve exclusively to provide the Licensee with a rapidly available basis for continued developments, improvements etc. in this connection. The Licensee knows that this software was developed by the Licensor for system integration (i.e., further processing) and has not been checked for absolute liability in all application environments and therefore cannot be taken over and used by the Licensee untested. Instead, the Licensee shall have the duty to personally check these contract components prior to any use (which is not provided by this contract) to determine freedom from errors and suitability for a specific application environment. For the stated reasons, the Licensor shall neither maintain the software nor assume a guarantee therefor. However, if the Licensor becomes aware of errors or defects in the B1-KLC and B1-KLT software, it shall promptly inform the Licensee. (2) The Licensor shall guarantee neither the marketability nor the economic exploitability of the trademark, know-how or interface information. (3) No guarantee is assumed that the use of the license does not infringe upon proprietary rights or copyrights of third parties or that it causes no damage to third parties. This shall not apply in cases in which the Licensor is aware of contrary rights or damage of third parties or is unaware thereof as a result of gross negligence. At this time, the Licensor is aware of no third-party rights which are in opposition to the intended use by the Licensee. If the Licensor becomes aware of rights of the aforementioned type, the Licensor shall promptly notify the Licensee. (4) Liability between the parties is hereby barred for compensation of damages--regardless of the legal ground--specifically arising from default, impossibility, Verschulden bei Vertragasabschluss,1 positive breaches of contract and tortious activity, except in cases of mandatory liability involving intentional conduct, gross negligence or absense of promised characteristics. In such cases, mutual liability between the contracting parties for personal injury and property damage shall be limited to one million German marks and, for other direct damages, shall be limited to the amount which corresponds to the license payments which are to be made by the Licensee under this contract (not including VAT) in the year prior to the damage event. The Licensor shall not be liable for the lack of economic result, indirect damages, consequential damages or atypical or unforeseeable damages resulting from defects in the contract components or any consulting which is provided, or for the fact that the contract components and contract know-how are free from rights of third parties beyond the assurance pursuant to paragraph 3. SECTION 8 ADVERTISING RIGHT The contracting parties shall be entitled to refer to the other contracting party as a license partner in a non-damaging manner. This shall also apply to written publications. - -------- 1 Verschulden bei Vertragsabschluss, or culpa in contrahendo (lit.: "fault at the time of concluding the contract"). A German legal doctrine which holds that once a negotiation has been undertaken there is an obligation implied in law to negotiate in good faith. See Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of Contract: A Comparative Study (1964) 77 Harv.L.Rev. 401 (Kessler & Fine).--Trans. 8 SECTION 9 USE OF THE TRADEMARK, QUALITY CONTROL, PRODUCT LIABILITY (1) The Licensee shall have the right (but not the duty) to place the trademark in any quantity on B1 components for use with PCMCIA card readers and media related thereto (prospectuses, advertising, etc.) in an appropriate and non-harmful manner; paragraphs 4 and 5 shall be observed. If the Licensee produces B1 components as a supplier and the supplied B1 components, as part of an overall system of the principal, are no longer remain visible to the observer to an extent sufficient for application of the trademark (printed circuit board, for example), the Licensee shall have the right to permit the principal to apply the trademark in relation to the supplied components. The Licensee shall be responsible for the principal's compliance with the provisions of this contract relating to the trademark. (2) The trademark shall be used exclusively in the layout presented below. Reductions or enlargements permissible pursuant to paragraph one may only be carried out proportionally. [Graphic] B1 TECHNOLOGY Since it is not possible to rule out color deviations in the manner of printing selected for this contract, the colors are described as follows: "B" Border color, black (Euro scale: 100% black; Pantone: black 6 U 2 X; RAL: 9011 graphite black) Fill-color gray (Euro scale: 47% black, Pantone: Cool Gray 7 U; RAL; 7045 Tele gray 1) "1" Border color, black (Euro scale: 100% black; Pantone: black 6 U 2 X; RAL: 9011 graphite black) Fill color, white (Pantone: 9060 C; RAL; 9010 white) 9 "TECHNOLOGY" No border Fill color, black (Euro scale: 100% black; Pantone: black 6 U 2 X; RAL: 9011 graphite black) SURFACE No border Fill-color magenta (Euro scale: magenta; Pantone; Rhodamine red U; RAL; 4010 Tele magenta) (3) To the extent necessary, the border and fill colors may be adapted to the material colors. This shall require the written consent of the Licensor. Consent may not and shall not be refused in an unreasonable manner. (4) A successful check of the respective B1 components in accordance with the requirements of the effective B1 specification shall be an indispensable prerequisite for use of the trademark. The respective effective B1 specification shall be made available to the Licensee at no charge. Each receipt of a new B1 specification shall be deemed to constitute a revocation and replacement of the preceding specifications. For purposes of testing, the Licensee shall contact an auditor for IT [information media] security named by the Licensor and follow the test office's test requirements. The Licensee is in agreement with the fact that, in individual instances, the Licensor will request test reports from the Licensee for control purposes for the B1 components in question. The Licensee shall present them promptly at its own expense. (5) The Licensee shall be required to ensure that the Licensee's function as a manufacturer of the B1 components is made clear in an appropriate manner on the components and is not concealed by the trademark. If the Licensor is nevertheless confronted with claims by third parties arising from product liability, the Licensee shall hold the Licensor harmless with respect to such claims This shall also apply if joint liability does not exist between the contracting parties. SECTION 10 APPLICATION, MAINTENANCE AND DEFENSE (1) The Licensor is informed of the fact that, at the time of the conclusion of the contract, an application had been made for registration of the trademark with the German Patent Office, but registration had not yet taken place. However, the contracting parties are in agreement that market conditions in existence at the time of the conclusion of the contract justify the risk of non-registration. The Licensor shall make all efforts which are necessary for a successful registration. If these efforts definitively fail and no registration takes place, the provisions of paragraph 4 shall apply mutatis mutandis. (2) The Licensor shall inform the Licensee appropriately if the Licensor acquires proprietary rights to the trademark in countries other than the Federal Republic of Germany. Such an expansion of the proprietary rights shall not result in an increase in license fees. (3) To the extent that proprietary rights to the trademark have been granted, the Licensor shall ensure their maintenance. The Licensor shall bear the expense thereof. (4) If the licensed trademark is declared void in whole or in part by final legal adjudication in one country, the validity of the contract shall not be affected thereby, as long as a proprietary right to the trademark exists in at least one other country or the co-licensed know-how is still secret at that point in time; the Licensor shall bear the burden of proof in this regard. No adjustment of the license fees shall take place. 10 (5) The contracting parties shall inform one another of all contractually relevant infringements by third parties. Neither parties shall be obligated to proceed against infringers. If a contracting party wishes to proceed judicially against infringers, the other party shall support in such a proceeding. If necessary, the Licensor shall provide the Licensee with all necessary powers of attorney and authorizations. If the Licensee proceeds judicially against an infringer, the Licensor shall receive 25% of the proceeds after deduction of the costs which Licensee incurs on the basis of a legally final decision. Otherwise, the contracting parties shall bear their own expenses. (6) If the Licensee is sued by third parties for infringement of proprietary rights arising from the use of the contract components or the contract know-how, the Licensee shall notify the Licensor promptly. The Licensor shall be obligated to provide the Licensee with information and documents for the defense against such accusations, to the extent that the Licensor is able to do so without violating obligations to third parties and is able to protect its own confidentiality interests. The Licensor shall be entitled to join in any legal dispute. Each contracting party shall bear the expense incurred in the prosecution of such a legal dispute. SECTION 11 FURTHER DEVELOPMENTS OF THE B1 DRIVER SOFTWARE (1) The Licensee shall notify the Licensor concerning further developments of the B1 driver software and make them available to the Licensor at no charge for free and unrestricted use in connection with its own applications. (2) The Licensee shall assume no guarantee for the further developments which are given for use; Section 7 shall apply mutatis mutandis. SECTION 12 CONTRACT TERM, TERMINATION (1) The contract shall run for an indefinite term and may be terminated by registered mail upon notice of 6 months effective at the end of the year. Other termination possibilities provided in this contract shall remain unaffected. (2) The contractual relationship may be terminated by either contracting party for good cause without compliance with a notice period. Such termination may only be effected within two weeks after secured receipt of knowledge of a ground justifying termination and shall specifically be possible for one of the following--non-exclusive--grounds: > in the event of violation by the other contracting party of one of the substantial contractual duties of this contract and futile expiration of a period of 10 days following warning by the other party, > in the case of application for the opening of bankruptcy or composition proceedings concerning the assets of the other party or in the case of a suspension of payments, > in the case of substantial changes in the control over the other contracting party, excluding changes in the Licensor as a result of the postal structure, > in the event of failure within the meaning of and in accordance with Section5 paragraph 5. 11 SECTION 13 RIGHTS AFTER TERMINATION OF CONTRACT (1) All rights of the licensee to use the contract components and contract know-how shall end when the contract ends. This shall apply to the contract know-how only to the extent that, and as long as, it is still secret; the Licensor shall bear the burden of proof in this regard. (2) Following the end of the contract, the Licensee shall be obligated to return all contract components with the exception of the interface descriptions. (3) If, prior to termination, the licensee has entered into obligations which remain in effect beyond the end of the contract, the Licensee shall definitively satisfy them at the next possible point in time. In such cases, the end of the contract within the meaning of paragraph 1 shall be replaced by the end of the obligation. New obligations may no longer be entered into following the receipt of termination notice,. (4) Paragraphs 1 through 3 shall apply mutatis mutandis to further developments given for use in accordance with Section 11. SECTION 14 MISCELLANEOUS (1) If individual provisions of this contract are invalid, the validity of the remaining provisions of the contract shall not be affected thereby. The invalid provisions shall be replaced by a provision which comes as close as possible to the economic goal of the invalid provision; the same shall apply in the case of a loophole. However, the contract shall be invalid in its entirety if adherence thereto would represent an unreasonable hardship for a contracting party, even taking into account the modifications provided pursuant to sentence 2. (2) Other contractual relationships between the parties shall remain unaffected and shall not be modified by this contract. (3) In the course of use, the Licensee shall be obligated to observe any export provisions. (4) No collateral agreements were concluded. Modifications of and addenda to this contract shall be designated as such, must be in writing and shall be binding as soon as they are signed by the contracting parties. All collateral agreements shall be valid only if they have been confirmed in writing. This written form reservation may only be rescinded by an agreement drafted in writing and signed by both contracting parties. (5) It is hereby stipulated that the Munich I State Court shall have jurisdiction over all disputes arising from this contract. The applicable law shall be the law of the Federal Republic of Germany. 12 (6) Contact persons for all questions as well as for all service of process and communications shall be: Licensor Deutsche Telekom AG PZ Telesec Paul Mertes Untere Industriestrasse 20 57250 Netphen Tel.: (0271) 708-1610 Fax: (0271) 708-1625 Licensee SCM MICROSYSTEMS GmbH Bernd Meier Luitpoldstrasse 6 85276 Pfaffenhofen Tel.: (08441) 896-0 Fax: (08441) 82884 Bonn, 7/7/96 Pfaffenhofen, 9/4/96 ------------------ ------------------ Deutsche Telekom AG, SCM MICROSYSTEMS GmbH [signature] [signature] [signature] [signature] - ----------------------- -------------------------- (legally valid signatures) (legally valid signatures) 13 MODIFICATION AGREEMENT TO THE B1 TRADEMARK LICENSE AND KNOW-HOW CONTRACT - hereinafter referred to as the "BASIC AGREEMENT" - BETWEEN Deutsche Telekom AG, D-53105 Bonn - hereinafter referred to as the Licensor - AND SCM MICROSYSTEMS GmbH D-85276 Pfaffenhofen - hereinafter referred to as the Licensee - [logo] B1 TECHNOLOGY 14 SECTION 1 CONTRACT TERM, TERMINATION Section 12 Paragraph 1 of the basic agreement is hereby amended and now provides as follows: The contract shall run for an indefinite term and may be terminated by registered mail upon notice of 6 months effective at the end of the year, but not earlier than the end of 1998. Other termination possibilities provided in this contract shall remain unaffected. SECTION 2 MISCELLANEOUS This addendum agreement shall become valid when signed by both contracting parties and shall become a direct component of the basic agreement, whose provisions shall continue to apply to the extent not otherwise expressly provided in this addendum agreement. Bonn, 8/29/96 Pfaffenhofen, 9/4/96 --------------- --------------- Deutsche Telekom AG, SCM MICROSYSTEMS GmbH [signature] [signature] [signature] [signature] - -------------------------- -------------------------- (legally valid signatures) (legally valid signatures) EX-10.29 29 PATENT LICENSE AGREEMENT DATED NOVEMBER 15, 1995 1 EXHIBIT 10.29 PATENT LICENSE AGREEMENT THIS PATENT LICENSE AGREEMENT ("Agreement") is entered into effective as of November 15, 1995 ("Effective Date") by and between SCM Microsystems, having offices at 131 Albright Way, Los Gatos, California 95030 ("SCM") and MIPS Dataline America, Inc.("MIPS"), having offices at 13240 Evening Creek Drive, Suite 311, San Diego, California 92128. WHEREAS, MIPS owns United States patents number 5,036,429, 5,136,467 and 5,396,617, and any and all extensions, continuations, continuations-in-part, divisionals, reissues-in-part, reissues and reissues-in-part of each and any of such patent and any and all foreign counterparts of any of the foregoing (the foregoing collectively referred to herein as the "Licensed Patents", and United States patent number 5,396,617, specifically, being referred to herein specifically as the "617 Patent"); and WHEREAS, SCM desires to license and MIPS desires to grant licenses under the Licensed Patents on the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises above and the parties' mutual promises below, and other good and valuable consideration, the sufficiency of which is hereby acknowledged by the parties, SCM and MIPS hereby agree as follows: 1. Grant of Rights. 1.1 License Grant. Subject to the terms and conditions of this Agreement, MIPS hereby grants to SCM, and SCM accepts a perpetual, irrevocable, fee-bearing, worldwide, and transferable right and license under the Licensed Patents and any and all of MIP's right, title and interest therein and thereto, with right to grant sublicenses of the foregoing rights, to manufacture, use and sell, have manufactured, lease and import "Exclusive Products" and "Nonexclusive Products" (as such terms are defined below) and provide related services of any kind or nature. 1.2 Exclusivity. The rights and licenses granted to SCM in Section 1.1 above are and will be exclusive with respect to the "Exclusive Products". For purposes of this Agreement, "Exclusive Products" means the following: PC cards and related products, including but not limited to smart cards, ethernet cards, adapters, connectors and extensions; but specifically excluding (i) products marketed by MIPS as of the Effective Date ("Current MIPS Products") and (ii) products not competitive (directly or indirectly) with products that may be offered by SCM from time to time ("Future MIPS Products"), which Future Products are functionally similar to Current MIPS Products. 1.3 Nonexclusivity. The rights and licenses granted to SCM in Section 1.1 are and will be nonexclusive with respect to the "Nonexclusive Products". For purposes of this Agreement, "Nonexclusive Products" means the following: Products of any kind for data storage, communication and/or transfer, including but not limited to the Exclusive Products, and related applications and interfaces, but specifically excluding Current MIPS Products. -1- 2 2. Compensation. 2.1 License Fees. For and in consideration of the rights and licenses granted to SCM under this Agreement, subject to Sections 2.2, 2.3 and 2.4 below. SCM agrees to pay, on the terms set forth in Section 2.5, below, the following MIPS license fees: (a) An up-front fee of [ * ] and (b) A per unit fee of [ * ] on the sale by SCM of the "Floppy IC Card Combination Product" unit (as defined in SCM marketing literature published as of the Effective Date) covered by the 617 Patent; and (c) A sublicensing fee of [ * ] of "Hardware Sublicense Royalties" received by SCM. As used in this Section, "Hardware Sublicense Royalties" means Licensed Patent sublicense royalties received by SCM and allocated to hardware content (as opposed to software or firmware content) according to the terms of the Licensed Patent sublicense agreement between SCM and the third party sublicensee. However, if no such allocation is made in such sublicense agreement, then all royalties payable under the sublicense agreement will be deemed to be allocated to hardware content; and (d) A supplemental annual fee of [ * ] 2.2 Accrual of Fees. Fees payable in accordance with Section 2.1 above will accrue only upon actual receipt of revenues by SCM in respect of the commercial disposition of products covered by one or more of the Licensed Patents. However, no fees will accrue on revenues received by SCM from any of its affiliates, by any SCM affiliates from SCM or by any SCM affiliates from one another. However, SCM will not license through its affiliates in order to avoid fees hereunder; and revenues received by such affiliates from third parties will be deemed to accrue for purposes of calculating royalties of this Agreement. 2.3 Maximum Annual Fees. Fees payable to SCM in accordance with Section 2.1 above will not exceed [ * ] per year (commencing with the Effective Date and each anniversary thereof), and no fees in excess of such amount will accrue to MIPS for any such year. 2.4 Patent Coverage. No fees will be payable under this agreement unless there is a transaction for the commercial disposition of a product covered by one or more unexpired, valid and enforceable Licensed Patents issued in the jurisdiction in which the transaction occurs; provided that, except for the U.S. patents specifically listed in the Recitals to this Agreement, SCM must receive, in advance of the accrual of fees hereunder, unequivocal and unambiguous written notice from MIPS of the issuance of such Licensed Patents. For purposes of the preceding sentence, a transaction will be deemed to occur in the jurisdiction in which physical possession of such product is received by the recipient in such transaction (e.g., a purchaser or lessee). * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. -2- 3 2.5 Payment Terms. SCM shall pay MIPS fees as provided in Section 2.1 above, by valid bank check to be drawn on a U.S. bank, as follows: (a) Up-front fees are payable within fifteen (15) days after the Effective Date; and (b) Per unit fees are payable within forty-five (45) days after the fiscal quarter of SCM during which revenue is received by SCM on the sale of the Floppy IC Card Combination Product unit; and (c) Sublicensing fees are payable within forty-five (45) days after the fiscal quarter of SCM during which sublicense royalty revenue is received by SCM; and (d) Supplemental annual fees are payable in advance at least fifteen (15) days after each anniversary of the effective date during the term of this Agreement, although the first such annual fee will be paid within fifteen (15) days after the Effective Date. 2.6 Most Favored Licensee. MIPS represents and warrants to SCM that MIPS has not granted any third party rights within the scope of the rights and licenses granted to SCM under this Agreement on terms and conditions any of which are more favorable than the terms and conditions provided to SCM in this Section 2 above. MIPS agrees that, if at any time, MIPS offers or grants any such more favorable terms and conditions to a third party, MIPS will notify SCM in writing as soon as practicable. SCM will be entitled to substitute any such more favorable terms and conditions for corresponding terms and conditions, if any, provided in this Agreement. 2.7 Currency Conversion. SCM shall pay all fees under this Agreement in U.S. dollars. If SCM receives sublicense royalties (upon which sublicensing fees are based, as above) in currencies other than U.S. dollars, then SCM shall convert such other currencies, for purposes of calculating sublicensing fees, at currency conversion rates published by the Wall Street Journal, U.S. West Coast Edition, on the last day of publication in the quarter during which revenues accrue. 2.8 Taxes. MIPS shall bear all taxes, other than taxes on the income of SCM, resulting from the grant or exercise of the rights and licenses provided to SCM herein. Without limiting the foregoing, SCM may deduct from fees payable to MIPS, and pay to taxing authorities in each jurisdiction, taxes levied on fees payable to MIPS in connection with such grant or exercise. SCM agrees to provide MIPS with certificates or other documents received by SCM in connection with the payment of such withholding taxes to such authorities (which may be usable by MIPS in obtaining foreign tax credits under U.S. federal law in respect of such foreign taxes withheld). 2.9 Reports and Audits. (a) SCM agrees to include with each quarterly payment of fees a reasonably detailed report setting forth the information used to calculate such fees. -3- 4 (b) SCM agrees to keep reasonably detailed books and records containing such information. (c) MIPS shall have the right to have its auditors reasonably acceptable to SCM inspect such books and records to determine whether quarterly payments made to MIPS under this Agreement are accurate; provided that, SCM may condition any such inspection upon (i) reasonable notice to SCM; (ii) conduct of the inspection during SCM's normal business hours, (iii) initiation of any such inspection not more often than once a year and (iv) the written agreement of the auditors to keep information SCM reasonably deems confidential from unauthorized disclosure and to disclose to MIPS only the amount of any overpayments or underpayments under this Agreement. MIPS shall bear the cost of any such inspection; provided that SCM shall reimburse MIPS for the reasonable cost of any such inspection which discloses an aggregate underpayment to MIPS for the period for which books and records are inspected of five percent (5%) or more (provided that SCM shall be obligated for such reimbursement for any period only once). 3. Marketing Participation by MIPS. SCM will consider including MIPS as a participant in SCM's marketing activities related to products manufactured by SCM and covered by the Licensed Patents, including sharing certain sales and marketing data and reports, as well as potential technical collaboration and possible cooperative selling activities. Such participation will be subject to written agreement of both parties. 4. Expiration and Termination. 4.1 Expiration of Specific Licenses. The licenses granted to SCM under each Licensed Patent as provided in this Agreement will expire, as to each jurisdiction, upon the expiration, or a ruling of invalidity or unenforceability of each Licensed Patent in any such jurisdiction; and SCM's payment obligations under this Agreement in respect of such Licensed Patent will cease upon such expiration; provided that SCM may continue to practice the inventions covered by such Licensed Patent. 4.2 Termination. SCM may terminate this Agreement at any time for any reason or for no reason upon thirty (30) days' written notice to MIPS. Upon any such termination of this Agreement (or any other termination agreed by both parties in writing), all rights and licenses granted to SCM under Section 2 of this Agreement will cease; except that SCM will continue to have a perpetual right to continue to manufacture and distribute replacement products and components and provide product services in accordance with SCM's warranties given to its customers and reasonable service policies. 4.3 Survival of Obligations. All payment obligations that have accrued as of the effective date of expiration of any license or termination of this Agreement shall survive termination for any reason. In addition, the provisions of Sections 4 et seq. will survive termination of this Agreement for any reason. -4- 5 5. Warranty and Authority. MIPS hereby represents and warrants to SCM that MIPS owns all right, title and interest in and to the Licensed Patents necessary in order for SCM to practice the inventions covered by the Licensed Patents free from interference or claim by any third party. MIPS further represents and warrants to SCM that MIPS has not granted or entered into (and MIPS covenants to SCM that MIPS will not grant or enter into) any license or agreement inconsistent with this Agreement. MIPS agrees to indemnify and hold SCM harmless from and against any and all expenses, costs (including the reasonable fees of attorneys and other professionals), damages, judgments, awards and other liabilities of any nature incurred by SCM as a result of a breach of the foregoing representations and warranties by MIPS, and MIPS shall reimburse SCM or pay any of the foregoing promptly upon written request by SCM. 6. Limitation of Liability. IN NO EVENT WILL SCM BE LIABLE UNDER THIS AGREEMENT FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OR FOR ANY AMOUNT IN EXCESS OF AMOUNTS EXPRESSLY PROVIDED HEREIN, UNDER ANY LEGAL OR EQUITABLE THEORY, WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. General Provisions. 7.1 Governing Law; Venue. This Agreement will be governed and interpreted in accordance with the laws of the State of California, excluding its conflicts of law principles. The parties agree that any proceeding to resolve any dispute under or in connection with this Agreement shall be brought in the state or federal courts in Santa Clara County, California. 7.2 Notices. Any notices permitted or required under this Agreement shall be sent in writing via certified U.S. Mail or internationally recognized courier to the recipient party's address first set forth in this Agreement. Notices will be deemed to be effective three (3) days after sending. 7.3 Severability. The invalidity or unenforceability of any term or provision of this Agreement shall in no way affect the validity or enforceability of any other term of provision. 7.4 Complete Agreement. This Agreement is the final, complete and exclusive understanding between SCM and MIPS with respect to its subject matter. This Agreement supersedes all prior agreements and promises relating to its subject matter. No promises or agreements made at or after the Effective Date are binding unless in writing and signed by both parties. -5- 6 IN WITNESS WHEREOF, THE PARTY SIGNATORIES BELOW AGREE TO THIS AGREEMENT AS SET FORTH ABOVE. SCM MICROSYSTEMS, INC. MIPS DATALINE AMERICA, INC. By:_________________________ By:_________________________ Robert Schneider, Dipl. Phys. Thomas Villwock, President President -6- EX-10.31 30 MANUFACTURER'S SALES REPRESENTATIVE AGREEMENT 1 EXHIBIT 10.31 MANUFACTURER'S SALES REPRESENTATIVE AGREEMENT This Agreement is dated as of December 8, 1994 between SCM Microsystems, Inc., with an office located at 131 Albright Way, Los Gatos, CA 59030 (hereinafter called the "Manufacturer"), and the undersigned, AGM, with an office located at 15505 Quail Run Drive, North Potomac, MD 20878 (hereinafter called the "Representative"). NOW, THEREFORE, in consideration of the mutual agreements of the parties hereto, Manufacturer and Representative agree as follows: 1. Appointment and Territory. Subject to the terms and conditions hereafter set forth, Manufacturer hereby appoints and grants to Representative the exclusive and nonassignable right to sell all products of Manufacturer described in Exhibit A hereto (hereinafter called the "Products") in the geographic territory described in Exhibit A hereto (hereinafter called the "Territory") and Representative hereby accepts such appointment. 2. Obligations of Representative and Manufacturer. A. As Manufacturer's exclusive sales representative for the Products in the Territory, Representative shall: 1. Actively and fully promote the Products, identify potential customers in the Territory and exploit, expand and cover existing and potential customers in the Territory on a regular basis, consistent with good business practice, and bear all costs and expenses incurred by Representative in connection therewith; 2. Cooperate with and assist Manufacturer in all advertising and merchandising campaigns initiated by Manufacturer with respect to the Products; provided, however, that the costs and expenses of such campaigns initiated by Manufacturer shall be borne by Manufacturer; 3. Employ such sales personnel on such compensation terms (payable by Representative) and on such other terms and conditions as Representative may deem appropriate to market and sell the Products in the Territory and otherwise carry out its obligations under this Agreement; provided, however, Representative, in so employing such sales personnel, shall act individually and not as an agent for Manufacturer, and such sales personnel shall for all purposes be employees of Representative and not Manufacturer; 4. When requested by Manufacturer, travel to the main office of Manufacturer in Los Gatos, California, or any other location deemed appropriate by Manufacturer to report to and consult with Manufacturer and to acquaint itself with the Products and all phases of Manufacturer's sales and manufacturing capabilities; and 2 5. Immediately notify Manufacturer in the event Manufacturer introduces a new Product that may be competitive with other products that Representative markets or sells for other manufacturers. B. Manufacturer shall assist Representative with Representative's performance of its obligations under this Agreement by: 1. Furnishing Representative, without charge, reasonable amounts of promotional sales and technical information and other literature and brochures representing the Products, and, with respect to new Products, endeavoring to provide such information in advance of initial production or sale of such Products; 2. Providing reasonable sales and service assistance; 3. Furnishing Representative with current price lists and schedules; and 4. Endeavoring to keep Representative fully informed of all changes in the Products. 3. Commissions; Collection of Accounts. A. Manufacturer shall pay Representative commissions on sales made to Representative's customers in the Territory in accordance with the Commission Schedule set forth on Exhibit A hereto. Direct customers of Manufacturer which are identified on Exhibit A hereto as being a "House Account" shall under no circumstances be deemed customer of Representative for purposes of this Agreement notwithstanding that such "House Account" customers may be located in the Territory. Representative's commission shall be computed on the net invoice price (i.e., the gross price less customary charges for such items a taxes, freight and trade discounts) of the Products as billed to Representative's customers by Manufacturer and shall be payable by Manufacturer. Commission amounts will be paid to the Representative after the customer's invoice has been paid. B. Manufacturer shall provide Representative with copies of all invoices sent to Representative's customers in the Territory. All Products for which sales orders are accepted by Manufacturer shall be billed and shipped directly to Representative's customers by Manufacturer and all payments by such customers shall be made directly to Manufacturer. Manufacturer shall be responsible for all collections from Representative's customers and, unless otherwise agreed by Manufacturer and Representative in writing, Representative shall have no authority to make any such collections; provided, however, upon request by Manufacturer, Representative shall assist Manufacturer in collecting overdue accounts. Manufacturer has the sole authority and discretion to collect, compromise and settle the accounts of all customers of Representative. Nevertheless, Manufacturer shall exercise reasonable diligence to collect the full invoice amount for all Products sold by Representative to its customers in the Territory. -2- 3 4. Commission Charge-Back Manufacturer shall have the right to charge back to Representative's commission account: A. In the event of any refund or credit to the account of any customer of Representative because of rejection or return by such customer of any Products, the amount which represents the commission previously paid to Representative or credited to Representative's commission account in respect of such refunded or credited amount; B. In the event final settlement of an account of a customer of Representative is made on less than a full payment basis or in the event an account of any such customer is charged off in whole or in part by Manufacturer, the amount which represents the commission previously paid to Representative or credited to Representative's commission account in respect of the uncollected portion of such customer's account resulting from such final settlement or charge-off; and C. In the event Representative assumes responsibility for an existing account which was previously the responsibility of another sales representative of Manufacturer or which previously was a House Account, all commission charge-backs of the nature described in Clauses 4A an B above made on or after 60 days after Representative assumes responsibility for such account notwithstanding that Representative may not have earned any commissions with respect to such account at the time of such charge-back. 5. Prices and Terms. Representative shall conduct its business as an independent sales representative and shall have no authority to bind Manufacturer. All sales orders, including, without limitation, the prices and terms thereof, shall be subject to the final approval of and acceptance by Manufacturer. Representative acknowledges that the price lists and schedules for the Products and the prices and terms of all sales orders constitute confidential information of Manufacturer, and Representative shall not disclose any of such information to any other person except as may be necessary to enable Representative to perform its obligations under this Agreement. 6. Termination. A. This Agreement shall be effective as of the date first written above and may be terminated at any time by either party hereto upon thirty (30) days' prior written notice to the other party at the address for such party set forth in the opening paragraph of this Agreement, or such other address as such party shall designate in writing to the other party. Each notice under this Agreement shall be sent certified U.S. mail, return receipt requested, postage prepaid and shall be effective upon the earlier of receipt or three (3) days after the mailing thereof. B. Representative shall be entitled to a commission in accordance with the provisions of this Agreement on all sales orders which are transmitted to and accepted by Manufacturer prior to the effective date of termination of the Agreement; provided, however, that under no circumstances shall -3- 4 Representative be entitled to commissions on any shipments made by Manufacturer with respect to such sale orders more than thirty (30) days after the effective date of termination of this Agreement. 7. Indemnification. A. Manufacturer shall have sole responsibility for the design, development, and performance of the Products and the protection of its trade name. B. Manufacturer agrees to indemnify and hold Representative harmless from, and to pay all losses, costs, or expenses which Representative may have to incur on account of, any infringement of patents, trademarks, trade names or copyrights resulting from sales of the Products. 8. Entire Agreement. This Agreement supersedes all prior agreements between the parties hereto relating to the subject matter hereof and all such prior agreements are declared to be null and void and without further force or effect. This Agreement constitutes the entire agreement between Manufacturer and Representative and there are no oral or other agreements, arrangements, representations, or understandings between Manufacturer or Representative. This Agreement may not be amended or modified except by an instrument in writing duly signed by both parties hereto. 9. Miscellaneous. This Agreement shall be governed by and construed in accordance with the laws of the State of California. -4- 5 In WITNESS WHEREOF, Representative has hereunto affixed his/her signature and an authorized officer of Manufacturer has hereunto affixed his/her signature, both as of the day and year first above written. MANUFACTURER: SCM MICROSYSTEMS, INC. s/signature By: s/Michael Hunter - ----------------------------- ----------------------------- Witness Name: Michael Hunter Title: Vice President of Sales --------------------------- REPRESENTATIVE: s/signature AGM - ----------------------------- -------------------------------- Witness Name: s/signature --------------------------- 6 EXHIBIT A A. The Products All SCM Microsystems Brand Products
B. The Territory: State Zip-Code DC 20000-20500 DE 19700-19900 MD 20600-21900 NJ 08000-08700 PA 16800-19600 VA 22000-24500
C. The Commission Schedule: [*] * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-11.1 31 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 SCM Microsystems, Inc. and Subsidiaries Statement Regarding Computation of Net Income Per Share (in thousands, except per share data)
Three month Year ended, period ended, December 31, 1996 March 31, 1997 ----------------- -------------- Net loss $(1,110) $ (475) Interest expense on convertible notes payable 96 -- ------- ------ Net loss used in earnings per share calculation $(1,024) $ (475) ------- ------ Weighted average common shares outstanding 1,280 1,468 Weighted average convertible preferred stock and notes payable 2,631 3,225 Staff Accounting Bulletin No. 83 issuances and grants(1) 1,361 1,361 ------- ------ Shares used to compute pro forma net loss per share 5,272 6,054 ------- ------ Pro forma net loss per share $ (0.19) $(0.08) ------- ------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock, convertible preferred stock and convertible notes payable issued for consideration below the assumed initial public offering (IPO) price, and stock options and warrants granted with exercise prices below the IPO price during the 12-month period preceding the date of the initial filing of the Registration Statement, have been included in the calculation of common equivalent shares, using the treasury stock method, as if they were outstanding for all periods presented. EX-21.1 32 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT SCM Microsystems GmbH, a wholly owned subsidiary of Registrant, is a corporation organized under the laws of Germany. SCM Microsystems (U.S.) Inc., a wholly owned subsidiary of Registrant, is a Delaware corporation. EX-23.1 33 CONSENT OF KPMG 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE The Board of Directors SCM Microsystems, Inc.: The audits referred to in our report dated March 31, 1997, except as to Note 11, which is as of May 30, 1997, included the related financial statement schedule as of December 31, 1996, and for each of the years in the three-year period ended December 31, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the registration statement. KPMG Peat Marwick LLP Palo Alto, California June 12, 1997 EX-27.1 34 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SCM MIROSYSTEMS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND REGISTRATION STATEMENT ON FORM S-1. 1,000 YEAR 3-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 MAR-31-1997 2,593 4,946 0 0 5,237 4,516 210 203 2,279 2,411 10,628 12,546 1,274 1,323 456 508 11,459 13,374 12,415 5,503 0 0 5,068 14,554 1 1 1 2 (6,026) (6,686) 11,459 13,374 21,520 4,365 21,520 4,365 14,880 2,800 14,880 2,800 7,620 2,041 159 0 304 66 (1,110) (475) 0 0 (1,110) (475) 0 0 0 0 0 0 (1,110) (475) (0.19) (0.08) (0.19) (0.08)
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