-----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, IKtQZtf0sEBgUI8TP9iqy3Cv7qWNjrKVgOvmpzIrgJZ/fWE4FvjfchqEQhzh5OXi gKPKU1mbQO+l/IBeCqLylg== 0000891618-97-003707.txt : 19970912 0000891618-97-003707.hdr.sgml : 19970912 ACCESSION NUMBER: 0000891618-97-003707 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19970908 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCM MICROSYSTEMS INC CENTRAL INDEX KEY: 0001036044 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770444317 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-29073 FILM NUMBER: 97676411 BUSINESS ADDRESS: STREET 1: 131 ALBRIGHT WAY CITY: LOS GATOS STATE: CA ZIP: 95030 BUSINESS PHONE: 4083704888 MAIL ADDRESS: STREET 1: 131 ALBRIGHT WAY CITY: LOS GATOS STATE: CA ZIP: 95030 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997 REGISTRATION NO. 333-29073 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO 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. N. ANTHONY JEFFRIES, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: (i) one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and (ii) the other to be used in connection with a concurrent offering outside of the United States and Canada (the "International Prospectus"). The U.S. Prospectus and the International Prospectus are identical in all respects except for the front cover page and back cover page of the International Prospectus, both of which are included herein after the final page of the U.S. Prospectus and are labeled "Alternate Page for International Prospectus." Final forms of each of the Prospectuses will be filed with the Securities and Exchange Commission under Rule 424(b). 3 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 September 5, 1997 3,370,000 Shares LOGO Common Stock ----------------------------- Of the 3,370,000 shares of Common Stock offered, 2,620,000 shares are being offered hereby in the United States and Canada (the "U.S. Offering") and 750,000 shares are being offered in a concurrent international offering outside the United States and Canada (the "International Offering"), subject to transfers of shares between the U.S. Underwriters and International Underwriters (collectively, the "Underwriters"). The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. The closing of the U.S. Offering and International Offering are conditioned upon each other. See "Underwriting." Of the 3,370,000 shares of Common Stock offered, 3,250,000 shares are being sold by SCM Microsystems, Inc. (the "Company") and 120,000 shares are being sold by certain selling stockholders (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of the shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "SCMM" and intends to submit an application to have the Common Stock listed on the Neuer Markt of the Frankfurt Stock Exchange. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 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. ========================================================================================================== Proceeds to Price to Underwriting Proceeds to Selling Public Discount (1) Company (2) Stockholders - ---------------------------------------------------------------------------------------------------------- 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 $1,170,000, 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 505,500 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, Proceeds to Company, and Proceeds to Selling Stockholders 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 4 [See Appendix - Description of Graphics] 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 5 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 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"); (ii) the sale to Gemplus of 200,000 shares of Common Stock at $9.00 per share in a private placement that will close concurrently with this offering (the "Directed Placement") and (iii) that the Underwriters' over-allotment option is not exercised. THE COMPANY SCM Microsystems designs, develops and sells standards-compliant hardware, firmware and software products and technologies used in smart card and other token-based network security and conditional access systems. The Company's objective is to leverage its expertise in Personal Computer Memory Card Industry Association ("PCMCIA") peripheral products 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 sells security and access products which include SwapBox PC Card adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules and its SmartOS universal smart card interface architecture. The Company sells security and access products to original equipment manufacturers ("OEMs") such as computer, telecommunication and digital video broadcasting ("DVB") component and system manufacturers. The Company markets, sells and licenses its products through a direct sales and marketing organization primarily to OEMs and also through distributors, value-added resellers ("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 and electronic commerce market by: (i) securing data before it is transmitted across LANs, public switched networks or the Internet; (ii) providing a range of products that enable smart cards to be read through standard PCMCIA slots thus bridging the gap between smart cards and PCs, network computers and other devices; and (iii) employing an open-systems, remotely upgradeable architecture that provides compatibility across a range of hardware platforms and software environments. The Company addresses the needs of the conditional access market by providing smart card-based Digital Video Broadcast -- Conditional Access Module ("DVB-CAM") products that: (i) adhere to the European DVB-Common Interface ("DVB-CI") standard and the United States "NRSS-B" standard promulgated by the National Renewable Security Standards Committee of the Society of Cable and Telecommunication Engineers; (ii) include real time, high-bandwidth video decryption capabilities within the reader which can be unlocked by smart card tokens, which by themselves are not capable of decrypting digital video data at the rate required for DVB; and (iii) incorporate read/write capabilities that permit DVB content and service providers to perform a virtually no-cost upgrade of users' access rights as new products and services 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 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. 3 6 From the Company's inception 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. The Company has formed strategic relationships, including technology sharing agreements, with a number of key industry players such as France Telecom, Gemplus, Intel 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 address of the Company's principal United States office is located at 131 Albright Way, Los Gatos, California 95032 and its telephone number is (408) 370-4888. THE OFFERING Common Stock offered by the Company............ 3,250,000 shares Common Stock offered by Selling Stockholders... 120,000 shares ------------------ Total................................ 3,370,000 shares Common Stock offered in U.S. Offering.......... 2,620,000 shares Common Stock offered in International 750,000 shares Offering..................................... ------------------ Total................................ 3,370,000 shares Common Stock to be outstanding after the 10,115,243 shares (1) offerings.................................... Use of proceeds................................ For repayment of indebtedness and general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol......... SCMM
The Company intends to submit an application to have the Common Stock listed on the Neuer Markt of the Frankfurt Stock Exchange. - --------------- (1) Excludes: (i) 665,926 shares of Common Stock issuable upon exercise of stock options outstanding as of June 30, 1997 at a weighted average exercise price of $3.87 per share; (ii) 189,191 shares of Common Stock and Preferred Stock subject to warrants outstanding as of June 30, 1997 at an exercise price of $5.72 per share and (iii) 751,500 shares of Common Stock issuable upon exercise of stock options and warrants issued subsequent to June 30, 1997 at a weighted average exercise price of $11.63 per share. See "Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements. "SwapBox," "SwapSmart," "SwapAccess" and "SmartOS" are trademarks of the Company. This Prospectus also contains trademarks of other companies. 4 7 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------- ----------------- 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales(1): Security and access products........ $ -- $ 1,426 $12,520 $16,628 $ 5,789 $ 9,820 PCMCIA peripheral products.......... 2,379 5,020 5,546 4,892 2,724 163 ------- ------- ------- ------- ------- ------- Total net sales................ 2,379 6,446 18,066 21,520 8,513 9,983 ------- ------- ------- ------- ------- ------- Gross profit........................... 600 1,359 2,295 6,640 2,342 3,857 Operating expenses..................... 1,601 2,966 4,895 7,620 3,496 4,564 ------- ------- ------- ------- ------- ------- Loss from operations................... (1,001) (1,607) (2,600) (980) (1,154) (707) Net loss............................... (1,096) (1,868) (2,926) (1,110) (1,246) (410) Accretion on redeemable convertible preferred stock..................... -- -- (139) (287) (143) (478) ------- ------- ------- ------- ------- ------- Net loss applicable to common stockholders........................ $(1,096) $(1,868) $(3,065) $(1,397) $(1,389) $ (888) ======= ======= ======= ======= ======= ======= Pro forma net loss per common share(2)............................ $ (0.25) $ (0.13) ======= ======= Shares used to determine pro forma net loss per common share(2)............ 5,272 7,018 ======= =======
JUNE 30, 1997 -------------------------- CONSOLIDATED BALANCE SHEET DATA: ACTUAL AS ADJUSTED(3) ------- -------------- Cash and cash equivalents......................................... $10,942 $ 45,505 Working capital................................................... 13,694 50,594 Total assets...................................................... 20,665 55,228 Redeemable convertible preferred stock............................ 21,781 -- Total stockholders' equity (deficit).............................. (7,223) 51,458
- --------------- (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) Adjusted to reflect the sale of 3,250,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $12.00 per share, after deducting the underwriting discounts and estimated offering expenses payable by the Company and the application of the estimated net proceeds therefrom, the Automatic Conversion and the Directed Placement. See "Use of Proceeds" and "Capitalization." 5 8 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"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All forward-looking statements 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. The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides safe harbors for certain forward-looking statements. The Reform Act, by its terms, does not apply to initial public offerings. Nonetheless, 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 incurred a net loss of $410,000 for the six months ended June 30, 1997 and net operating losses on an annual basis since its inception in 1993. As of June 30, 1997, the Company had an accumulated deficit of $8.9 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 or its 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 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 data security products to the U.S. government. The Company expects that as sales of its DVB products, which are currently 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. Initial sales of the Company's products to a new customer typically involve a 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 9 Based upon the factors enumerated above, the Company believes that its operating results may vary significantly in future periods and that historical results are not reliable indicators of future performance. It is likely that, in some future quarter or quarters, the Company's operating results will be below the expectations of stock market analysts and investors. In such event, the market price of the Company's Common Stock could decline significantly. 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 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. The Company's net sales are now and will continue to 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. 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 to 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 designed to provide smart card 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 SwapAccess DVB-CAM product implements the DVB-CI and NRSS-B standards. 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. While the NRSS Committee has proposed the NRSS-B standard for use in the United States, there can be no assurance that this standard will be adopted as currently proposed or at all. Moreover, even if this or another standard is adopted, there can be no assurance whether, or to what extent, the United States DVB market will grow. In addition, the substantial installed base of analog set-top boxes in the United States may cause the market for DVB products in general, and the Company's SwapAccess products in particular, 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." DEPENDENCE ON SALES TO OEMS A substantial majority of the Company's products are intended for use as components or subsystems in systems manufactured and sold by third party OEMs. In 1996, almost all of the Company's sales were to OEMs and the Company expects this dependence on OEM sales to continue. 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 (all of which are OEMs) 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 7 10 demonstrate such advantages, there can be no assurance that OEMs will elect to incorporate the Company's products into their current or future systems. Further, the business strategies and manufacturing practices of the Company's OEM customers are subject to change and any such change may result in decisions by the customers to decrease their purchases of the Company's products, seek other sources for products currently manufactured by the Company or manufacture these products internally. The Company's OEM customers may also seek price concessions from the Company. Failure of OEMs to incorporate the Company's products into their systems, the failure of such OEMs' systems to achieve market acceptance or any other event causing a decline in the Company's sales to OEMs 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 suppliers to the DoD. A significant loss of indirect sales to the U.S. 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, 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 and access control products 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. 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 security and access control 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 or standards and to changes in customer requirements, or may be able 8 11 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: the extent to which products support industry standards and provide interoperability; technical features; ease of use; quality/reliability; level of security; strength of distribution channels; and price. There can be no assurance that the Company will be able to compete as to these or other factors 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 1994 to $21.5 million in 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 13 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 72 as of June 30, 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 U.S. headquarters are located in Los Gatos, California, its European headquarters are located in Pfaffenhofen, Germany, and its 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. Operating in diverse geographic locations imposes a number of risks and burdens on the Company, including the need to manage employees and contractors from diverse cultural backgrounds and who speak different languages, and difficulties associated with operating in a number of time zones. Although the Company seeks to mitigate the difficulties associated with operating in 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 to implement and operate complex information systems that are capable of providing timely information which can readily be consolidated. 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 12 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. In April 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. Although such dispute was settled on terms acceptable to the Company, there can be no assurance that future disputes with third parties will not arise nor that any such disputes can be resolved on terms acceptable to the Company. In addition, a third party has alleged that the Company has infringed the third party's trademarks and engaged in unfair competition. 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. In the event that such manufacturer (or any other key supplier) were unable to meet the Company's 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 10 13 supplies of its products from its current or alternative sources would materially and adversely affect the Company's business and operating results. 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. 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 contractor's 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-based supplier, and mechanical components for use in its smart card reader product exclusively from Stocko, a German-based supplier. The Company's reliance on sole source 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 on a timely and continuous basis new and enhanced products that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. 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. Approximately 82.5%, 49.0%, 52.5% and 69.0% of the Company's revenues in 1994, 1995, 1996 and the six months ended June 30, 1997, respectively, were derived from customers located outside the United States. Because a significant number of the Company's principal customers are located in other 11 14 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. These factors may 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. The Company does not currently engage in hedging activities with respect to its foreign currency exposure. 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 could 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. In addition, 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 of the respective agreements has no set termination date, may be terminated by the subsidiary or the officer with six months notice, and provides that the officer is bound by a non-compete provision during the one-year period following his termination. Non-compete agreements are, however, generally difficult to enforce and therefore these provisions may not provide significant protection to the Company. The Company also has an employment agreement with Jean-Yves Le Roux, its Vice President, Engineering, that is terminable by either party at will. The Company does not have employment agreements with any of its other key employees and does not maintain key man life insurance on any of its 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 12 15 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 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 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. 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 23.3% of the Company's outstanding shares of Common Stock. Accordingly, these stockholders, acting together, will continue to be able to exert significant influence over 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 and Selling 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 its officers and directors 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 foregoing provisions give 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. The Company's Amended and Restated Certificate of Incorporation 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. 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. In addition, in connection with its listing on the Neuer Markt of the Frankfurt Stock Exchange, the Company will be required to comply with the German Takeover Code (the "German Code"). The German Code regulates mergers, consolidations and tender offers ("Public Offers"), and requires companies seeking to 13 16 make a Public Offer to inform the German regulatory authorities and the public of the offer, to provide certain disclosure to the target company's stockholders, to generally treat stockholders equally in an offer, and to comply with certain other procedural requirements. In addition, the German Code gives broad authority to the German regulatory authorities to interpret the German Code and to review and regulate specific Public Offers. Compliance with the German Code could have the effect of delaying, deterring or preventing 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 licenses certain technology from a third party pursuant to a license that is not transferable by the Company without the prior written consent of the third party. This provision may prohibit the transfer of such technology in a merger or consolidation of the Company with another company. As a result, this provision may have the effect of discouraging or preventing an acquisition of the Company. 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. See "Underwriting." 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 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. 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 10,115,243 shares of Common Stock, assuming no further exercise of options or warrants outstanding as of June 30, 1997. Of these shares, the 3,370,000 shares offered hereby (3,875,500 shares if the Underwriters' overallotment options are 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 6,745,243 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 and an additional 31,126 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 4,377,560 shares will become eligible for sale pursuant to Rule 144 or Rule 701 under the Securities Act, and 2,278,939 additional shares will become eligible for sale thereafter under Rule 144. See "Shares Eligible for Future Sale." Holders of an aggregate of 6,278,947 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 $12.00 per share, investors purchasing shares in this offering will incur immediate dilution of $6.91 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 17 BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS This offering will provide substantial benefits to the current stockholders of the Company. Consummation of this offering is expected to create a public market for the Common Stock held by the Company's current stockholders, including the Company's directors and executive officers. The Selling Stockholders, each of whom serves as an officer and director of the Company, paid approximately $18,000 for the 120,000 shares of Common Stock offered by them pursuant to this Prospectus. They will recognize a gain of approximately $1.4 million upon the sale of such Common Stock, assuming an initial public offering price of $12.00 per share. In addition, the current stockholders paid $25.1 million for the 6,745,243 other shares of Common Stock held by them and not offered by this Prospectus. This offering will result in an unrealized gain to such stockholders of approximately $55.8 million based on the assumed initial public offering price. See "Dilution" and "Principal and Selling Stockholders." 15 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,250,000 shares of Common Stock being offered by the Company, based on an assumed initial public offering price of $12.00 per share and after deducting the underwriting discount and estimated offering expenses payable by the Company, are estimated to be approximately $35,100,000 ($40,741,380 if the Underwriters' over-allotment option is exercised in full). The Company intends to use $2.3 million of the proceeds of the offering to repay amounts owed under a term loan from a German bank. This loan is due in part on December 31, 2003 and in part 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." The Company intends to use the remaining net proceeds for general corporate purposes, including working capital and capital expenditures. 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. The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholders. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock or other securities. The Company is currently negotiating a new U.S. line of credit to replace its previous U.S. line of credit which expired in August 1997. The Company expects the new U.S. line of credit to require that the Company 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. 16 19 CAPITALIZATION The following table sets forth the total capitalization of the Company at June 30, 1997 and such capitalization adjusted give effect to the Automatic Conversion, the Directed Placement and the sale of the 3,250,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $12.00 per share (after deducting the underwriting discount and estimated offering expenses) and the application of net proceeds therefrom. See "Principal and Selling Stockholders." This table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Short-term debt, including current portion of long-term debt(1)........ $ 2,337 $ -- ------- ------- Redeemable Convertible Preferred Stock, $0.001 par value; 10,000,000 shares authorized, 3,944,495 shares issued and outstanding actual; no shares issued and outstanding as adjusted............................ 21,781 $ -- Stockholders' equity (deficit): Preferred Stock, $0.001 par value; 854,038 shares issued and outstanding actual; no shares as adjusted......................... 1 -- Common Stock, $0.001 par value; authorized -- 40,000,000 shares actual, and as adjusted; issued and outstanding -- 1,866,710 shares actual and 10,115,243 shares as adjusted(2)................ 2 10 Additional paid-in capital........................................... 2,446 61,120 Deferred compensation................................................ (188) (188) Accumulated deficit.................................................. (8,903) (8,903) Currency translation adjustment...................................... (581) (581) ------- ------- Total stockholders' equity (deficit).............................. (7,223) 51,458 ------- ------- Total capitalization......................................... $16,895 $51,458 ======= =======
- --------------- (1) See Note 3 of Notes to Consolidated Financial Statements. (2) Excludes: (i) 665,926 shares of Common Stock issuable upon exercise of stock options outstanding as of June 30, 1997 at a weighted average exercise price of $3.87 per share; (ii) 189,191 shares of Common Stock and Preferred Stock subject to warrants outstanding as of June 30, 1997 at an exercise price of $5.72 per share and (iii) 751,500 shares of Common Stock issuable upon exercise of stock options and warrants issued subsequent to June 30, 1997 at a weighted average exercise price of $11.63 per share. See "Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements. 17 20 DILUTION The pro forma net tangible book value of the Company as of June 30, 1997 was $16,358,000 or $2.38 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 the Automatic Conversion and Directed Placement. After giving effect to the sale of the 3,250,000 shares of Common Stock offered by the Company (at an assumed initial public offering price of $12.00 per share and after deduction of the underwriting discount and estimated offering expenses payable by the Company), the Company's pro forma net tangible book value at June 30, 1997 would have been $51,458,000 or $5.09 per share. This represents an immediate increase in net tangible book value to existing stockholders of $2.71 per share and an immediate dilution to new investors of $6.91 per share. The following table illustrates the per share dilution: Assumed initial public offering price per share............... $12.00 Net tangible book value per share as of June 30, 1997....... $2.38 Increase per share attributable to new investors............ 2.71 ----- Pro forma net tangible book value per share after this offering.................................................... 5.09 ------ Dilution per share to new investors........................... $ 6.91 ======
The following table sets forth, on the pro forma basis described above, as of June 30, 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 $12.00 per share (before deducting the underwriting discount and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ----------- ------- --------- Existing stockholders(1)................. 6,865,243 67.9% $25,144,000 39.2% $ 3.66 New investors(1)......................... 3,250,000 32.1% 39,000,000 60.8% 12.00 --------- ----- ----------- ----- Total.......................... 10,115,243 100.0% $64,144,000 100.0% ========= ===== =========== =====
- --------------- (1) Shares held and total consideration paid by existing stockholders includes 200,000 shares of Common Stock sold in the Directed Placement. Sales by Selling Stockholders in this offering will reduce the number of shares of Common Stock held by existing stockholders to 6,745,243 shares or approximately 67% of the total shares of Common Stock outstanding after this offering and will increase the number of shares held by new investors to 3,370,000 shares or approximately 33% of the total shares of Common Stock outstanding after the offering. The foregoing computations assume no exercise of the Underwriters' over-allotment option and no exercise of stock options outstanding at June 30, 1997. As of June 30, 1997, there were outstanding options to purchase an aggregate of 665,926 shares of Common Stock at a weighted average exercise price of $3.87 per share. Also as of June 30, 1997, there were outstanding warrants to purchase an aggregate of 189,191 shares of Common Stock and Preferred Stock at an exercise price of $5.72 per share. In addition, subsequent to June 30, 1997, the Company issued options and warrants to purchase an aggregate of 751,500 shares of Common Stock at a weighted average exercise price of $11.63 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. 18 21 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, 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 June 30, 1997 and for the six-month periods ended June 30, 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.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ------------------- 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 $ 5,789 $ 9,820 PCMCIA peripheral products...................... 2,379 5,020 5,546 4,892 2,724 163 ------- ------- ------- ------- ------ ------ Total net sales............................... 2,379 6,446 18,066 21,520 8,513 9,983 Cost of sales..................................... 1,779 5,087 15,771 14,880 6,171 6,126 ------- ------- ------- ------- ------ ------ Gross profit...................................... 600 1,359 2,295 6,640 2,342 3,857 Operating expenses: Research and development........................ 691 1,162 1,399 2,386 1,180 1,418 Sales and marketing............................. 564 1,224 2,057 3,230 1,408 2,013 General and administrative...................... 346 580 1,439 2,004 908 1,133 ------- ------- ------- ------- ------ ------ Total operating expenses...................... 1,601 2,966 4,895 7,620 3,496 4,564 ------- ------- ------- ------- ------ ------ Loss from operations.............................. (1,001) (1,607) (2,600) (980) (1,154) (707) Interest income (expense), net.................... (95) (261) (337) (304) (148) 58 Foreign currency transaction gain................. -- -- 11 174 56 239 ------- ------- ------- ------- ------ ------ Net loss.......................................... (1,096) (1,868) (2,926) (1,110) (1,246) (410) Accretion on redeemable convertible preferred stock........................................... -- -- (139) (287) (143) (478) ------- ------- ------- ------- ------ ------ Net loss applicable to common stockholders........ $(1,090) $(1,868) $(3,065) $(1,397) $(1,389) $ (888) ======= ======= ======= ======= ====== ====== Pro forma net loss per share(2)................... $ (0.25) $ (0.13) ======= ====== Shares used to determine pro forma net loss per share(2)........................................ 5,272 7,018 ======= ======
DECEMBER 31, ------------------------------------------- 1993 1994 1995 1996 JUNE 30, 1997 ------- ------- ------- ------- ------------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents....................... $ 115 $ 70 $ 739 $ 2,593 $10,942 Working capital (deficit)....................... 454 823 1,620 (1,787) 13,694 Total assets.................................... 1,829 3,452 8,143 11,459 20,665 Long-term debt, less current portion............ 503 3,027 2,147 -- -- Redeemable convertible preferred stock.......... -- -- 4,781 5,068 21,781 Total stockholders' equity (deficit)............ 19 (2,027) (4,760) (6,024) (7,223)
- --------------- (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. 19 22 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" and elsewhere in this Prospectus. OVERVIEW SCM Microsystems designs, develops and sells standards-compliant hardware, firmware and software products and technologies used in smart card and other token-based network security and conditional access systems. The Company's objective is to leverage its expertise in PCMCIA peripheral products 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 sells security and access products which include SwapBox PC Card adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules and its SmartOS universal smart card interface architecture. The Company sells security and access products to OEMs such as computer, telecommunication and DVB component and system manufacturers. 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. From the Company's inception 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. The Company's net sales are now, and will continue to be, dependent upon the sales of the Company's 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. The Company's dependence upon a limited number of significant customers imposes certain risks on the Company. See "Risk Factors -- Dependence on Sales to OEMs," "-- Dependence on Sales to Government Contractors" and "-- Dependence on Development of Industry Relationships." 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 United States headquarters are located in Los Gatos, California, its international headquarters are located near Munich, Germany and its 20 23 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 and the six months ended June 30, 1997, the Company's sales denominated in U.S. dollars represented approximately 54.8% and 38.5% of the Company's total net sales, respectively. The Company does not currently engage in risk management activities with respect to its foreign currency exposure. 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." In April 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 September 1997, the Company entered into a license agreement and memorandum of understanding, and settled this dispute, with Gemplus. In connection with these transactions, the Company issued warrants to Gemplus to purchase up to 200,000 shares of Common Stock at an exercise price of $13.00 per share and up to 200,000 shares of Common Stock at an exercise price of $14.00 per share. The Company also agreed to sell 200,000 shares of Common Stock to Gemplus at a purchase price of $9.00 per share in the Directed Placement. The Company's general and administrative expenses for the quarter ending September 30, 1997 will include a one-time expense of approximately $500,000 in connection with the foregoing agreements, approximately $450,000 of which is non-cash consideration. See "Business -- Collaborative Industry Relationships" and "-- Legal Proceedings." 21 24 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:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net sales: Security and access products..................... 22.1% 69.3% 77.3% 68.0% 98.4% PCMCIA peripheral products....................... 77.9 30.7 22.7 32.0 1.6 ----- ----- ----- ----- ----- Total net sales............................... 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of sales...................................... 78.9 87.3 69.1 72.5 61.4 Gross profit....................................... 21.1 12.7 30.9 27.5 38.6 ----- ----- ----- ----- ----- Operating expenses: Research and development......................... 18.0 7.7 11.1 13.9 14.2 Sales and marketing.............................. 19.0 11.4 15.0 16.5 20.2 General and administrative....................... 9.0 8.0 9.3 10.7 11.3 ----- ----- ----- ----- ----- Total operating expenses...................... 46.0 27.1 35.4 41.1 45.7 ----- ----- ----- ----- ----- Loss from operations............................... (24.9) (14.4) (4.6) 13.6 (7.1) Interest income (expense), net..................... (4.1) (1.9) (1.4) (1.7) 0.6 Foreign currency transaction gain.................. 0.0 0.1 0.8 0.7 2.4 ----- ----- ----- ----- ----- Net loss........................................... (29.0) (16.2) (5.2) (14.6) (4.1) ----- ----- ----- ----- ----- Accretion on redeemable convertible preferred stock............................................ -- (0.8) (1.3) (1.7) (4.8) ----- ----- ----- ----- ----- Net loss applicable to common stockholders......... (29.0)% (17.0)% (6.5)% (16.3)% (8.9)% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Net Sales. Net sales reflect the invoiced amount for goods shipped less estimated returns. Revenue is recognized upon product shipment. Net sales were $10.0 million for the first six months of 1997, compared to $8.5 million in the first six months of 1996. This increase was due primarily to increased unit sales of the Company's new DVB-CAM products. Sales of security and access products were $9.8 million in the first six months of 1997, compared to $5.8 million in the first six months of 1996, an increase of 70%, reflecting the Company's shift in product strategy toward security and access products. This increase was primarily due to the introduction of the Company's DVB-CAM products, which products were first shipped in the fourth quarter of 1996. The Company made the final shipment of PCMCIA peripheral products in the quarter ended March 31, 1997, completing its exit from that business. Gross Profit. Gross profit was $3.9 million, or 38.6% of net sales, for the first six months of 1997, compared to $2.3 million, or 27.5% of net sales, in the first six months of 1996. The increase in gross profit, both in absolute amount and as a percentage of net sales, was primarily due to the introduction of DVB-CAM products and the concurrent 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'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, gross profits are expected to fluctuate from period to period. 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, to date the Company has not capitalized any software development costs. Research and development expenses were $1.4 million, or 14.2% of net sales, for the first six months of 1997, compared 22 25 to $1.2 million, or 13.9% of net sales, in the prior year period. The 20.2% increase in research and development spending was due primarily to higher headcount in the Company's French facility and a rise in prototype and related expenses for the Company's DVB-CAM product. The Company believes that research and development expenses during 1997 will continue to be higher than in 1996 in absolute amount due to a higher number of personnel to support the Company's new product development and customer projects. Sales and Marketing. Sales and marketing expenses consist primarily of employee compensation and trade show and other marketing costs. Sales and marketing expenses were $2.0 million, or 20.2% of net sales, for the first six months of 1997, compared to $1.4 million, or 16.5% of net sales, for the first six months of 1996, an increase of 43.0%. 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 amount as the Company continues to expand its headcount to support a larger customer base and expanded product line. General and Administrative. General and administrative expenses consist primarily of compensation expenses for administrative employees. General and administrative expenses were $1.1 million, or 11.3% of net sales, for the first six months of 1997, compared to $908,000, or 10.7% of net sales in the first six months of 1996, an increase of 24.8%. General and administrative expenses increased both in absolute amount and as a percentage of net sales in the first six months of 1997 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. Interest Income (Expense), Net. Interest income (expense), net consists of interest earned on invested cash, offset by interest paid or accrued on outstanding debt. Net interest income was $58,000 for the first six months of 1997, compared to a net expense of $148,000 for the first six months of 1996. During the first six months of 1997, the Company raised $12.1 million through the sale of preferred stock, and converted $4.2 million of convertible debt into preferred stock, resulting in both a reduction of outstanding debt and corresponding interest expense and an increase in investable cash balances. The Company expects to realize increased interest income in the near term as a result of investing the net proceeds of this offering. Income Taxes. The Company incurred operating losses in 1995 and 1996 and for the six months ended June 30, 1997, and therefore did not incur income tax obligations in such periods. As of December 31, 1996, the Company had German net operating loss carry forwards 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 carry forwards of approximately $1.9 million and $800,000 for U.S. federal and California income tax purposes, respectively. The Company's utilization of U.S. federal net operating loss carry forwards is limited to approximately $340,000 per year. At June 30, 1997, the Company recorded a full valuation allowance to offset 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. 1996 COMPARED TO 1995 Net Sales. Net sales were $21.5 million in 1996, compared to $18.1 million in 1995, an increase of 19.1%. This increase was due primarily to increased unit sales of certain previously existing products as well as sales of products first introduced in 1996. 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 were $16.6 million in 1996 compared to $12.5 million in 1995, an increase of 32.8%. 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 23 26 1996, including SwapSmart and the Company's DVB products. One customer accounted for 11% of the Company's net sales in 1996, resulting from the initial shipments of the Company's DVB-CAM products which were introduced in the fourth quarter. Accounts receivable from this customer represented 25% of the Company's total receivables as of December 31, 1996 due to the timing of shipments in the fourth quarter. All such receivables were collected during the first quarter of 1997. Consistent with the Company's shift away from PCMCIA peripheral products, sales of such products were $4.9 million in 1996, compared to $5.5 million in 1995, a decrease of 11.8%. Gross Profit. Gross profit was $6.6 million, or 30.9% of net sales, in 1996, 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 that 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 totaled $2.4 million, or 11.1% of net sales, in 1996, 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 totaled $3.2 million, or 15.0% of net sales, in 1996, 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 totaled $2.0 million, or 9.3% of net sales, in 1996, 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 Income (Expense), Net. 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. 1995 COMPARED TO 1994 Net Sales. Net sales increased to $18.1 million in 1995, compared to $6.4 million during 1994. This increase reflected increased unit sales across the Company's product lines. 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 $12.5 million in 1995, compared to $1.4 million in 1994. This substantial increase resulted 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 was $2.3 million, or 12.7% of net sales, in 1995, 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 24 27 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 totaled $1.4 million, or 7.7% of net sales, in 1995, compared to $1.2 million, or 18.0% of net sales, in 1994. The 20.4% increase in research and development spending in 1995 was primarily due to increased headcount related to the Company's establishment of its research facility in La Ciotat, France. The decrease in research and development expenses as a percentage of net sales was due to the large increase in net sales. Sales and Marketing. Sales and marketing expenses totaled $2.1 million, or 11.4% of net sales, in 1995, 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 totaled $1.4 million, or 8.0% of net sales, in 1995, 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 Income (Expense), Net. 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. 25 28 QUARTERLY RESULTS OF OPERATIONS The following tables present certain unaudited consolidated statement of operations data for each of the four quarters in the year ended December 31, 1996 and the first two quarters 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 ----------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- STATEMENTS OF OPERATIONS DATA (IN THOUSANDS): Net sales: Security and access products.................... $ 2,811 $2,978 $ 4,927 $5,912 $ 4,202 $5,618 PCMCIA peripheral products...................... 1,446 1,278 1,073 1,095 163 -- ------- -------- ------- ------- - ------- ------- - Total net sales............................... 4,257 4,256 6,000 7,007 4,365 5,618 ------- -------- ------- ------- - ------- ------- - Cost of sales..................................... 3,068 3,103 3,903 4,806 2,804 3,322 Gross profit...................................... 1,189 1,153 2,097 2,201 1,561 2,296 ------- -------- ------- ------- - ------- ------- - Operating expenses: Research and development........................ 624 556 598 608 628 790 Sales and marketing............................. 631 777 889 933 975 1,038 General and administrative...................... 441 467 605 491 548 585 ------- -------- ------- ------- - ------- ------- - Total operating expenses...................... 1,696 1,800 2,092 2,032 2,151 2,413 ------- -------- ------- ------- - ------- ------- - Income (loss) from operations..................... (507) (647) 5 169 (590) (117) ------- -------- ------- ------- - ------- ------- - Interest income (expense), net.................... (25) (123) (70) (86) (28) 86 Foreign currency transaction gain................. 35 21 92 26 64 175 ------- -------- ------- ------- - ------- ------- - Net income (loss)................................. (497) (749) 27 109 (554) 144 Accretion on redeemable convertible preferred stock........................................... (71) (72) (72) (72) (160) (318) ------- -------- ------- ------- - ------- ------- - Net loss applicable to common stockholders........ $ (568) $ (821) $ (45) $ 37 $ (714) $ (174) ======= ======== ======= ======== ======= ======== AS A PERCENTAGE OF TOTAL NET SALES: Net sales: Security and access products.................... 66.0% 70.0% 82.1% 84.4% 96.3% 100.0% PCMCIA peripheral products...................... 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 ----- ----- ----- ----- ----- ----- Cost of sales..................................... 72.1 72.9 65.1 68.6 64.2 59.1 Gross profit...................................... 27.9 27.1 35.0 31.4 35.8 40.9 ----- ----- ----- ----- ----- ----- Operating expenses: Research and development........................ 14.7 13.1 10.0 8.7 14.4 14.1 Sales and marketing............................. 14.8 18.2 14.8 13.3 22.3 18.5 General and administrative...................... 10.3 11.0 10.1 7.0 12.6 10.4 ----- ----- ----- ----- ----- ----- Total operating expenses...................... 39.8 42.3 34.9 29.0 49.3 43.0 ----- ----- ----- ----- ----- ----- Income (loss) from operations..................... (11.9) (15.2) 0.1 2.4 (13.5) (2.1) ----- ----- ----- ----- ----- ----- Interest income (expense), net.................... (0.6) (2.9) (1.2) (1.2) (0.6) 1.5 Foreign currency transaction gain................. 0.8 0.5 1.5 0.4 1.5 3.1 ----- ----- ----- ----- ----- ----- Net income (loss)................................. (11.7) (17.6) 0.5 1.6 (12.6) 2.5 Accretion on redeemable convertible preferred stock........................................... (1.7) (1.7) (1.2) (1.0) (3.7) (5.6) ----- ----- ----- ----- ----- ----- Net loss applicable to common stockholders........ (13.4)% (19.3)% (0.7)% 0.6% (16.3)% (3.1)% ===== ===== ===== ===== ===== =====
26 29 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 France and 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 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 or its 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 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 June 30, 1997, the Company's working capital was $13.7 million. Working capital increased during the first two quarters of 1997 due primarily to the Company's receipt of $12.1 million in net proceeds from the private placement of redeemable convertible preferred stock and the conversion of approximately $4.2 million of notes payable into redeemable convertible preferred stock. These notes payable were classified as current liabilities as of December 31, 1996 due to certain demand features in the notes, resulting in a working capital deficit as of that date. 27 30 During the first six months of 1997, cash and cash equivalents increased by $8.3 million due primarily to financing activities which included preferred stock sales totaling $12.1 million, partially offset by repayments of short term debt of $1.3 million. Investing activities in the first half of 1997 consisted of $265,000 in capital equipment expenditures. Operating activities in the period used $1.7 million of cash, including an increase in receivables of $956,000 due primarily to higher revenue levels, an increase in prepaid expenses of $350,000 related to costs associated with the Company's planned initial public stock offering, and an increase in inventory of $162,000 relating to an increase in backlog for third quarter shipments. In 1996, cash and cash equivalents increased by $1.9 million due primarily to financing activities which included issuance of convertible notes payable totaling $5.0 million and line of credit borrowings of $1.0 million, partially offset by repayments of short term debt of $1.5 million. Investing activities consisted of $643,000 in capital equipment expenditures. Operating activities used $1.7 million of cash, including an increase in receivables of $1.0 million due primarily to higher revenue levels, and an increase in prepaid expenses of $582,000, consisting primarily of financing costs relating to the convertible debt and preferred stock placements which closed in the first quarter of 1997. In 1995, cash and cash equivalents increased $669,000 due primarily to financing activities which included issuance of $2.4 million of redeemable convertible preferred stock, issuance of convertible notes payable totaling $1.5 million, and issuance of non-convertible notes payable of $1.2 million. Investing activities consisted of $524,000 in capital equipment expenditures. Operating activities used $3.9 million of cash, including an increase in receivables of $2.8 million due to the large revenue increase over 1994, an increase in inventories of $800,000 due to the increase in business levels, and an increase in accounts payable and accrued expenses of $2.3 million related to higher purchasing and employment levels in support of the Company's sales growth. The Company has revolving lines of credit with three banks in Germany providing total borrowings of up to 4.5 million DM (approximately $2.6 million at June 30, 1997). 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 June 30, 1997, no amounts were outstanding under the German lines of credit. The Company is in the process of negotiating a new U.S. line of credit to replace its previous $2.5 million U.S. line of credit which expired in August 1997. At June 30, 1997, no amounts were outstanding under the previous U.S. line of credit. In addition to the lines of credit, the Company had outstanding debt at June 30, 1997 totaling approximately $2.3 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. In May 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." As of June 30, 1997, the Company had no material commitments for capital expenditures. 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. 28 31 BUSINESS SCM Microsystems designs, develops and sells standards-compliant hardware, firmware and software products and technologies used in smart card and other token-based network security and conditional access systems. The Company's objective is to leverage its expertise in PCMCIA peripheral products 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 sells security and access products which include SwapBox PC Card adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules and its SmartOS universal smart card interface architecture. The Company sells security and access products to OEMs such as computer, telecommunication and DVB component and system manufacturers. 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, 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 direct electronic links 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. 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 otherwise desirable, and those that allow access are adopting various security measures to guard against unauthorized access. The Company believes 29 32 that enterprises seek solutions which will allow them to expand access to data while maintaining adequate security. 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 will grow 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 Secure Enterprise Data and 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. [See Appendix - Description of Graphics] 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. A firewall essentially acts 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. 30 33 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 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 the 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 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 the worldwide market will grow to 3.4 billion units 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 31 34 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-based security systems become accepted in the United States, users outside the United States will adopt similar systems. There are several reasons for these endorsements of smart card-based data security solutions. Key end-user benefits include ease-of-use, low cost, convenience and durability. Even more compelling is the architectural simplicity of these systems. E-mail messages, purchase orders, credit card numbers, video clips, data inquiries and other confidential transmissions are secured as they are sent. Therefore, these secure transmissions can be opened only by the intended recipient, thus eliminating many of the security weakpoints of the communications infrastructure between the parties. Other solutions such as firewalls, secure modems and SSL software may continue to be used or added without interfering with the smart-card based security. The Company believes that smart cards provide the easiest, most flexible, most cost-effective way to achieve the key benefits of a secure, authenticated transaction between two or more parties regardless of the specific infrastructure between them. The smart-card initiatives launched by the companies discussed in the preceding paragraph indicate that this view is shared by some other significant companies in the PC, LAN, WAN, Internet and digital content industries. 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/decryption 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 the DVB-CI standard. Such standard 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 32 35 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: (i) for broadcasters to upgrade systems installed in their customers' homes by downloading new operating system software onto the universal set-top box; (ii) for customers to use one universal set-top box to access digital content from various service providers by inserting the appropriate conditional access module for each particular service provider; and (iii) for service providers to secure access to new or additional services by issuing new tokens coded for access to such services. [See Appendix - Description of Graphics] 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. In the United States, the NRSS Committee has proposed the NRSS-B standard for a conditional access system. The NRSS-B standard is substantially similar to the DVB-CI standard. Adoption of the NRSS-B standard is expected to take from six to 12 months. The Company believes that similar standards may be adopted in certain Asian countries in the future. The Company believes that successful implementation of the DVB-CI, NRSS-B and similar standards 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 implementations of DVB-CI and NRSS-B use set-top boxes, the Company believes that as the standards evolve and as flexible hardware solutions become available, the DVB-CI and NRSS-B 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. 33 36 THE SCM MICROSYSTEMS SOLUTION SCM Microsystems provides OEMs with key standards-compliant enabling hardware, firmware and software products and technologies used in 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, electronic commerce and DVB conditional access. Enterprise Data Security and Electronic Commerce. The Company's products address the needs of the enterprise data security and electronic commerce markets as described below. 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. This eliminates the requirement for special purpose smart card readers and provides interoperability between smart cards and PCs, network computers and other devices equipped with standard PCMCIA ports. STANDARDS-BASED, INTEROPERABLE PRODUCTS. The Company's products employ an open-systems architecture that provides compatibility across a range of hardware platforms and software environments. The Company's products are remotely upgradeable so that compatibility can be maintained as the security infrastructure evolves. SPEED AND PERFORMANCE. Certain of the Company's smart card reader products transparently extend the speed and performance capabilities of smart cards used as security tokens by including encryption/decryption capabilities. By this approach, smart cards are used as keys to activate the encryption/decryption capabilities of the reader thus eliminating the speed and performance limitations inherent in smart cards. Digital Video Broadcasting. The Company's products address the needs of the DVB market as described below. INEXPENSIVE, EASY TO DELIVER CONDITIONAL ACCESS MODULES. The Company provides smart card-based conditional access readers and modules that adhere to the DVB-CI and NRSS-B standards. 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 that permit content and service providers to perform a virtually no-cost upgrade of users' access rights as new products and services are developed and introduced and as users' subscriptions 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 34 37 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. 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 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, 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 contributed to the adoption of the DVB-CI specification as the standard by the PCMCIA. The Company intends to maintain an active role in these and other 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 many different 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 as described below. 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 readers can be updated electronically to accommodate new types of 35 38 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 sided 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 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, the Internet 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 that 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
- - -------------------------- - - -------------------------------------------------------------------------------- 36 39 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------- SWAPACCESS 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 and NRSS-B standards - -------------------------------------------------------------------------------------------- SMARTOS UNIVERSAL SMART - A chip and accompanying software which provides a CARD INTERFACE ARCHITECTURE 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 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 remotely 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 37 40 commerce. Because of its encryption capabilities, the reader is well suited for security applications, particularly 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. SWAPACCESS DVB-CAM MODULES By combining SCM Microsystems' SwapSmart reader technology with the proprietary descrambling code of a digital content provider, the Company's SwapAccess DVB-CAM provides a cost-effective means of controlling access to digital broadcasts through the use of a PC Card. SwapAccess 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, SwapAccess descrambles the signal for viewing. SwapAccess is the world's first implementation of the DVB-CI standard. The Company's 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 SwapAccess can be used in any DVB-CI or NRSS-B compliant "open" set-top box, it allows 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 or NRSS-B standard will eliminate the need for multiple set-top boxes in order for users to access a broad range of desired broadcast data. SwapAccess 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. In the United States, the NRSS Committee has proposed the NRSS-B standard for a conditional access system. The NRSS-B standard is substantially similar to the DVB-CI standard. Adoption of the NRSS-B standard is expected to take from six to 12 months. SwapAccess is fully compliant with the NRSS-B standard as currently proposed. The Company has been and remains active in the definition and adoption of the NRSS-B standard, and intends to keep SwapAccess compliant with such standard as it progresses through the formal adoption process. The Company believes that similar standards may be adopted in certain Asian countries in the future. SMARTOS SMART CARD INTERFACE ARCHITECTURE Based on a unique chip and firmware technology that 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 flexibility. Many hardware designs, such as a keyboard or network computer, may already incorporate a controller chip but lack an interface unit and firmware for the completion of a smart card reader solution. Instead of being forced to purchase all components, 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. 38 41 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 that purchased in excess of $300,000 of the Company's security and access products during the year ended December 31, 1996. ================================================================================= OEM PRODUCTS PURCHASED --------------------------------------------------------------------------------- Dell PC Card Adapters Digital Equipment Corporation PC Card Adapters Gateway PC Card Adapters IBM PC Card Adapters; Smart Card Readers Kirch Group (BetaDigital) DVB Modules Micron PC Card Adapters Packard Bell PC Card Adapters Siemens/Nixdorf PC Card Adapters; Smart Card Readers Sun Microsystems PC Card Adapters Sysorex 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. Siemens-Nixdorf 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 Siemens-Nixdorf 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 Deutsche Telekom's 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. The principal reasons for Siemens-Nixdorf'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 39 42 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. SwapAccess 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 June 30, 1997, the Company had 20 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 June 30, 1997, the Company's backlog was approximately $6.9 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. Gemplus. In September 1997, the Company and Gemplus, a leading smart card manufacturer, reached an agreement to explore cooperative opportunities in several areas. The agreement includes the development of a single smart card reader chip and software core to form the basis of a family of smart card readers to be sold by both companies as well as the development of next-generation smart card readers. SCM Microsystems and Gemplus have also agreed to examine joint marketing and market development activities and joint manufacturing opportunities. The two companies also believe that standard setting will accelerate market acceptance of both companies' products and so have agreed to explore joint use of a single DVB-CAM based on the DVB-CI standard and joint use of a single PCMCIA smart card reader. The companies are not required, however, to reach a binding cooperative agreement covering any of the foregoing items and there can be no assurance that they will reach such an agreement. Nonetheless, as an initial step in this cooperation, the Company and Gemplus have entered into a cross-license agreement for PCMCIA-based smart card reader technology, DVB-CI technology, and related patents and intellectual property. In addition, Gemplus has agreed to make a $1.8 million investment in the Company through the Directed Placement, which will close concurrently with this offering. 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 Intel a non-exclusive license to 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 have agreed to jointly promote various industry standards applicable to security products. 40 43 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 in order to enable 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, and $1.4 million for the six months ended June 30, 1997. As of June 30, 1997, the Company had 27 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 with technology development revenues received from OEM customers in connection with design and development of specific products. The Company recognized $562,000, $543,000 and $1.6 million in technology development revenues in 1994, 1995 and 1996, respectively, and $1.0 million in the six months ended June 30, 1997. 41 44 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. In the event that such manufacturer (or any other key supplier) were unable to meet the Company's 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. The Company believes that its success will depend in large part on its ability to provide quality products and services. As of June 30, 1997, the Company had 10 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 of its suppliers, and 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 sole source 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 and access control products 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 42 45 competition from certain of its customers which currently offer alternative products or are expected to 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 and access control 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 or standards and to 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: the extent to which products support industry standards and provide interoperability; technical features; ease of use; quality/reliability; level of security; strength of 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 compete as to these or other factors 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. Although such dispute was settled on terms acceptable to the Company, there can be no assurance that future disputes with third parties will not arise nor that any such disputes can be resolved on terms acceptable to the Company. In addition, a third party has alleged that the Company has infringed the third party's trademarks and engaged in unfair competition. See "Business -- Legal Proceedings." The Company expects that companies in the computer and digital information security market will 43 46 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, 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 June 30, 1997, SCM Microsystems had a total of 72 full-time employees, of which 27 were engaged in engineering, research and development; 20 in sales and marketing; 10 in manufacturing; and 15 in general management and administration. In addition, the Company had a total of 3 part-time employees as of June 30, 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 leases approximately 5,300 square feet in Los Gatos, California pursuant to a lease agreement dated September 29, 1994 (the "Los Gatos Lease") and approximately 2,900 additional square feet pursuant to a sublease agreement, dated July 6, 1996 (the "Los Gatos Sublease"). In 1996, the Company paid approximately $63,000 and $25,000 for rent pursuant to the Los Gatos Lease and Los Gatos Sublease, respectively. The Los Gatos Lease and the Los Gatos Sublease end on October 31, 1998 and July 31, 1998, respectively. In addition, the Company has the option to extend the Los Gatos Lease for two one-year periods. The Company leases approximately 6,000 square feet in Pfaffenhofen pursuant to a lease agreement dated September 30, 1994 (the "Pfaffenhofen Lease"). In 1996, the Company paid approximately $120,000 for rent pursuant to the Pfaffenhofen Lease. The Pfaffenhofen Lease ends on June 30, 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 In April 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 September 1997, the Company and Gemplus settled this dispute. In connection with the settlement, Gemplus and the Company agreed to cross-license to each other certain patented technology held by each company and entered into a memorandum of understanding providing for the negotiation of a joint product development and supply agreement. The Company also agreed to issue to Gemplus warrants to purchase up to 200,000 shares of Common Stock at $13.00 per share and up to 200,000 shares of Common Stock at $14.00 per share. These warrants are immediately exercisable and expire in September 1998. The Company has been notified by Smith Corona Corporation ("Smith Corona") that Smith Corona believes that the "SCM" in the Company's name, logo and a certain product name infringe a trademark held by Smith Corona and that the Company has engaged in unfair competition. The Company believes that it has defenses to Smith Corona's claim and has so notified Smith Corona. In the event that Smith Corona were to initiate legal proceedings against the Company with respect to this matter, the Company would vigorously defend the action. Defending any action can be costly and time consuming regardless of the outcome and, as with any litigation matter, there can be no assurance that the outcome of any such dispute would be favorable to the Company. An unfavorable outcome in the matter could subject the Company to monetary damages and may result in the Company having to change its name and logo, which would require the Company to incur costs related thereto and may result in a loss of the goodwill associated with its name and logo. 44 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company, and their ages as of June 30, 1997, are as follows:
NAME AGE POSITION - ----------------------------------- ---- ---------------------------------------------------- Robert Schneider................... 48 Chairman of the Board Steven Humphreys................... 36 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.................. 38 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....................... 37 Director Randall Lunn(2).................... 46 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. 45 48 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 is a Certified Public Accountant and 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 manufacturer's representative for computer products. From September 1994 through May 1997, Mr. Ng served as Director, Business Development at Intellicard Systems Pte. Ltd. ("Intellicard"), a contract manufacturing company and developer of communications products. 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. 46 49 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 and 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 was granted an initial option to purchase 5,000 shares of Common Stock upon the effective date of the Director Plan and each person who becomes an Outside Director after that date will automatically be granted an initial option to purchase 10,000 shares of Common Stock. Each Outside Director will automatically be granted subsequent annual options to purchase 5,000 additional shares of Common Stock under the Director Plan on the date of each annual meeting of stockholders. All such options have an exercise price equal to the fair market value of the Common Stock at the date of grant, have a term of ten years and vest monthly over one year from the date of grant. 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 47 50 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. 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($) OPTIONS(#) COMPENSATION($) - ---------------------------------------- --------- -------- ------------ ------------------ Robert Schneider........................ 154,800 84,415 50,577 1,935(2) Managing Director of German subsidiary Steven Humphreys(1)..................... 76,064 17,258 276,570 30(2) President and Chief Executive Officer Bernd Meier............................. 154,800 125,807 201,026 1,935(2) Chief Operations Officer and Managing Director of German subsidiary Nicholas Efthymiou...................... 100,000 30,458 75,544 11,357(3) Vice President, U.S. Sales and Business Development
- --------------- (1) Mr. Humphreys began working at the Company in August 1996. (2) Represents payments of life insurance premiums. (3) Represents payments of a housing and auto allowance of $11,327 and life insurance premiums of $30. Option Grants During 1996. The following table sets forth for each of the Named Executive Officers certain information concerning stock options granted during 1996.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF INDIVIDUAL GRANTS STOCK ----------------------------------------------------- PRICE NUMBER OF PERCENT OF TOTAL APPRECIATION SECURITIES OPTIONS FOR OPTION UNDERLYING GRANTED TO EXERCISE TERM(2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------- NAME GRANTED 1996 PER SHARE DATE(1) 5%($) 10%($) - -------------------------------- ---------- ---------------- --------- --------- ------- ------- Robert Schneider................ 50,577 7% $0.10 --(3) 3,181 8,061 Steven Humphreys................ 276,570 38% 0.10 4/30/2006 17,393 44,078 Bernd Meier..................... 201,026 28% 0.10 --(3) 12,642 32,038 Nicholas Efthymiou.............. 75,544 10% 0.10 --(3) 4,751 12,040
- --------------- (1) Options generally vest as to 25% of the shares one year from the date of grant and monthly thereafter for the succeeding 36 months. Options may generally be exercised ahead of vesting, subject to a right of the Company to repurchase the unvested portion of the shares if the optionee's status as an employee or consultant is terminated or upon the optionee's death or disability prior to the shares vesting. (2) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the Company's future Common Stock prices. The actual value realized may be greater or less than the potential realizable values set forth in the table. (3) These options have no expiration date. 48 51 Year-End Option Values. The following table sets forth, for each of the Named Executive Officers, the year-end value of unexercised options as of December 31, 1996:
NUMBER OF SECURITIES UNDERLYING VALUE(1) OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY AT YEAR-END(#): OPTIONS AT YEAR-END($): NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2) - ----------------------------------------------- ------------------------- ---------------------------- Robert Schneider............................... 88,989/ -- 185,097/ -- Steven Humphreys............................... -- /276,570 -- /575,266 Bernd Meier.................................... 239,438/ -- 498,031/ -- Nicholas Efthymiou............................. 88,348/ -- 183,764/ --
- --------------- (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 (approximately $82,000) per year, including a bonus of FF 70,000 (approximately $12,000). 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 options to purchase 671,900 shares 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 49 52 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 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 50 53 paid their payroll deductions to date. Participation ends automatically upon termination of employment with the Company. 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. 51 54 CERTAIN TRANSACTIONS From time to time, Robert Schneider loaned to the Company various amounts up to approximately DM 240,000 (approximately $145,000). These loans accrued interest at 8.5% per annum and were due on demand. As of December 31, 1996, the amount outstanding under these loans was approximately DM 100,000 (approximately $69,000) and, as of June 30, 1997, all such loans had been repaid. 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 $8.58 per share. See "Business -- Collaborative Industry Relationships" and "Principal and Selling Stockholders." During 1995, 1996 and the first six months of 1997, the Company purchased contract manufacturing services totaling $3.5 million, $3.3 million and $1.1 million, respectively, from Intellicard. Poh Chuan Ng, a director of the Company, served as Director, Business Development for Intellicard from September 1994 through May 1997. 52 55 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of June 30, 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; (iv) all directors and executive officers of the Company as a group; and (v) each Selling Stockholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING(1) OFFERING(1) --------------------- SHARES --------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - --------------------------------------- --------- ------- ------- --------- ------- (APM) AlpinvestInternational B.V.(2)... 784,128 11.8 -- 784,128 7.7 Gooimeer 3 P.O. Box 5073 1410 AB Naarden, The Netherlands Robert Schneider(3).................... 686,944 10.3 80,000 606,944 6.0 c/o SCM Microsystems GmbH Luitpoldstrasse 6 D-85276 Pfaffenhofen Germany Telenor Venture AS..................... 674,965 10.1% -- 674,965 6.7% P.O. Box 6701, St. Olavs plass N-0130 Oslo, Norway TVM Techno Venture Management 667,857 10.0 -- 667,857 6.6 GmbH(4).............................. c/o Friedrich Bornikoel Tolzerstrasse 12A 82031 Grunwald Germany Bernd Meier(5)......................... 621,002 9.3 40,000 581,002 5.7 c/o SCM Microsystems GmbH Luitpoldstrasse 6 D-85276 Pfaffenhofen Germany Vertex Investment (II) Ltd.(6)......... 580,187 8.7 -- 580,187 5.7 83, Science Park Drive #01-01/02 Singapore 0511 Gemplus(7)............................. 400,000 5.7 -- 600,000 5.7 Z.I. Athelia III-Voie Antiope 13705 La Ciotat Cedex 8, France Intel Corporation...................... 349,650 5.2 -- 349,650 3.5 c/o Laila Partridge 2200 Mission College Boulevard Santa Clara, CA 95052 Steven Humphreys(8).................... 276,570 4.0 -- 276,570 2.7 Nicholas Efthymiou(9).................. 219,591 3.3 -- 219,591 2.2 Friedrich Bornikoel(10)................ 677,023 10.1 -- 677,023 6.7 Bruce Graham(11)....................... 2,917 -- -- 2,917 -- Randall Lunn(12)....................... 670,774 10.1 -- 670,774 6.6 Poh Chuan Ng(13)....................... 2,917 -- -- 2,917 -- Andrew Vought(14)...................... 101,544 1.5 -- 101,544 1.0 All directors and executive officers as a group (13 persons)(15)............. 2,550,449 36.5% 120,000 2,430,449 23.3%
- --------------- 53 56 (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 September 30, 1997 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 5,537 shares of Series D Preferred Stock exercisable before April 15, 2003. (3) Includes 32,010 shares held by Robert Schneider's wife, Ursula Schneider. (4) 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. TVM Techno Venture Management provides certain advisory services to (APM) Alpinvest International B.V. but disclaims beneficial ownership of shares held by such entity. (5) 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. (6) Includes warrants to purchase 8,017 shares of Series D Preferred Stock exercisable before April 15, 2003. (7) Shares beneficially owned prior to offering includes warrants to purchase 400,000 shares of Common Stock exercisable before September 1998. Shares beneficially owned after the offering also include 200,000 shares of Common Stock purchased in the Direct Placement. (8) Includes options to purchase 276,570 shares of Common Stock exercisable within 60 days of September 30, 1997, 92,190 of which will be vested as of such date and the remainder of which will 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) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH. 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 and (ii) options to purchase 9,166 shares of Common Stock exercisable within 60 days of September 30, 1997. TVM Techno Venture Management provides certain advisory services to (APM) AlpinvestInternational B.V. but disclaims beneficial ownership of shares held by such entity. (11) Includes options to purchase 2,917 shares of Common Stock exercisable within 60 days of September 30, 1997. (12) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH. 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 and (ii) options to purchase 2,917 shares of Common Stock exercisable within 60 days of September 30, 1997. TVM Techno Venture Management provides certain advisory services to (APM) AlpinvestInternational B.V. but disclaims beneficial ownership of shares held by such entity. (13) Includes options to purchase 2,917 shares of Common Stock exercisable within 60 days of September 30, 1997. (14) Includes: (i) 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 and (ii) options to purchase 2,917 shares of Common Stock exercisable within 60 days of September 30, 1997. (15) 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, 13 and 14 above. 54 57 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 July 31, 1997, there were 6,865,243 shares of Common Stock outstanding (after giving effect to the conversion of all Preferred Stock into Common Stock and the Directed Placement) held of record by approximately 90 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 589,191 shares of Common Stock at a weighted average exercise price of $11.00 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 Amended and Restated Certificate of Incorporation 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. 55 58 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. In addition, in connection with its listing on the Neuer Markt of the Frankfurt Stock Exchange, the Company will be required to comply with the German Code. The German Code regulates Public Offers, and requires companies seeking to make a Public Offer to inform the German regulatory authorities and the public of the offer, to provide certain disclosure to the target Company's stockholders, to generally treat stockholders equally in an offer, and to comply with certain other regulatory requirements. In addition, the German Code gives broad authority to the German regulatory authorities to interpret the German Code and to review and regulate specific Public Offers. Compliance with the German Code could have the effect of delaying, deferring or preventing 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 licenses certain technology from a third party pursuant to a license that is not transferable by the Company without the prior written consent of the third party. This provision may prohibit the transfer of such technology in a merger or consolidation of the Company with another company. As a result, this provision may have the effect of discouraging or preventing an acquisition of the Company. Each of the foregoing may have the effect of preventing or rendering 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 6,278,947 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." LISTING The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "SCMM" and also intends to apply to have the Common Stock listed on the Neuer Markt of the Frankfurt Stock Exchange. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Company's Common Stock is American Stock Transfer & Trust Company. 56 59 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 10,115,243 shares of Common Stock, assuming no exercise of options or warrants outstanding as of June 30, 1997. Of these shares, the 3,370,000 shares offered hereby (3,875,500 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 6,745,243 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 31,126 shares will become eligible for sale beginning 90 days after commencement of this offering. Upon expiration of certain lock-up agreements described below (which occurs 180 days after the commencement of this offering), an aggregate of 4,377,560 shares will become eligible for sale pursuant to Rule 144 or Rule 701 under the Securities Act ("Rule 701") and 2,278,939 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 99,000 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 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 certain lock-up agreements, the Company and certain stockholders owning upon completion of this offering, in the aggregate, 6,598,224 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. 57 60 UNDERWRITING Subject to the terms and conditions of an underwriting agreement (the "U.S. Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell to each of the underwriters named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom Cowen & Company and Hambrecht & Quist LLC are acting as representatives (the "U.S. Representatives"), has severally agreed to purchase from the Company and the Selling Stockholders, the respective number of shares of Common Stock set forth opposite the name of such U.S. Underwriter below:
NUMBER U.S. UNDERWRITERS OF SHARES ------------------------------------------------------------------ --------- Cowen & Company................................................... Hambrecht & Quist LLC............................................. --------- Total................................................... 2,620,000 =========
Subject to the terms and conditions of an underwriting agreement (the "International Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell to the international managers named below (the "International Managers"), and each of the International Managers, for whom Cowen International L.P., Hambrecht & Quist LLC and Westdeutche Landesbank Girozentrale are acting as lead managers (the "Lead Managers"), has severally agreed to purchase from the Company and the Selling Stockholders, the respective number of shares of Common Stock set forth opposite the name of such International Manager below:
NUMBER INTERNATIONAL MANAGERS OF SHARES ----------------------------------------------------------------- --------- Cowen International L.P.......................................... Hambrecht & Quist LLC............................................ Westdeutsche Landesbank Girozentrale............................. --------- Total.................................................. 750,000 =======
The U.S. Underwriters and the International Managers, and the U.S. Representatives and Lead Managers, are collectively referred to as the "Underwriters" and "Representatives," respectively. The U.S. Underwriting Agreement and the International Underwriting Agreement are collectively referred to as the "Underwriting Agreements." The offering price and aggregate underwriting discounts and commissions per share for the U.S. Offering and the International Offering are identical. The completion of each offering is contingent upon the completion of the other. The Underwriting Agreements provide that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the Underwriters' over-allotment option described below) if any such shares are taken. The Underwriters propose to offer the shares of Common Stock in part directly to the public at the initial public 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. 58 61 Pursuant to the Agreement among U.S. Underwriters and International Managers (the "Agreement Among"), each U.S. Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares (as defined herein) for the account of anyone other than a United States or Canadian Person (as defined herein) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Among, each International Manager has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares in the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is both a U.S. Underwriter and an International Manager, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an International Manager apply only to it in its capacity as an International Manager. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Among. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the Underwriters under the Underwriting Agreements are referred to herein as the "Shares." Pursuant to the Agreement Among, sales may be made between the U.S. Underwriters and the International Managers of such number of shares of Common Stock as may be mutually agreed. The price of any shares so sold shall be the initial public offering price, less an amount not greater than the selling concession. 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 505,500 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 tables, bears to the 3,370,000 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, the Selling Stockholders and certain of the Company's other stockholders 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 stockholders 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 stockholders 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 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 59 62 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. The Underwriters have reserved for sale, at the initial public offering price, up to 360,000 shares of the Common Stock offered hereby for certain individuals and entities that have expressed an interest in purchasing such shares of Common Stock in the offering. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. Hambrecht & Quist California ("H&Q California"), an affiliate of Hambrecht & Quist LLC ("H&Q LLC"), Daniel H. Case III, the President and Chief Executive Officer of H&Q LLC, and Joshua M. Rafner, a managing director of H&Q LLC purchased 69,930, 8,741 and 8,741 shares of the Company's Series E Preferred Stock, respectively, in a March 1997 financing. Each of H&Q California and Messrs. Case and Rafner has agreed not to sell, transfer, assign, pledge or hypothecate such shares for a period of one year from the date of this Prospectus. The National Association of Securities Dealers has deemed the difference between the purchase price of those 87,412 shares ($5.72 per share) and the initial public offering price of the shares of the Company's Common Stock offered hereby to be additional underwriting compensation. 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. This Prospectus may be used by underwriters and dealers in connection with offers and sales of the Common Stock, including shares initially sold in the International Offering, to persons located in the United States. 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. 60 63 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. 61 64 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 June 30, 1997 (unaudited)......................................................................... F-3 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and for the six-month periods ended June 30, 1996 and 1997 (unaudited)......... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1994, 1995 and 1996 and for the six-month period ended June 30, 1997 (unaudited)......................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the six-month periods ended June 30, 1996 and 1997 (unaudited)......... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 65 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 Palo Alto, California March 31, 1997, except as to Note 10, which is as of September 5, 1997 F-2 66 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
1995 1996 ------- ------- JUNE 30, 1997 ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 739 $ 2,593 $10,942 Accounts receivable, less allowance of $93, $210 and $160 in 1995, 1996 and 1997, respectively................... 4,430 5,237 5,822 Inventories............................................... 2,313 2,279 2,396 Prepaid expenses.......................................... 113 519 641 ------- -------- -------- Total current assets................................... 7,595 10,628 19,801 Property and equipment, net................................. 476 818 850 Other assets, net........................................... 72 13 14 ------- -------- -------- $ 8,143 $11,459 $20,665 ======= ======== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable and current portion of long-term debt....... $ 1,973 $ 5,896 $ 2,337 Current portion of related party debt..................... 84 2,350 -- Accounts payable.......................................... 3,184 3,351 2,877 Accrued payroll and related expenses...................... 161 458 356 Other accrued expenses.................................... 573 360 537 ------- -------- -------- Total current liabilities.............................. 5,975 12,415 6,107 Notes payable and long-term debt, less current portion...... 2,147 -- -- ------- -------- -------- Total liabilities...................................... 8,122 12,415 6,107 Redeemable convertible preferred stock; $0.001 par value; 6,000,000 shares authorized in 1995 and 1996, 10,000,000 shares authorized in 1997; 1,211,914 shares issued and outstanding in 1995 and 1996, and 3,944,495 shares issued and outstanding in 1997 (liquidation preference of $4,642 and $21,768 in 1996 and 1997)............................. 4,781 5,068 21,781 Stockholders' deficit: Convertible preferred stock, $0.001 par value; 854,038 shares issued and outstanding.......................... 1 1 1 Common stock, $0.001 par value; 19,000,000 shares authorized in 1995 and 1996 and 40,000,000 shares authorized in 1997; 1,280,414 shares issued and outstanding in 1995 and 1996, and 1,866,710 shares issued and outstanding in 1997......................... 1 1 2 Additional paid-in capital................................ 2,010 2,387 2,446 Deferred stock compensation............................... -- (224) (188) Accumulated deficit....................................... (6,618) (8,015) (8,903) Cumulative translation adjustment......................... (154) (174) (581) ------- -------- -------- Total stockholders' deficit............................ (4,760) (6,024) (7,223) ------- -------- -------- Commitments and contingencies $ 8,143 $11,459 $20,665 ======= ======== ========
See accompanying notes to consolidated financial statements. F-3 67 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------- -------------------- 1994 1995 1996 1996 1997 ------- ------- --------- ------- ------ (UNAUDITED) Net sales.............................. $ 6,446 $18,066 $ 21,520 $ 8,513 $9,983 Cost of sales.......................... 5,087 15,771 14,880 6,171 6,126 ------- -------- ------- ------- ------- Gross profit...................... 1,359 2,295 6,640 2,342 3,857 Operating expenses: Research and development............. 1,162 1,399 2,386 1,180 1,418 Sales and marketing.................. 1,224 2,057 3,230 1,408 2,013 General and administrative........... 580 1,439 2,004 908 1,133 ------- -------- ------- ------- ------- Loss from operations.............. (1,607) (2,600) (980) (1,154) (707) Interest income (expense).............. (261) (337) (304) (148) 58 Other.................................. -- 11 174 56 239 ------- -------- ------- ------- ------- Net loss.......................... (1,868) (2,926) (1,110) (1,246) (410) Accretion on redeemable convertible preferred stock...................... -- (139) (287) (143) (478) ------- -------- ------- ------- ------- Net loss applicable to common stockholders......................... $(1,868) $(3,065) $ (1,397) $(1,389) $ (888) ======= ======== ======= ======= ======= Pro forma net loss per share........... $ (0.25) $(0.13) ======= ======= Shares used to compute pro forma net loss per common share................ 5,272 7,018 ======= =======
See accompanying notes to consolidated financial statements. F-4 68 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)...... -- -- 586,296 1 59 -- -- -- 60 Amortization of deferred employee compensation (unaudited)...... -- -- -- -- -- 36 -- -- 36 Foreign currency translation adjustment (unaudited)...... -- -- -- -- -- -- -- (407) (407) Net loss (unaudited)...... -- -- -- -- -- -- (410) -- (410) Accretion on redeemable convertible preferred stock (unaudited)...... -- -- -- -- -- -- (478) -- (478) -- -- ------- --------- ------ ----- ------- ----- ------- Balances as of June 30, 1997 (unaudited)...... 854,038 $1 1,866,710 $2 $2,446 $ (188) $(8,903) $(581) $ (7,223) ======= == ========= == ====== ===== ======= ===== =======
See accompanying notes to consolidated financial statements. F-5 69 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (UNAUDITED) Cash flows from operating activities: Net loss.................................... $(1,868) $(2,926) $(1,110) $(1,246) $ (410) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............ 87 135 445 118 172 Interest on subordinated stockholder loans converted to equity.............. -- 242 -- -- -- Amortization of deferred employee compensation........................... -- -- 153 -- 36 Changes in operating assets and liabilities: Accounts receivable.................... (472) (2,816) (991) 450 (956) Inventories............................ (1,020) (800) (75) 644 (162) Prepaid expenses....................... (10) (99) (582) (187) (350) Accounts payable....................... 882 1,983 370 (812) (79) Accrued expenses....................... 332 390 116 104 70 ------- ------- ------- ------ ------ Net cash used in operating activities........................ (2,069) (3,891) (1,674) (929) (1,679) ------- ------- ------- ------ ------ Cash flows used in investing activities -- capital expenditures........................ (194) (524) (643) (318) (265) ------- ------- ------- ------ ------ Cash flows from financing activities: Proceeds from notes payable................. -- 1,253 5,011 3,289 -- Payments on notes payable................... (17) -- (1,531) (1,702) (1,290) Proceeds from long-term debt................ 2,470 1,509 -- -- -- Principal payments on long-term debt........ (58) (59) -- -- (63) Proceeds from issuance of equity............ -- 2,441 -- -- 12,148 Proceeds from line of credit................ -- -- 1,000 -- -- ------- ------- ------- ------ ------ Net cash provided by financing activities........................ 2,395 5,144 4,480 1,587 10,795 ------- ------- ------- ------ ------ Effect of exchange rates on cash.............. (180) (60) (309) (173) (502) ------- ------- ------- ------ ------ Net (decrease) increase in cash and cash equivalents................................. (48) 669 1,854 167 8,349 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 $ 906 $10,942 ======= ======= ======= ====== ====== Supplemental disclosures of cash flow information: Cash paid during the period -- interest..... $ 79 $ 191 $ 313 $ 147 $ 65 ======= ======= ======= ====== ====== 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 70 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, 1995 AND 1996 (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company SCM Microsystems designs, develops and sells standards-compliant hardware, firmware and software products and technologies used in smart card and other token-based network security and conditional access systems. The Company currently sells its products to a number of OEM customers. The Company maintains its U.S. headquarters in California and maintains its 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 4,798,533 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 June 30, 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 71 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 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. Nonrecurring engineering contract revenue is recognized using the percentage of completion method. 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 72 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 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 June 30, 1997, and for the six months ended June 30, 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 73 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. This statement is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Statement establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. This Statement is effective for financial statements for periods beginning after December 31, 1997. The Company has not yet determined whether it has any separately reportable business segments. 2. BALANCE SHEET COMPONENTS A summary of balance sheet components is as follows (in thousands):
DECEMBER 31, ----------------- JUNE 30, 1995 1996 1997 ------ ------ --------- Inventories: Raw materials............................... $ 945 $1,615 $ 1,131 Work in process............................. 241 -- -- Finished goods.............................. 1,127 664 1,265 ------ ------ ------ $2,313 $2,279 $ 2,396 ====== ====== ====== Property and equipment: Furniture, fixtures, and office equipment... $ 570 $1,070 $ 1,143 Purchased software.......................... 109 204 289 ------ ------ ------ 679 1,274 1,432 Less accumulated depreciation............... 203 456 582 ------ ------ ------ $ 476 $ 818 $ 850 ====== ====== ======
3. NOTES PAYABLE, LONG-TERM DEBT, AND RELATED PARTY DEBT Notes payable and long-term debt consisted of the following (in thousands):
DECEMBER 31, ----------------- JUNE 30, 1995 1996 1997 ------ ------ --------- Nonconvertible loans.......................... $2,070 $2,580 $ 2,294 Notes payable to banks........................ 2,050 357 43 Convertible notes payable, Series C........... -- 1,959 -- Line of credit................................ -- 1,000 -- ------ ------ --- 4,120 5,896 2,337 Less current portion.......................... 1,973 5,896 2,337 ------ ------ --- Notes payable and long-term debt, less current portion........................ $2,147 $ -- $ -- ====== ====== ===
F-10 74 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) Related party debt consisted of the following (in thousands):
DECEMBER 31, JUNE ----------------- 30, 1995 1996 1997 ------ ------ ------ Convertible notes payable Series C -- related party.......................................... $ -- $ 627 $ -- Convertible notes payable Series D -- related party.......................................... -- 1,654 -- Stockholder loans................................ 84 69 -- ------ ------ ------ 84 2,350 Less current portion............................. 84 2,350 ------ ------ ------ Long-term related party debt, less current portion................................... $ -- $ -- $ -- ====== ====== ======
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 $2,294,000 as of December 31, 1995 and 1996, and June 30, 1997, respectively. In May 1997, the Company and the lender resolved the additional compensation arrangement in exchange for a warrant to purchase 138,000 shares of the Company's Common Stock at a price of $5.72 per share. The fair value of these warrants was not significant. Notes Payable to Banks Notes payable to banks bear interest at 10% and are guaranteed by certain stockholders of the Company. Stockholder Loans Loans from stockholders accrue interest at 8.5% per annum. These loans from stockholders are due on demand. 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. F-11 75 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) Convertible Notes Payable, Series B 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. 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. 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 loan was converted into 377,580 shares of Series D preferred stock. 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. 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. In April 1997, the Company issued 849,790 shares of Series F redeemable convertible preferred stock (see Note 10). 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, E and F preferred stock have a liquidation preference of $3.83, $4.29, $5.72, $5.72 and $8.58 per share, respectively, plus any declared but unpaid dividends. F-12 76 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) - Holders of Series A, B, C, D, E and 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 $1.75, $3.83, $4.29, $5.72, $5.72 and $8.58, respectively, by the conversion price in effect at the time. - Holders of Series B, C, D, E and 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 June 30, 1999, February 28, 2000, December 31, 2001, February 28, 2002 and March 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. 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. In April 1997, the Company's stockholders approved the 1997 Stock Plan and the 1997 Director Option Plan (see Note 10). Stock option activity during the periods indicated is as follows:
OUTSTANDING OPTIONS ----------------------- WEIGHTED SHARES AVERAGE AVAILABLE NUMBER OF PRICE OPTION HISTORY FOR GRANT SHARES PER SHARE ----------------------------------------- --------- --------- --------- Balance as of January 1, 1995............ -- -- $ -- Shares reserved........................ 376,443 -- Options granted........................ (281,686) 281,686 0.10 -------- -------- Balance as of December 31, 1995.......... 94,757 281,686 0.10 Shares reserved........................ 653,654 -- Options granted........................ (733,657) 733,657 0.10 Options canceled....................... 81,626 (81,626) 0.10 -------- -------- Balance as of December 31, 1996.......... 96,380 933,717 0.10 Shares assumed under 1997 stock plans............................... (96,380) -- Shares reserved under 1997 stock plans 1,050,000 Options granted........................ (345,400) 345,400 7.38 Options canceled....................... 26,895 (26,895) 0.10 Options exercised...................... -- (586,296) 0.10 -------- -------- Balance as of June 30, 1997.............. 731,495 665,926 $3.87 ======== ========
As of December 31, 1996, 480,414 options were fully vested and exercisable. F-13 77 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) 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) (1,110)
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%, and expected life of 4 years; 1996 -- expected dividend yield 0.0%, risk-free interest rate of 6.32%, and expected life of 4 years. F-14 78 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) 5. GEOGRAPHIC INFORMATION Information regarding operations in different geographic regions is as follows (in thousands):
YEARS ENDED DECEMBER 31, JUNE 30, --------------------------- ----------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- Net sales to unaffiliated customers: Europe......................... $ 5,319 $ 8,848 $11,289 $ 4,581 $ 6,890 United States.................. 1,127 9,218 10,231 3,932 3,093 ------- ------- ------- ------ ------- $ 6,446 $18,066 $21,520 $ 8,513 $ 9,983 ======= ======= ======= ====== ======= Transfers between geographic areas (eliminated in consolidation): Europe......................... $ 1,207 $ 8,608 $ 6,241 $ 1,968 $ 1,805 United States.................. -- -- -- -- 149 ------- ------- ------- ------ ------- $ 1,207 $ 8,608 $ 6,241 $ 1,968 $ 1,954 ======= ======= ======= ====== ======= Income (loss) from operations: Europe......................... $ (683) $ (907) $(1,144) $(1,053) $ 211 United States.................. (924) (1,693) 164 (101) (918) ------- ------- ------- ------ ------- $(1,607) $(2,600) $ (980) $(1,154) $ (707) ======= ======= ======= ====== ======= Identifiable assets: Europe......................... $ 2,532 $ 4,168 $ 6,912 $ 7,270 United States.................. 920 3,975 4,547 13,395 ------- ------- ------- ------- $ 3,452 $ 8,143 $11,459 $20,665 ======= ======= ======= =======
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, 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. F-15 79 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) 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-16 80 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 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. The warrants expired unexercised on June 30, 1997. 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. Legal Proceedings The Company has been notified by Smith Corona Corporation ("Smith Corona") that Smith Corona believes that the "SCM" in the Company's name, logo and a certain product name infringe a trademark held by Smith Corona and that the Company has engaged in unfair competition. The Company believes that it has F-17 81 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED.) defenses to Smith Corona's claim and has so notified Smith Corona. In the event that Smith Corona were to initiate legal proceedings against the Company with respect to this matter, the Company would vigorously defend the action. Defending any action can be costly and time consuming regardless of the outcome and, as with any litigation matter, there can be no assurance that the outcome of any such dispute would be favorable to the Company. An unfavorable outcome in the matter could subject the Company to monetary damages and may result in the Company having to change its name and logo, which would require the Company to incur costs related thereto and may result in a loss of the goodwill associated with its name and logo. In April 1997, Gemplus served the Company with a complaint alleging that certain of the Company's products infringe certain claims of a French patent held by Gemplus. In September 1997, the Company entered into a license agreement and memorandum of understanding, and settled this dispute, with Gemplus. In connection with these transactions, the Company issued warrants to Gemplus to purchase up to 200,000 shares of Common Stock at an exercise price of $13.00 per share and up to 200,000 shares of Common Stock at an exercise price of $14.00 per share. The Company also agreed to sell 200,000 shares of Common Stock to Gemplus at a purchase price of $9.00 per share 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 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. August 1997 Stock Option Grants On August 11, 1997, the Company granted to certain employees options to purchase 351,500 shares of common stock with an exercise price of $9.50. F-18 82 SCM MICROSYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 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):
JUNE 30, 1997 -------------------------------------------- HISTORICAL ADJUSTMENTS PRO FORMA ---------- --------- -------------------------------------------- (UNAUDITED) Current assets: Cash................................................. $ 10,942 $ -- $10,942 Other current assets................................. 8,859 -- 8,859 ------- -------- ------- Total current assets.............................. 19,801 19,801 Other noncurrent assets................................ 864 -- 864 ------- -------- ------- Total assets...................................... $ 20,665 $ -- $20,665 ======= ======== ======= Total liabilities...................................... $ 6,107 $ -- $ 6,107 Redeemable convertible preferred stock................. 21,781 (21,781)(a) -- Stockholders' equity (deficit): Convertible preferred stock.......................... 1 (1)(b) -- Common stock......................................... 2 5(a)(b) 7 Additional paid-in capital........................... 2,446 21,777(a)(b) 24,223 Deferred stock compensation.......................... (188) -- (188) Accumulated deficit.................................. (8,903) -- (8,903) Cumulative translation adjustment.................... (581) -- (581) ------- -------- ------- Total stockholders' equity (deficit).............. (7,223) 21,781 14,558 ------- -------- ------- Total liabilities and stockholders' equity (deficit).................................. $ 20,665 $ -- $20,665 ======= ======== =======
- --------------- (a) Gives effect to the conversion of the Company's Series B, C, D, E, and F redeemable convertible preferred stock into 1,211,914, 653,642, 765,864, 463,285, and 849,790 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. F-19 83 ============================================================ 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............................ 16 Dividend Policy............................ 16 Capitalization............................. 17 Dilution................................... 18 Selected Consolidated Financial Data....... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 20 Business................................... 29 Management................................. 45 Certain Transactions....................... 52 Principal and Selling Stockholders......... 53 Description of Capital Stock............... 55 Shares Eligible for Future Sale............ 57 Underwriting............................... 58 Legal Matters.............................. 60 Experts.................................... 60 Additional Available Information........... 61 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. ============================================================ ============================================================ 3,370,000 Shares LOGO Common Stock ------------------------------ PROSPECTUS ------------------------------ COWEN & COMPANY HAMBRECHT & QUIST , 1997 ============================================================ 84 [Alternate Page for International Prospectus] INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. PROSPECTUS (Subject to Completion) Dated September 5, 1997 3,370,000 Shares LOGO Common Stock ----------------------------- Of the 3,370,000 shares of Common Stock offered, 750,000 shares are being offered hereby in an international offering outside the United States and Canada (the "International Offering") and 2,620,000 shares are being offered in a concurrent offering in the United States and Canada (the "U.S. Offering"), subject to transfers of shares between the International Underwriters and U.S. Underwriters (collectively, the "Underwriters"). The initial public offering price and the aggregate underwriting discount per share will be identical for both offerings. The closing of the International Offering and U.S. Offering are conditioned upon each other. See "Underwriting." Of the 3,370,000 shares of Common Stock offered, 3,250,000 shares are being sold by SCM Microsystems, Inc. (the "Company") and 120,000 shares are being sold by certain selling stockholders (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of the shares being sold by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. The Company has applied to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "SCMM" and intends to submit an application to have the Common Stock listed on the Neuer Markt of the Frankfurt Stock Exchange. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 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. ----------------------------- THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA AND IS NOT TO BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES OR CANADA. THE COMMON STOCK OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 FOR THE PURPOSE OF SALES OUTSIDE THE UNITED STATES. ========================================================================================================== Proceeds to Price to Underwriting Proceeds to Selling Public Discount (1) Company (2) Stockholders - ---------------------------------------------------------------------------------------------------------- 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 $1,170,000, 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 505,500 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, Proceeds to Company, and Proceeds to Selling Stockholders 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 INTERNATIONAL L.P. HAMBRECHT & QUIST WESTDEUTSCHE LANDESBANK GIROZENTRALE , 1997 85 [Alternate Page for International Prospectus] - ------------------------------------------------------------ - ------------------------------------------------------------ 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............................ 16 Dividend Policy............................ 16 Capitalization............................. 17 Dilution................................... 18 Selected Consolidated Financial Data....... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 20 Business................................... 29 Management................................. 45 Certain Transactions....................... 52 Principal and Selling Stockholders......... 53 Description of Capital Stock............... 55 Shares Eligible for Future Sale............ 57 Underwriting............................... 58 Legal Matters.............................. 60 Experts.................................... 60 Additional Available Information........... 61 Index to Consolidated Financial Statements............................... F-1
------------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS INTERNATIONAL PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK IN THE UNITED STATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER THE U.S. PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THE U.S. PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS IN THE UNITED STATES. ============================================================ ============================================================ 3,370,000 Shares LOGO Common Stock ------------------------------ PROSPECTUS ------------------------------ COWEN INTERNATIONAL L.P. HAMBRECHT & QUIST WESTDEUTSCHE LANDESBANK GIROZENTRALE , 1997 ============================================================ 86 APPENDIX - DESCRIPTION OF GRAPHICS INSIDE FRONT COVER DESCRIPTION: Photo of SwapBox product with caption "SwapBox PC Card Adaptors" Photo of SwapAccess product and smart card with caption "SwapAccess Digital Video Broadcast--Conditional Access Modules Photo of SwapSmart product and smart card with caption "SwapSmart Smart Card Readers" Image of SmartOS logo with caption: "SmartOS Universal Smart Card Interface Architecture" TEXT SCM Microsystems Logo; Securing Access to Digital Information Today's world increasingly relies upon computer networks, the Internet and intranets and direct broadcast systems to access information, entertainment and data in a digital form and to conduct electronic commerce. This increasing proliferation and reliance upon digital data has caused data security to become a paramount concern. 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. GATEFOLD - FIRST PAGE DESCRIPTION: Photo of SwapAccess product with smart card. Caption: "Video Digital Video Broadcast" Graphic of video screen showing scrambled video image, television set-top box with SmartAccess and smart card leading to clear video image on screen. Caption: "Scrambled incoming digital video broadcasts are received by the set-top box. The SCM Microsystems DVB-CAM verifies authorization via the subscriber's smart card, descrambles the video signal and provides output for viewing. " Graphic of set-top box with SwapAccess and analog television; and digital television with SmartAccess and smart card fitting into television. Caption: "Integrated digital TV set." TEXT SCM Microsystems smart card technology secures a wide range of applications today . . . SCM Microsystems' SwapAccess Digital Video Broadcast-Conditional Access Module (DVB-CAM) provides a cost-effective means of controlling access to digital broadcasts through the use of a PC Card which utilizes a smart card to authorize, access, and initiate real-time, high-bandwidth video decryption. SwapAccess can be used in any DVB-CI or NRSSB compliant "open" set-top box. GATEFOLD -- SECOND PAGE DESCRIPTION: Photo of SwapSmart and smart card. Photo of SwapBox. Image of personal computers linked through Internet (or other network structure), with SCM Microsystems' products securing and unsecuring data. TEXT PC Data Security and Access Control SCM Microsystems offers a range of smart card and PC Card-based solutions that enable enterprises to protect vital digital data, yet still provide authorized individuals with easy and secure access. SCM Microsystems' solutions secure data before it is sent across LANs, public switched networks and the Internet to its destination, where it is unlocked for use. Only the sender and the intended recipient can access the data. . . . and provides solution for emerging data platforms of tomorrow. PAGE 30 The Data Security "Patchwork" DESCRIPTION: These graphics depict numerous icons representing laptop computers, servers, firewalls and clouds (representing the internet and other networks), each with a caption identifying the particular icon, and all of which are tied to each other by solid, connecting lines. TEXT Information Sources and Types of Users Seeking Access Websites and other information sources which include applets and push technologies. Enterprise websites and limited network access sought by external users such as customers and vendors. Full network access sought by mobile and remote employees. PAGE 33 Securing Digital Video Broadcasts DESCRIPTION: These graphics depict a satellite receiving a television signal, the forwarding of the signal to a set-top box containing a smart card and the continuation of the signal to a television. TEXT The text describes the process depicted by the graphics. 1. Set-top box receives DVB signal 2. Set-top box transfers MPEG2 data to Conditional Access Model ("CAM") 3. CAM checks Smart Card for authorization to view broadcast 4. If card is accepted, CAM descrambles MPEG2 data 5. Set-top box decodes MPEG2 data and provides output for standard TVs and VCRs. Enables services such as: -- Video-on-Demand -- Home Banking -- Pay-Per-View -- Interactive Video and Games -- Home Shopping INSIDE BACK COVER DESCRIPTION: Lap top personal computer, palm-top computer, computer key board, desk top personal computer, SmartOS logo and four smart cards labeled: "memory," "cryptographic," "microprocessor" and "any other." TEXT SCM Microsystems' open systems-based smart card interface architecture (Smart OS(TM)) allows OEMs to integrate smart card support cost-effectively within desktop, notebook or network computers and peripheral devices. The SmartOS solution allows integrators to utilize only essential components to control cost and maximize design flexibility. Many hardware designs, such as a keyboard or network computer, may already incorporate a controller chip, but lack an interface unit and firmware for the completion of a smart card reader solution. Instead of being forced to purchase all components, 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. SmartOS(TM) provides support for most smart cards. SmartOS-based products can be upgraded through software to support additional smart cards, operating systems, applications and evolving industry standards. 87 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............................................. $ 15,268 NASD filing fee.................................................. 5,539 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.................................................... 241,193 ---------- Total.................................................. $1,170,000 ==========
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 88 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 U.S. Underwriting Agreement................................. 1.1 Form of International Underwriting Agreement........................ 1.2 Form of Third Amended and Restated Certificate of Incorporation..... 3.1 Form of Fourth 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 The Registrant has recently issued and sold the following securities: (i) From January 1, 1994 through September 4, 1997 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 $21,290,570; (ii) From January 1, 1994 through September 4, 1997 the Registrant issued and sold 586,296 shares of Common Stock to employees and consultants at an exercise price of $0.10 for aggregate consideration of approximately $59,000; (iii) From January 1, 1994 through September 4, 1997, the Registrant issued warrants to purchase up to 784,121 shares of Common Stock at exercise prices ranging from $5.72 to $14.00 per share in connection with the issuance of a portion of the Preferred Stock described in (i) above, certain loan arrangements and the settlement with Gemplus; and (iv) Concurrently with these offerings, the Registrant will issue and sell 200,000 shares of Common Stock at $9.00 per share. The issuances referred to in paragraphs (i), (iii) and (iv) 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 U.S. Underwriting Agreement. 1.2 Form of International Underwriting Agreement. 3.1* Third Amended and Restated Certificate of Incorporation of Registrant. 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.
II-2 89
EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------------------------- 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. 10.20 Form of amendment to the Partnership Agreement, dated June 8, 1995, between Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank and form of warrant. 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* Intentionally omitted. 10.27*+ B-1 License and Know-How Contract, dated September 4, 1996, between Deutsche Telekom AG and Registrant, as amended. 10.28 Technology Option Agreement, dated January 31, 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. 10.32+ License Agreement, dated September 5, 1997, between the Registrant and Gemplus. 10.33 Warrant Issuance and Common Stock Agreement, dated September 5, 1997, between the Registrant and Gemplus. 10.34 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus. 10.35 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus. 10.36 Waiver and Amendment to Amended and Restated Stockholders' Agreement dated September 5, 1997. 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
II-3 90
EXHIBIT NO. DESCRIPTION ----------- ---------------------------------------------------------------------------- 23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 24.1* Power of Attorney 27.1* Financial Data Schedule
- --------------- * Filed previously. ** 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 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 91 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Company's 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 4th day of September 1997. SCM MICROSYSTEMS, INC. By: /s/ STEVEN HUMPHREYS ------------------------------------ Steven Humphreys President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Company's 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 September 4, 1997 - ----------------------------------------------- Executive Officer Steven Humphreys (Principal Executive Officer) and Director /s/ JOHN NIEDERMAIER Vice President, Finance September 4, 1997 - ----------------------------------------------- and Chief Financial John Niedermaier Officer (Principal Financial and Accounting Officer) /s/ ROBERT SCHNEIDER* Chairman of the Board September 4, 1997 - ----------------------------------------------- Robert Schneider /s/ BERND MEIER* Chief Operations September 4, 1997 - ----------------------------------------------- Officer and Director Bernd Meier /s/ FRIEDRICH BORNIKOEL* Director September 4, 1997 - ----------------------------------------------- Friedrich Bornikoel /s/ BRUCE GRAHAM* Director September 4, 1997 - ----------------------------------------------- Bruce Graham /s/ RANDALL LUNN* Director September 4, 1997 - ----------------------------------------------- Randall Lunn /s/ POH CHUAN NG* Director September 4, 1997 - ----------------------------------------------- Poh Chuan Ng /s/ ANDREW VOUGHT* Director September 4, 1997 - ----------------------------------------------- Andrew Vought *By: /s/ JOHN NIEDERMAIER - ----------------------------------------------- John Niedermaier Attorney-in-Fact
II-5 92 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 Six months ended June 30, 1997................... 210 -- 50 160 Warranty accrual Year ended December 31, 1994..................... -- -- -- -- Year ended December 31, 1995..................... -- 84 -- 84 Year ended December 31, 1996..................... 84 19 -- 103 Six months ended June 30, 1997................... 103 30 2 131
II-6 93 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------- 1.1 Form of U.S. Underwriting Agreement 1.2 Form of International Underwriting Agreement 3.1* Third Amended and Restated Certificate of Incorporation of Registrant 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 10.20 Form of Amendment to the Partnership Agreement, dated June 8, 1995, between Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank and form of Warrant 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.
94
EXHIBIT NO. DESCRIPTION ----------- ----------------------------------------------------------------- 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* Intentionally omitted 10.27*+ B-1 License and Know-How Contract, dated September 4, 1996, between Deutsche Telekom AG and Registrant, as amended 10.28 Technology Option Agreement, dated January 31, 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 10.32+ License Agreement, dated September 5, 1997, between the Registrant and Gemplus 10.33 Warrant Issuance and Common Stock Agreement, dated September 5, 1997, between the Registrant and Gemplus 10.34 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus 10.35 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus 10.36 Waiver and Amendment to Amended and Restated Stockholders' Agreement dated September 5, 1997 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 27.1* Financial Data Schedule
- --------------- * Filed previously. ** 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-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 R&W Draft 9/3/97 2,620,000 Shares SCM MICROSYSTEMS, INC. Common Stock U.S. UNDERWRITING AGREEMENT _____________, 1997 COWEN & COMPANY HAMBRECHT & QUIST LLC As Representatives of the several U.S. Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Dear Sirs: 1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the "Company"), and the selling stockholders named in Schedule B hereto (the "Selling Stockholders") propose to sell, pursuant to the terms of this Agreement, to the several U.S. Underwriters named in Schedule A hereto (the "U.S. Underwriters," or, each, a "U.S. Underwriter"), an aggregate of 2,620,000 shares of Common Stock, $0.001 par value per share (the "Common Stock"), of the Company. The aggregate of 2,620,000 shares so proposed to be sold is hereinafter referred to as the "Firm Stock." The Company also proposes to sell to the U.S. Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to an additional 393,000 shares of Common Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are hereinafter collectively referred to as the "Stock." Cowen & Company ("Cowen") and Hambrecht & Quist LLC are acting as representatives of the several U.S. Underwriters and in such capacity are hereinafter referred to as the "Representatives." It is understood by all parties that the Company and the Selling Stockholders are concurrently entering into an agreement dated the date hereof (the "International Underwriting Agreement") providing for the sale by the Company and the Selling Stockholders of an aggregate of 750,000 shares of Common Stock (the "International Stock") through arrangements with certain international managers outside the United States (the "International Managers"), for whom Cowen International L.P., Hambrecht & Quist LLC and Westdeutsche Landesbank Girozentrale are acting as lead manager (the "Lead Managers"). The U.S. Underwriters and the International Managers simultaneously are entering into an agreement among the U.S. and International underwriting syndicates (the "Agreement Among U.S. Underwriters and International Managers") which provides for, among other things, the transfer of shares of Common Stock between the two syndicates. Two forms of prospectus are to be used in connection with the offer and sale of shares 1 2 of Common Stock contemplated by the foregoing, one relating to the Stock and the other relating to the International Stock. In addition, the International version of the prospectus will be translated into German for purposes of the application to list the International Stock on the Neuer Markt of the Frankfurt Stock Exchange. Except as used in the first paragraph hereof and in Section 3 and 8 herein, and except as the context may otherwise require, references herein to the Stock shall include all the shares of Common Stock which may be sold pursuant to both this Agreement and the International Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include the U.S. and the International versions thereof and the German translation version of the International version. 2a. Representations and Warranties of the Company and its Subsidiaries. The Company hereby represents and warrants to, and agrees with, the several U.S. Underwriters that: (a) A registration statement on Form S-1 (File No. 333-29073) in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective with respect to the Stock, including any pre-effective prospectuses included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") promulgated thereunder, copies of which have heretofore been delivered to you, has been prepared by the Company in conformity with the requirements of the Securities Act and has been filed with the Commission under the Securities Act; one or more amendments to such registration statement, including in each case an amended pre- effective prospectus, copies of which amendments have heretofore been delivered to you, have been so prepared and filed. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Stock may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Stock that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, (A) if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Securities Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the requirements of Section 10(a) of the Securities Act are delivered pursuant to Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in this Agreement means the "prospectus subject to completion" (as such term is defined in Rule 434(g) under the Securities Act) as supplemented by (a) the addition of Rule 430A information or other information contained in the form of prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the information contained in the term sheets described in Rule 434(b)(3) under the Securities Act, and (ii) the date of such prospectuses shall be deemed to be the date of the term sheets. The term "Pre-effective Prospectus" as used in this Agreement means the prospectus 2 3 subject to completion dated September __, 1997, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. (b) The Commission has not issued or, to the Company's knowledge, threatened to issue any order preventing or suspending the use of any Pre-effective Prospectus, and, at its date of issue, each Pre-effective Prospectus complied in all material respects with the applicable provisions of the Securities Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, other than any nonconformance or untrue statement or omission in a Pre-effective Prospectus that has been corrected in the Prospectus; and, when the Registration Statement becomes effective and at all times subsequent thereto up to and including each of the Closing Dates (as hereinafter defined), the Registration Statement and the Prospectus and any amendments or supplements thereto contained and will contain all material statements and information required to be included therein by the Securities Act and complied and will comply in all material respects with the applicable provisions of the Securities Act and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, contained or will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations and warranties shall not apply to information contained in or omitted from any Pre-effective Prospectus or the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Representatives on behalf of the several U.S. Underwriters, directly or through you, specifically for use in the preparation thereof. With respect to the preceding sentence, the Company acknowledges that the only information furnished in writing by the Representatives on behalf of the several U.S. Underwriters for use in the Pre-effective Prospectus, the Registration Statement and the Prospectus is the paragraph with respect to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus. (c) The Registration Statement is effective under the Securities Act and no stop order suspending effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, are threatened under the Securities Act; any required filing of the Prospectus and any amendment or supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been or will be made in the manner and within the time period required by Rule 424(b). (d) There is no document, contract or other agreement of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required by the Securities Act or the Rules and Regulations. Each agreement described in the Registration Statement and the Prospectus or listed in the Exhibits to the Registration Statement is in full force and effect and is valid and enforceable by and against the Company or its subsidiaries in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by applicable bankruptcy, insolvency and other similar laws affecting conditions, 3 4 rights and rules of law governing specific performance, injunctive relief and other equitable remedies. Neither the Company nor any subsidiary is in default in the observance or performance of any material term or obligation to be performed by it under any such agreement, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in any such case which default or event would have a material adverse effect on the Company and its subsidiaries taken as a whole. No default exists, and, to the knowledge of the Company, no event has occurred which, with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company or any of its subsidiaries of any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their respective properties or businesses may be bound or affected, in any case which default or event could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole. (e) None of the Company or its subsidiaries is in violation of any franchise, license, permit, judgment, decree, order, statute or rule or regulation, which could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole, or any term or provision of its certificate of incorporation or by-laws. (f) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, nor entered into any transactions not in the ordinary course of business, and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiaries considered as a whole, except for issuances of Common Stock pursuant to the Company's 1997 Stock Plan, 1997 Employee Stock Purchase Plan, 1997 Director Option Plan, 1997 Stock Option Plan for French Employees and the 1997 Employee Stock Purchase Plan for Non-U.S. Employees (collectively, the "1997 Plans"). (g) The financial statements, together with the related notes and schedules, set forth in the Prospectus and elsewhere in the Registration Statement fairly present, the financial position and the results of operations and changes in financial position of the Company and its consolidated subsidiaries at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. The summary and selected financial and statistical data set forth in the Prospectus under the captions "Summary Consolidated Financial Data," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations" and "-- Quarterly Results of Operations" fairly present, on the basis stated in the Registration Statement, the information set forth therein as at the respective dates and for the respective periods specified, and such data have been presented on a basis consistent with the financial statements so set forth in the Prospectus and other financial information. 4 5 (h) To the Company's knowledge, KPMG Peat Marwick LLP, who have expressed their opinions on the audited financial statements and related schedules included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. (i) The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of organization, with power and authority (corporate and other) to own or lease their properties and to conduct their businesses as described in the Registration Statement and the Prospectus; each of the Company and its subsidiaries is in possession of and operating in compliance with all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of its business, all of which are valid and in full force and effect; and each of the Company and its subsidiaries is duly qualified to do business and in good standing as a foreign corporation in all other jurisdictions where its ownership or leasing of properties or the conduct of its businesses requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company and its subsidiaries considered as a whole. The Company has and each of its subsidiaries have all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public regulatory or governmental agencies and bodies to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. The Company owns or controls, directly or indirectly, only the corporations, associations or other entities named in Schedule C hereto. (j) The Company's authorized and outstanding capital stock is on the date hereof, and will be on the Closing Dates, as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company conform to the description thereof in the Prospectus and have been duly authorized and validly issued and are fully paid and nonassessable; and have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any pre-emptive rights or similar rights to subscribe for or purchase securities. Except as disclosed in and or contemplated by the Prospectus and the consolidated financial statements of the Company and related notes thereto included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any pre-emptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except for options granted subsequent to the date of information provided in the Prospectus pursuant to the Company's employee and stock option plans as disclosed in the Prospectus. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, as set forth in the Prospectus, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. All outstanding shares of capital stock of each subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable and are owned directly by the Company or by another wholly owned subsidiary of the Company free and clear of any liens, encumbrances, equities or claims. 5 6 (k) The Stock to be issued and sold by the Company to the U.S. Underwriters hereunder and the International Stock to be issued and sold by the Company to the International Managers under the International Underwriting Agreement has been duly and validly authorized and, when issued and delivered against payment therefor as provided herein and therein, will be duly and validly issued, fully paid and nonassessable and free of any pre-emptive or similar rights and will conform to the description thereof in the Prospectus and the U.S. Underwriters and the International Managers will receive good title to the Stock and the International Stock, respectively, free and clear of all liens, security interests, pledges, charges, claims and encumbrances. (l) Except as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any subsidiary is subject, which, if determined adversely to the Company or any such subsidiary, could individually or in the aggregate be reasonably expected to (i) prevent or adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Pre-effective Prospectus in any jurisdiction or (iv) result in a material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole and the Company is not aware of any valid basis for any such legal or governmental proceeding; and, to the Company's knowledge, no such proceedings are threatened or contemplated against the Company or any subsidiary by governmental authorities or others. Neither the Company nor any subsidiary is a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. The description of the Company's litigation under the heading "Legal Proceedings" in the Prospectus is true and correct and complies with the Rules and Regulations and no other suit or proceeding before any court or governmental authority known to the Company is required to be disclosed in the Prospectus that is not so disclosed. (m) The execution, delivery and performance of this Agreement and the International Underwriting Agreement and the consummation of the transactions herein and therein contemplated (A) will not result in any violation of the provisions of the certificate of incorporation, by-laws or other organizational documents of the Company or its subsidiary, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its subsidiaries or any of their respective properties or assets, and (B) will not conflict with or result in a breach or violation of any of the terms or provision of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of their respective properties is or may be bound nor will such delivery and performance result in the creation of a security interest, lien, encumbrance, charge or claim. (n) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance of this Agreement and the International Underwriting Agreement by the Company or its subsidiaries and the consummation of the transactions contemplated hereby and thereby (including the 6 7 issuance, sale and delivery of the Stock), except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer Markt of the Frankfurt Stock Exchange or under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Stock by the U.S. Underwriters and the International Stock by the International Managers. (o) The Company has the full corporate power and authority to enter into this Agreement and the International Underwriting Agreement and to perform its obligations hereunder and thereunder (including to issue, sell and deliver the Stock and the International Stock), and this Agreement and the International Underwriting Agreement have each been duly and validly authorized, executed and delivered by the Company and each constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws and except as may be limited by applicable bankruptcy, insolvency and other similar laws affecting conditions, rights and rules of law governing specific performance, injunctive relief and other equitable remedies. (p) The Company and its subsidiaries are in all material respects in compliance with, and conduct their respective businesses in conformity with, all applicable federal, state, local and foreign laws, rules and regulations or any court or governmental agency or body; to the knowledge of the Company, otherwise than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such federal or state laws, rules or regulations has been adopted which, when made effective, could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole. (q) The Company and its subsidiaries have filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns and have paid all taxes shown as due thereon or with respect to any of their properties, and there is no tax deficiency that has been or to the knowledge of the Company is reasonably likely to be, asserted against the Company or any of its subsidiaries or any of their respective properties or assets that would materially and adversely affect the financial position, business or operations of the Company and its subsidiaries considered as a whole. (r) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise, except for persons and entities who have expressly waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. (s) Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of the Common Stock in violation of Regulation M of the Exchange Act, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of the Common Stock in violation of Regulation M of the Exchange Act. 7 8 (t) Each of the Company and each of its subsidiaries owns, or possesses adequate and enforceable rights, either as owner or licensee, to use all patents, trademarks (including "SwapBox(TM)," "SwapSmart(TM)," "SwapAcces(TM)" and "SmartOS(TM)"), trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, know-how and other similar rights described in the Prospectus as being owned or licensed by them and except as described in the Prospectus the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and its subsidiaries with respect to the foregoing. The Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with in any material respect any patents, trademarks, service marks, trade name, copyright, trade secrets, know-how, licenses or other intellectual property or franchise right of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, know-how, license in or other intellectual property right or franchise right of any person. (u) The Company is not involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened. Except as described in the Prospectus, the Company is not aware that (A) any executive, key employee or significant group of employees of the Company or any subsidiary plans to terminate employment with the Company or any such subsidiary or (B) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company and its subsidiaries. Neither the Company nor any subsidiary has or expects to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or any subsidiary makes or ever has made a contribution and in which any employee of the Company or any subsidiary is or has ever been a participant. With respect to such plans, the Company and each subsidiary is in compliance in all material respects with all applicable provisions of ERISA. (v) No transaction has occurred, and no relationship, direct or indirect, exists, between or among the Company or its subsidiaries, on the one hand, and any of its stockholders, officers, directors, customers or suppliers of the Company or its subsidiaries or any affiliate or affiliates of any such stockholder, officer, director, customer or supplier, on the other hand, that is required to be described and is not so described in the Prospectus. (w) The Company and its subsidiaries have, and the Company and its subsidiaries as of the Closing Dates will have, good and marketable title to all personal property owned by them which is material to the business of the Company or of its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as would not have 8 9 a material adverse effect on the Company and its subsidiaries considered as a whole; and any real property and buildings held under lease by the Company and its subsidiaries are, or will be as of each of the Closing Dates, held by them under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company and its subsidiaries considered as a whole, in each case except as described in or contemplated by the Prospectus. (x) The Company and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage after giving effect to the transactions described in the Prospectus; and neither the Company nor any subsidiary of the Company has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their business at a cost that would not have a material adverse effect on the Company and its subsidiaries considered as a whole, except as described in or contemplated by the Prospectus. (y) Other than as contemplated by this Agreement and the International Underwriting Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement or the International Underwriting Agreement. (z) The Stock has been duly authorized for (i) quotation on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System, subject to official Notice of Issuance, and (ii) listing on the Neuer Markt of the Frankfurt Stock Exchange, and a registration statement has been filed on Form 8-A pursuant to Section 12 of the Exchange Act, which registration statement complies in all material respects with the Exchange Act. (aa) The books, records and accounts of the Company and its subsidiaries accurately and fairly reflect, in all material respects, the transactions in, and dispositions of, the assets of, and the results of operation of, the Company and its subsidiaries. The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (bb) To the Company's knowledge, neither the Company nor any of its subsidiaries nor any employee or agent of the Company or any of its subsidiaries has made any payment of funds of the Company or any of its subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (cc) Neither the Company nor any of its subsidiaries is or, after application of the net proceeds of this offering as described under the caption "Use of Proceeds" in the Prospectus, will become an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 9 10 (dd) Each certificate signed by any officer of the Company and delivered to the U.S. Underwriters or counsel for the U.S. Underwriters shall be deemed to be a representation and warranty by the Company as to the matters covered thereby. (ee) Neither the Company nor any of its subsidiaries, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; or has violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977. 2b. Representations and Warranties and Agreements of the Selling Stockholders. Each Selling Stockholder represents and warrants to, and agrees with, the several U.S. Underwriters that such Selling Stockholder: (a) Now has, and on the Closing Date will have, valid and marketable title to the Stock and the International Stock to be sold by such Selling Stockholder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer, and has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement (each as hereinafter defined). (b) Now has, and on the Closing Date will have, upon delivery of and payment for each share of Stock hereunder and the International Stock under the International Underwriting Agreement, full right, power and authority, and approval required by law to sell, transfer, assign and deliver the Stock being sold by such Selling Stockholder hereunder and the International Stock being sold by such Selling Stockholder under the International Underwriting Agreement, and each of the several U.S. Underwriters will acquire valid and marketable title to all of the Stock being sold to the U.S. Underwriters by such Selling Stockholder, free and clear of any liens, encumbrances, equities claims, restrictions on transfer or other defects whatsoever. (c) For a period of 180 days after the date of this Agreement, without the consent of Cowen, such Selling Stockholder will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of any Stock or securities convertible into or exchangeable for Stock, including, without limitation Stock which may be deemed to be beneficially owned by such Selling Shareholder in accordance with the Rules and Regulations, except for the Stock being sold hereunder and the International Stock being sold under the International Underwriting Agreement. (d) Has duly executed and delivered a power of attorney, in substantially the form heretofore delivered by the Representatives (the "Power of Attorney"), appointing and and each of them, as attorney-in-fact (the "Attorneys-in-fact") with authority to execute and deliver this Agreement and the International Underwriting Agreement on behalf of such Selling Stockholder, to authorize the delivery of the shares of Stock to be sold by such Selling Stockholder hereunder and the shares of International Stock to be sold by such Selling Stockholder under the International Underwriting Agreement and otherwise to act 10 11 on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the International Underwriting Agreement. (e) Has duly executed and delivered a custody agreement, in substantially the form heretofore delivered by the Representatives ( the "Custody Agreement"), with _______________________ as custodian (the "Custodian"), pursuant to which certificates in negotiable form for the shares of Stock and International Stock to be sold by such Selling Stockholder hereunder have been placed in custody for delivery under this Agreement and the International Underwriting Agreement. (f) Has, by execution and delivery of each of this Agreement, the International Underwriting Agreement, the Power of Attorney and the Custody Agreement, created valid and binding obligations of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms, except to the extent that rights to indemnity hereunder may be limited by federal or state securities laws or the public policy underlying such laws. (g) The performance of this Agreement, the International Underwriting Agreement, the Custody Agreement and the Power of Attorney, and the consummation of the transactions contemplated hereby and thereby will not result in a breach or violation by such Selling Stockholder of any of the terms or provisions of, or constitute a default by such Selling Stockholder under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its properties is bound, or any judgement of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties, or to such Selling Stockholder's knowledge, any statute, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties. Each Selling Stockholder agrees that the shares of Stock and International Stock represented by the certificates held in custody under the Custody Agreement are for the benefit of and coupled with and subject to the interests of the U.S. Underwriters, the International Managers, the Selling Stockholders, and the Company hereunder, and that the arrangement for such custody and the appointment of the Attorneys-in-fact are irrevocable; that the obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death or incapacity, liquidation or distribution of such Selling Stockholder, or any other event, that if such Selling Stockholder should die or become incapacitated or any other event occurs, before the delivery of the Stock hereunder and the International Stock under the International Underwriting Agreement, certificates for the Stock and International Stock to be sold by such Selling Stockholder shall be delivered on behalf of such Selling Stockholder in accordance with the terms and conditions of this Agreement, the International Underwriting Agreement and the Custody Agreement, and action taken by the Attorneys- in-fact or any of them under the Power of Attorney shall be as valid as if such death, incapacity, or other event had not occurred, whether or not the Custodian, the Attorneys- in-fact or any of them shall have notice of such death, incapacity or other event. 11 12 3 Purchase by, and Sale and Delivery to, U.S. Underwriters --Closing Dates. The Company and the Selling Stockholders agree, severally and not jointly, to sell to the U.S. Underwriters the Firm Stock with the number of shares to be sold by the Company and each Selling Stockholder being the number of shares set forth opposite his, her or its name in Schedule B, and on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the U.S. Underwriters agree, severally and not jointly, to purchase the Firm Stock from the Company and the Selling Stockholders, the number of shares of Firm Stock to be purchased by each U.S. Underwriter being set opposite its name in Schedule A, subject to adjustment in accordance with Section 12 hereof. The number of shares of Stock to be purchased by each U.S. Underwriter from each Selling Stockholder hereunder shall bear the same proportion to the total number of shares of Stock to be purchased by such U.S. Underwriter hereunder as the number of shares of stock being sold by each Selling Stockholder bears to the total number of shares of Stock being sold by all Selling Stockholders, subject to adjustment by the Representatives to eliminate fractions. The purchase price per share to be paid by the U.S. Underwriters to the Company and the Selling Stockholders will be the price per share set forth in the "Per Share" row of the table on the cover page of the Prospectus under the heading "Proceeds to Company" and "Proceeds to Selling Stockholders," respectively (the "Purchase Price"). The Company and the Selling Stockholders will deliver the Firm Stock to the Representatives for the respective accounts of the several U.S. Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company and the Selling Stockholders given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the First Closing Date (as defined below) or, if no such direction is received, in the names of the respective U.S. Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine), against payment of the aggregate Purchase Price therefore by wire transfer in immediately available funds (same day funds), to the Company and ______________________ as Custodian for the Selling Stockholders, all at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304. The time and date of the delivery and closing shall be at 10:00 A.M., New York Time, on _________, 1997. The time and date of such payment and delivery are herein referred to as the "First Closing Date". The First Closing Date and the location of delivery of, and the form of payment for, the Firm Stock may be varied by agreement among the Company, Cowen and the Selling Stockholders. The First Closing Date may be postponed pursuant to the provisions of Section 12. The Company and the Selling Stockholders shall make the certificates for the Stock available to the Representatives for examination on behalf of the U.S. Underwriters not later than 10:00 A.M., New York time, on the business day preceding the First Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. It is understood that Cowen or the other Representative, individually and not as Representatives of the several U.S. Underwriters, may (but shall not be obligated to) make payment to the Company or to the Selling Stockholders on behalf of any U.S. Underwriter or U.S. Underwriters, for the Stock to be purchased by such U.S. Underwriter or U.S. Underwriters. Any such payment by Cowen or other Representatives shall not relieve such U.S. Underwriter or U.S. Underwriters from any of its or their other obligations hereunder. 12 13 The several U.S. Underwriters agree to make an initial public offering of the Firm Stock at the initial public offering price set forth on the cover page of the Prospectus as soon after the effectiveness of the Registration Statement as in their judgment is advisable. The Representatives shall promptly advise the Company and the Selling Stockholders of the making of the initial public offering. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Stock as contemplated by the Prospectus, the Company hereby grants to the U.S. Underwriters an option to purchase, severally and not jointly, up to an aggregate of 393,000 shares of Optional Stock. The price per share to be paid for the Optional Stock shall be the Purchase Price. The option granted hereby may be exercised as to all or any party of the Optional Stock at any time, and from time to time, not more than thirty (30) days subsequent to the effective date of this Agreement. No Optional Stock shall be sold and delivered unless the Firm Stock previously has been, or simultaneously is, sold and delivered. The right to purchase the Optional Stock or any portion thereof may be surrendered and terminated at any time upon notice by the U.S. Underwriters to the Company. The option granted hereby may be exercised by the U.S. Underwriters by giving written notice from Cowen to the Company setting forth the number of shares of the Optional Stock to be purchased by them and the date and time for delivery of and payment for the Optional Stock. Each date and time for delivery of and payment for the Optional Stock (which may be the First Closing Date, but not earlier) is herein called an "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than ten (10) business days after written notice is given. (The Option Closing Date and the First Closing Date are herein called the "Closing Dates".) Optional Stock shall be purchased for the account of each U.S. Underwriter in the same proportion as the number of shares of Firm Stock set forth opposite such U.S. Underwriter's name in Schedule A hereto bears to the total number of shares of Firm Stock (subject to adjustment by the U.S. Underwriters to eliminate odd lots). Upon exercise of the option of the U.S. Underwriters, the Company agrees to sell to the U.S. Underwriters the number of shares of Optional Stock set forth in the written notice of exercise and the U.S. Underwriters agree, severally and not jointly and subject to the terms and conditions herein set forth, to purchase the number of such shares determined as aforesaid. The Company will deliver the Optional Stock to the U.S. Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the Option Closing Date or, if no such direction is received, in the names of the respective U.S. Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine), against payment of the aggregate Purchase Price therefor by wire transfer in immediately available funds (same day funds), to the Company, all at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304. The Company shall make the certificates for the Optional Stock available to the U.S. Underwriters for examination not later than 10:00 A.M., New York Time, on the business day preceding the Option Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. The Option Closing Date and the location of delivery of, and the form of payment for, the Option Stock may be 13 14 varied by agreement between the Company and Cowen. The Option Closing Date may be postponed pursuant to the provisions of Section 12. 4 Covenants and Agreements of the Company. The Company covenants and agrees with the several U.S. Underwriters that: (a) The Company will (i) if the Company and the Representatives have determined not to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Representatives have determined to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (iii) if the Company and the Representatives have determined to deliver Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Representatives promptly as to the time at which the Registration Statement becomes effective, will advise the Representatives promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Representatives promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Representatives a reasonable time prior to the proposed filing thereof or to which the Representatives shall reasonably object in writing or which is not in compliance with the Securities Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Representatives may be necessary to enable the several U.S. Underwriters to continue the distribution of the Stock and the several International Managers to continue the distribution of the International Stock and will use its best efforts to cause the same to become effective as promptly as possible. (c) If, at any time after the effective date of the Registration Statement when a prospectus relating to the Stock is required to be delivered under the Securities Act, any event relating to or affecting the Company or any of its subsidiaries occurs as a result of which the Prospectus or any other prospectus as then in effect would contain any untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Representatives thereof and will prepare an amended or supplemented prospectus which will correct such statement or omission; and in case any U.S. Underwriter is required to deliver a prospectus relating to the Stock nine (9) months or more after the effective date of the Registration Statement, the Company upon the request of the Representatives and at the expense of such U.S. Underwriter will prepare promptly 14 15 such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. (d) The Company will deliver to each of the Representatives, at or before the Closing Dates, one signed copy of the Registration Statement, as originally filed with the Commission, and one signed copy of all amendments thereto including all financial statements and exhibits thereto and will deliver to the Representatives such number of unsigned copies of the Registration Statement, including such financial statements but without exhibits, and all amendments thereto, as the Representatives may reasonably request. The Company will deliver or mail to or upon the order the Representatives, from time to time until the effective date of the Registration Statement, as many copies of the Pre-effective Prospectus as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives on the date of the initial public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Stock is required under the Securities Act, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Representatives may reasonably request; provided, however, that the expense of the preparation and delivery of any prospectus required for use nine (9) months or more after the effective date of the Registration Statement shall be borne by the U.S. Underwriters required to deliver such prospectus. (e) The Company will make generally available to its stockholders as soon as practicable, but not later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement which will be in reasonable detail (but which need not be audited) and which will comply with Section 11(a) of the Securities Act, covering a period of at least twelve (12) months beginning after the "effective date" (as defined in Rule 158 under the Securities Act) of the Registration Statement. (f) The Company will cooperate with the Representatives to enable the Stock to be registered or qualified for offering and sale by the U.S. Underwriters and by dealers under the securities laws of such jurisdictions as the Representatives may designate and at the request of the Representatives will make such applications and furnish such consents to service of process or other documents as may be required of it as the issuer of the Stock for that purpose; provided, however, that the Company shall not be required to qualify to do business or to file a general consent (other than that arising out of the offering or sale of the Stock) to service of process in any such jurisdiction where it is not now so subject. The Company will, from time to time, prepare and file such statements and reports as are or may be required of it as the issuer of the Stock to continue such qualifications in effect for so long a period as the Representatives may reasonably request for the distribution of the Stock. The Company will advise the Representatives promptly after the Company becomes aware of the suspension of the qualifications or registration of (or any such exception relating to) the Common Stock of the Company for offering, sale or trading in any jurisdiction or of any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any orders suspending such qualifications, registration or exception, the Company will, with the cooperation of the Representatives use its best efforts to obtain the withdrawal thereof. 15 16 (g) The Company will furnish to its stockholders annual reports containing financial statements certified by independent public accountants. (h) The Company will maintain a transfer agent and registrar for its Common Stock. (i) For a period of one year after the date hereof, prior to filing its quarterly statements on Form 10-Q, the Company will have its independent auditors perform a limited quarterly review of its quarterly numbers. (j) The Company will not offer, sell, assign, transfer, encumber, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the Company in accordance with the Rules and Regulations) during the 180 days following the date on which the price of the Common Stock to be purchased by the U.S. Underwriters is set, other than (i) the Company's sale of Common Stock hereunder, (ii) issuances of Common Stock, stock options, stock purchase rights or other similar rights issued pursuant to the 1997 Plans as described in the Prospectus, and (iii) any Common Stock or preferred stock issued by the Company in any transaction of the type described in Rule 145 under the Securities Act or otherwise issued by the Company in exchange for technology or other non-cash assets of any third party. (k) The Company will file with the Commission any reports on Form SR required pursuant to Rule 463 of Rules and Regulations, and will deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission. (l) The Company will apply the net proceeds from the sale of the Stock as set forth in the description under "Use of Proceeds" in the Prospectus. (m) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Stock under the Securities Act and the Neuer Markt of the Frankfurt Stock Exchange in connection with the sale of the International Stock pursuant to the International Underwriting Agreement. (n) Prior to each of the Closing Dates the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its subsidiaries for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (o) Prior to the Closing Dates the Company will issue no press release or other public communications directly or indirectly and hold no press conference with respect to the Company (other than customary product related sales and marketing communications) or any of its subsidiaries, the financial condition, results of operations, business, prospects, assets or liabilities of the Company any of them, or the offering of the Stock, without your prior written consent, which shall not be unreasonably withheld. 16 17 (p) During the period of five (5) years hereafter, the Company will furnish to the Representatives, and upon request of the Representatives, to each of the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, or the NASD or any securities exchange; (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock; and (iv) from time to time such other information concerning the Company as you may reasonably request. 5 Payment of Expenses. (a) The Company will pay (directly or by reimbursement) all costs, fees and expenses incurred in connection with the performance of the obligations of the Company and of the Selling Stockholders under this Agreement and the International Underwriting Agreement and in connection with the transactions contemplated hereby, including but not limited to (i) all expenses and taxes incident to the issuance and delivery of the Stock to the Representatives; (ii) all expenses incident to the registration of the Stock and the International Stock under the Securities Act; (iii) the costs of preparing stock certificates (including printing and engraving costs); (iv) all fees and expenses of the registrar and transfer agent of the Stock and the International Stock; (v) all necessary issue, transfer and other taxes in connection with the issuance and sale of the Stock to the U.S. Underwriters; (vi) fees and expenses of the Company's counsel and the Company's independent accountants; (vii) all costs and expenses incurred by the Company in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Pre-effective Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, the Selling Stockholders' Power of Attorney, the Custody Agreement, the "Agreement Among U.S. Underwriters and International Managers" between the Representatives and Lead Managers, the "Agreement Among U.S. Underwriters" between the Representatives and the U.S. Underwriters, the Master Selected Dealers' Agreement, the U.S. Underwriters' Questionnaire and the Blue Sky memoranda (including related fees and expenses of counsel to the Underwriters) and this Agreement; (viii) all filing fees, attorneys' fees and expenses incurred by the Company or the U.S. Underwriters in connection with exemptions from the qualifying or registering (or obtaining qualification or registration of) all or any part of the Stock for offer and sale and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Representatives may designate; (ix) all fees and expenses paid or incurred in connection with filings made with the NASD and the Neuer Markt of the Frankfurt Stock Exchange; and (x) all other costs and expenses incurred by the Company and the Selling Stockholders incident to the performance of their obligations hereunder which are not otherwise specifically provided for in this Section. 17 18 (b) In addition to their other obligations under Section 6(a) hereof, the Company and the Selling Stockholders agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon (i) any statement or omission or any alleged statement or omission by the Company or the Selling Stockholders or (ii) any breach or inaccuracy in their representations and warranties contained in this Agreement, they will reimburse each U.S. Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's and each Selling Stockholder's obligation to reimburse each U.S. Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each U.S. Underwriter shall promptly return it to the Company or such Selling Stockholder, as the case may be, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Citibank, N.A., New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to a U.S. Underwriter in a timely manner as provided below shall bear interest at the Prime Rate from the due date for such reimbursement. This expense reimbursement agreement will be in addition to any other liability which the Company or any Selling Stockholder may otherwise have. The request for reimbursement will be sent to the Company with a copy to each Selling Stockholder. (c) In addition to its other obligations under Section 6(b) hereof, each U.S. Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 6(b) hereof which relates to information furnished to the Company pursuant to Section 6(c) hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the U.S. Underwriters' obligation to reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) shall promptly return it to the U.S. Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such U.S. Underwriter may otherwise have. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in paragraph (b) and/or (c) of this Section 5, including the amounts 18 19 of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in paragraph (b) and/or (c) of this Section 5 and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of Section 6. 19 20 6 Indemnification and Contribution. 20 21 (a) The Company and SCM Microsystems GmbH jointly and severally agree to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls such U.S. Underwriter within the meaning of the Securities Act and the respective officers, directors, partners, employees, representatives and agents of each of such U.S. Underwriter (collectively, the "Underwriter Indemnified Parties" and, each, an "Underwriter Indemnified Party"), against any losses, claims, damages, liabilities or expenses (including the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any other statute or at common law, (i) on the ground or alleged ground that any Pre-effective Prospectus, the Registration Statement or the Prospectus (or any Pre-effective Prospectus, the Registration Statement or the Prospectus as from time to time amended or supplemented) includes or allegedly includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any U.S. Underwriter, directly or through the Representatives, specifically for use in the preparation thereof and provided that the foregoing indemnity agreement with respect to any Pre-effective Prospectus shall not inure to the benefit of any U.S. Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Stock, or any person controlling such U.S. Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such U.S. Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Stock to such person, and the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure to deliver the Prospectus (as so amended or supplemented) resulted from the Company's failure to perform its obligations pursuant to Section 4(c) above or (ii) for any act or failure to act or any alleged act or failure to act by any U.S. Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or expense arising out of or based upon matters covered by clause (i) above (provided that the Company shall not be liable under this clause (ii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, or liability or expense resulted directly from any such acts or failures to act undertaken or omitted to be taken by such U.S. Underwriter through its gross negligence or willful misconduct). The Company will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and reasonably acceptable to the U.S. Underwriters. In the event the Company elects to assume the defense of any such suit and retain such counsel, any Underwriter Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) the Company shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include both any such Underwriter Indemnified Party and the Company, and such Underwriter Indemnified Parties have been advised by counsel to the U.S. Underwriters that one or more legal defenses may be available to it or them which may not be available to the Company, in which case the Company shall not be entitled to assume the defense of such 21 22 suit without the written consent of the Underwriter Indemnified Parties party to such suit notwithstanding its obligation to bear the fees and expenses of such counsel. In circumstances where the Company does not assume the defense of a suit for which indemnification is sought by one or more Underwriter Indemnified Parties, the Company will be obligated to bear the fees and expenses of only one firm on behalf of all Underwriter Indemnified Parties (plus local counsel, if, in the judgment of the primary counsel to the Underwriter Indemnified Parties use of such local counsel is necessary). This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party. (b) Each Selling Stockholder severally and not jointly agrees to indemnify and hold harmless each Underwriter Indemnified Party against any losses, claims, damages, liabilities or expenses (including, unless such Selling Stockholder elects to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any other statute or at common law, on the ground or alleged ground that any Pre-Effective Prospectus, the Registration Statement or the Prospectus (or any Pre-Effective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any U.S. Underwriter, directly or through the Representatives specifically for use in the preparation thereof; provided however that with respect to any untrue statement or omission or alleged untrue statement or omission made in any Pre-Effective Prospectus, the indemnity agreement contained in this subsection (b) shall not inure to the benefit of any Underwriter Indemnified Party from whom the person asserting any such losses, claims, damages or liabilities purchased the shares of Stock concerned to the extent that any such loss, claim, damage or liability of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such shares of Stock, as required by the Securities Act, and if the untrue statement or omission concerned has been corrected in the Prospectus. Such Selling Stockholder shall be entitled to participate at his own expense in the defense, or, if he so elects, to assume the defense of any suit brought to enforce any such liability, but, if such Selling Stockholder elects to assume the defense, such defense shall be conducted by counsel chosen by him. In the event that any Selling Stockholder elects to assume the defense of any such suit and retain such counsel, the Underwriter Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) such Selling Stockholder shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include both such Underwriter Indemnified Parties and such Selling Stockholder and such Underwriter Indemnified Parties have been advised by counsel that one or more legal defenses may be available to it or them which may not be available to such Selling Stockholder, in which case such Selling Stockholder shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. This indemnity agreement is not exclusive and will be in addition to any liability which such Selling Stockholder might otherwise have and shall not limit any rights 22 23 or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the U.S. Underwriters under this Agreement, as to their respective amounts of such liability for which they each shall be responsible. Notwithstanding any other provision of this Agreement or the International Underwriting Agreement, the liability of each Selling Stockholder to the U.S. Underwriters and International Managers under this Agreement, the International Underwriting Agreement or otherwise shall be limited to an amount equal to the aggregate initial public offering price of the shares of Common Stock sold by such Selling Stockholder in the initial public offering. (c) Each U.S. Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act (collectively, the "Company Indemnified Parties") and each Selling Stockholder (the "Selling Stockholder Indemnified Parties") against any losses, claims, damages, liabilities or expenses (including, unless the U.S. Underwriter or U.S. Underwriters elect to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which arise out of or are based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Pre-effective Prospectus, the Registration Statement or the Prospectus (or any Pre-effective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by such U.S. Underwriter, directly or through the Representatives, specifically for use in the preparation thereof. Such U.S. Underwriter shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but, if such U.S. Underwriter elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event that any U.S. Underwriter elects to assume the defense of any such suit and retain such counsel, the Company Indemnified Parties or Selling Stockholders Indemnified Parties and any other U.S. Underwriter or U.S. Underwriters or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, respectively. The U.S. Underwriter against whom indemnity may be sought shall not be liable to indemnify any person for any settlement of any such claim effected without such U.S. Underwriter's consent. This indemnity agreement is not exclusive and will be in addition to any liability which such U.S. Underwriter might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to any Company Indemnified Party or Selling Stockholder Indemnified Party. (d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to 23 24 herein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the U.S. Underwriters on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the U.S. Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the U.S. Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the U.S. Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the U.S. Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending, settling or compromising any such claim. Notwithstanding the provisions of this subsection (d), no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares of the Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The U.S. Underwriters' obligations to contribute are several in proportion to their respective underwriting obligations and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission to so notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party except to the extent that any such delay results in 24 25 the loss of the ability to assert any affirmative or negative defense the loss of which is materially prejudicial to the disposition of this matter. 7 Survival of Indemnities, Representations, Warranties, etc. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and its subsidiaries, the Selling Stockholders and the several U.S. Underwriters, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter, the Selling Stockholders, the Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Stock until all applicable statutes of limitation have expired. 8 Conditions of U.S. Underwriters' Obligations. The respective obligations of the several U.S. Underwriters hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of each of the Closing Dates, of the representations and warranties made herein by the Company and the Selling Stockholders to compliance at and as of each of the Closing Dates by the Company and the Selling Stockholders with their covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and to the following additional conditions: (a) The Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Representatives, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Representatives. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in the manner and within the time period required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case may be. (b) The Representatives shall have been satisfied that there shall not have occurred any change prior to each of the Closing Dates, in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiaries considered as a whole, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the reasonable opinion of the Representatives, is material, or omits to state a fact which, in the reasonable opinion of the Representatives, is required to be stated therein or is necessary to make the statements therein not misleading or (ii) it is impracticable in the reasonable judgment of the Representatives to proceed with the public offering or purchase the Stock as contemplated hereby. (c) The Representatives shall be satisfied that no legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's or the Selling Stockholders' ability to perform their respective obligations under this Agreement shall have been instituted or threatened and 25 26 there shall have occurred no material adverse development in any existing such action, suit or proceeding. (d) At the time of execution of this Agreement, the Representatives shall have received from KPMG Peat Marwick LLP, independent certified public accountants, a letter, dated the date hereof, in form and substance satisfactory to the U.S. Underwriters to the effect set forth in Exhibit I hereto. (e) The Representatives shall have received from KPMG Peat Marwick LLP, independent certified public accountants, letters, dated each of the Closing Dates, to the effect that such accountants reaffirm, as of each of the Closing Dates, and as though made on each of the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 8. (f) The Representatives shall have received (i) from Wilson Sonsini Goodrich & Rosati, Professional Corporation, United States securities counsel for the Company; (ii) from ______________, German counsel for the Company; and (iii) from ______________, intellectual property counsel to the Company, an opinion, dated each of the Closing Date, to the effect set forth in Exhibits II, III and IV hereto, respectively. (g) The Representatives shall have received from Rogers & Wells, counsel for the U.S. Underwriters, their opinion dated each of the Closing Dates with respect to the incorporation of the Company, the validity of the Stock, the Registration Statement and the Prospectus and such other related matters as it may reasonably request, and the Company shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. (h) The Representatives shall have received from _______ ______________, counsel for the Selling Stockholders, an opinion dated the Closing Date, to the effect set forth in Exhibit V. (i) The Representatives shall have received a certificate or certificates, dated each of the Closing Dates, of the chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: (i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (ii) Neither any Pre-effective Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the time when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) The representations and warranties of the Company in this Agreement are true and correct at and as of each of the Closing Dates, and the Company has complied with 26 27 all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Dates; and (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole; (ii) the business and operations conducted by the Company and its subsidiaries have not sustained a loss by strike, fire, flood, accident or other calamity (whether or not insured) of such a character as to interfere materially with the conduct of the business and operations of the Company and its subsidiaries considered as a whole; (iii) no legal or governmental action, suit or proceeding is pending or to the knowledge of the signers threatened against the Company which is material to the Company, whether or not arising from transactions in the ordinary course of business, or which may materially and adversely affect the transactions contemplated by this Agreement; (iv) since such dates and except as so disclosed, the Company has not incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock (except pursuant to the 1997 Plans), made any material change in its short-term or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the Closing Date. (j) The Selling Stockholders shall have furnished to the Representatives certificates as to the accuracy, at and as of each of the Closing Dates, of the representations and warranties made herein by them and as to compliance at and as of each of the Closing Dates by them with their covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and as to satisfaction of the other conditions to the obligations of the U.S. Underwriters hereunder. (k) Cowen shall have received the written agreements, substantially in the form of Exhibit V hereto, of the officers, directors and certain holders of Common Stock that each will not offer, sell, assign, transfer, encumber, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by such officer, director or holder in accordance with the Rules and Regulations) during the 180 days following the date of the final Prospectus except as provided therein. (l) The Nasdaq National Market shall have approved the Stock for listing, subject only to official notice of issuance. (m) The International Stock to be issued and sold by the Company and the Selling Stockholders shall have been duly authorized for listing by the Neuer Markt of the Frankfurt Stock Exchange. 27 28 (n) The Closing under the International Underwriting Agreement shall have occurred concurrently with the Closing hereunder on the Closing Date. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are reasonably satisfactory in form and substance to the Representatives. The Company will furnish to the Representatives conformed copies of such opinions, certificates, letters and other documents as the Representatives shall reasonably request. If any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to each of the Closing Dates, but Cowen, on behalf of the Representatives, shall be entitled to waive any of such conditions. 9 Effective Date. This Agreement shall become effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other provisions, at 11:00 a.m. New York City time on the first full business day following the effectiveness of the Registration Statement or at such earlier time after the Registration Statement becomes effective as the Representatives may determine on and by notice to the Company or by release of any of the Stock for sale to the public. For the purposes of this Section 9, the Stock shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Stock or upon the release by you of notices (i) advising U.S. Underwriters that the shares of Stock are released for public offering or (ii) offering the Stock for sale to securities dealers, whichever may occur first. 10 Termination. This Agreement (except for the provisions of Section 5) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Representatives and may be terminated by the Representatives at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to the liability of defaulting U.S. Underwriters. This Agreement may be terminated after it becomes effective by the Representatives by notice to the Company (i) if at or prior to the First Closing Date trading in securities on any of the New York Stock Exchange or the Nasdaq National Market System shall have been suspended (other than any short term suspension of trading pursuant to any "circuit breaker" provisions of the New York Stock Exchange) or minimum or maximum prices shall have been established on any such exchange or market, or a banking moratorium shall have been declared by New York or United States authorities; (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) if at or prior to the First Closing Date there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or (B) any material change in financial markets or any calamity or crisis which, in the reasonable judgment of the Representatives, makes it 28 29 impractical or inadvisable to offer or sell the Stock on the terms contemplated by the Prospectus; (iv) if there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus; (v) if there shall be any litigation or proceeding, pending or threatened, which, in the reasonable judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the on the terms contemplated by the Prospectus; or (vi) if there shall have occurred any of the events specified in the immediately preceding clauses (i) - (v) together with any other such event that makes it, in the reasonable judgment of the Representatives, impractical or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus. 11 Reimbursement of U.S. Underwriters. Notwithstanding any other provisions hereof, if this Agreement shall not become effective by reason of any election of the Company or the Selling Stockholder pursuant to the first paragraph of Section 10 or shall be terminated by the Representatives under Section 8 (excluding Section 8(g)) or Section 10, the Company will bear and pay the expenses specified in Section 5 hereof and, in addition to their obligations pursuant to Section 6 hereof, the Company will reimburse the reasonable out-of-pocket expenses of the several U.S. Underwriters (including reasonable fees and disbursements of counsel for the U.S. Underwriters) incurred in connection with this Agreement and the proposed purchase of the Stock, and promptly upon demand the Company will pay such amounts to you as Representatives. 12 Substitution of U.S. Underwriters. If any U.S. Underwriter or U.S. Underwriters shall default in its or their obligations to purchase shares of Stock hereunder and the aggregate number of shares which such defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares underwritten, the other U.S. Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the shares which such defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to purchase. If any U.S. Underwriter or U.S. Underwriters shall so default and the aggregate number of shares with respect to which such default or defaults occur is more than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Representatives and the Company for the purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate. If the remaining U.S. Underwriters or substituted U.S. Underwriters are required hereby or agree to take up all or part of the shares of Stock of a defaulting U.S. Underwriter or U.S. Underwriters as provided in this Section 12, (i) the Company and the Selling Stockholders shall have the right to postpone the Closing Dates for a period of not more than five (5) full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining U.S. Underwriters or substituted U.S. Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting U.S. Underwriter of its liability to the Company, the Selling Stockholders or the other U.S. Underwriters for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of any non-defaulting U.S. Underwriter, the Selling Stockholders or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 6. 13 Notices. All communications hereunder shall be in writing and, if sent to the U.S. Underwriters shall be mailed, delivered or facsimilied and confirmed to you, as their Representatives c/o Cowen & Company at Financial Square, New York. New York 10005 except that notices given to a U.S. Underwriter pursuant to Section 6 hereof shall be sent to such U.S. Underwriter at the address 29 30 furnished by the Representatives or, if sent to the Company, shall be mailed, delivered or facsimilied and confirmed c/o SCM Microsystems, Inc., 131 Albright Way, Los Gatos, California 95030, Attention: President. 14 Successors. This Agreement shall inure to the benefit of and be binding upon the several U.S. Underwriters, the Company and the Selling Stockholders and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions hereby contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company and the Selling Stockholders contained in this Agreement shall also be for the benefit of the person or persons, if any, who control any U.S. Underwriter or U.S. Underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the indemnities of the several U.S. Underwriters shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 15 Applicable Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York. 16 Authority of the Representatives. In connection with this Agreement, you will act for and on behalf of the several U.S. Underwriters, and any action taken under this Agreement by Cowen, as Representative, will be binding on all the U.S. Underwriters; and any action taken under this Agreement by any of the Attorneys-in-fact will be binding all the Selling Stockholders. 17 Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 18 General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the party or parties to this Agreement directly affected by such amendment, modification or waiver. 19 Counterparts. This Agreement may be signed in two (2) or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 30 31 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, SCM MICROSYSTEMS, INC. By: Name: Title: For purposes of agreeing to the indemnification provisions set forth in Section 6 of this agreement: SCM MICROSYSTEMS GmbH By:_____________________________________ Name: Title: Accepted and delivered in SELLING STOCKHOLDERS - as of LISTED IN SCHEDULE B the date first above written. COWEN & COMPANY By:__________________________ HAMBRECHT & QUIST LLC Acting on their own behalf and as Representatives of the several By:__________________________ U.S. Underwriters referred to in the Attorney-in-fact foregoing Agreement. By: COWEN & COMPANY By: Cowen Incorporated, its general partner By:_____________________________________ Name: Title: 31 32 SCHEDULE A U.S. UNDERWRITERS
Name Number of Number of Firm Shares Optional Shares to be to be Purchased Purchased ----------- ----------- Cowen & Company.................. Hambrecht & Quist LLC ........... ----------- ----------- Total =========== ===========
33 SCHEDULE B SELLING STOCKHOLDERS 32 34 SCHEDULE C SUBSIDIARIES 33 35 SCHEDULE D LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS 34 36 EXHIBIT I [Form of Accountant's Letter] The Accountants shall confirm that they are independent accountants to the Company within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating that: a. in their opinion the audited financial statements and financial statement schedules included in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and Regulations; b. on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data," carrying out certain procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (1) the amounts in "Summary Consolidated Financial Data," and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited or unaudited financial statements from which such amounts were derived; or (2) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any change in the capital stock of the Company, increase in the long-term debt of the Company or any decreases in net income or in stockholders' equity in the Company, as compared with the amounts shown on the Company's audited balance sheet for the fiscal year ended December 31, 1996 included in the Registration Statement; and c. they have performed certain other procedures as may be permitted under generally acceptable auditing standards as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company; and d. based upon the procedures set forth in clauses (ii) and (iii) above and a reading of the amounts included in the Registration Statement under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus and a reading of the financial 35 37 statements, from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus do not comply as to the form in all material respects with the applicable accounting requirements of the Securities Act and the Rules or that the information set forth therein is not fairly stated in relation to the financial statements included in the Registration Statement or Prospectus from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and Prospectus. 36 38 Exhibit II [Form of Opinion of Wilson Sonsini Goodrich & Rosati] 1. The Company and each of the corporations set forth in Exhibit A hereto (the "US Subsidiaries") have been duly incorporated and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in [list], which, to such counsel's knowledge are the only jurisdictions in which such qualification is necessary, and have all corporate power necessary to own or hold their respective properties and conduct their businesses as described in the Prospectus; 2. The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and nonassessable and all of the Shares to be issued and sold by the Company to the U.S. Underwriters pursuant to the Underwriting Agreement and to the International Managers pursuant to the International Underwriting Agreement have been duly and validly authorized and, when issued and delivered against payment therefor as provided for in the Underwriting Agreement or the International Underwriting Agreement, as the case may be, shall be duly and validly issued, fully paid and non-assessable and free of any pre-emptive or similar rights; and all of the issued shares of capital stock of the US Subsidiary have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; 3. Other than as described in the Prospectus there are no pre-emptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's Certificate of Incorporation or By-Laws or pursuant to any agreement or other instrument known to us; 4. Except as disclosed in the Prospectus, to our knowledge, there are no legal or governmental proceedings pending to which the Company or the US Subsidiary is a party or of which any property or assets of the Company or the US Subsidiary is the subject which, if determined adversely to the Company or the US Subsidiary, could, individually or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The Company and the US Subsidiary have full corporate power and authority to enter into the Underwriting Agreement and the International Underwriting Agreement and to perform their respective obligations thereunder (including to issue, sell and deliver the Shares), and each of the Underwriting Agreement and the International Underwriting Agreement has been duly and validly authorized, executed and delivered by the Company and the US Subsidiary and is a valid and binding obligation of each of the Company and the US Subsidiary, enforceable against each of them in accordance with their respective terms. 6. The execution, delivery and performance of the Underwriting Agreement and the International Underwriting Agreement by the Company and the consummation of the transactions contemplated by the Underwriting Agreement and the International Underwriting Agreement by the Company will not result in a breach or violation of (A) any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument that is filed as an exhibit to the Registration Statement, (B) the Certificate of Incorporation or By-laws or the 39 certificate of incorporation or by-laws of the US Subsidiary, or (C) any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or the US Subsidiary or any of their properties or result in the creation of a lien; 7. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company or the US Subsidiary of the transactions contemplated by the Underwriting Agreement or the International Underwriting Agreement, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer Markt of the Frankfurt Stock Exchange or under the Securities Act or the Exchange Act or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Shares by the U.S. Underwriters or the International Managers; 8. The Registration Statement was declared effective under the Securities Act as of ____, 1997, the Prospectus was filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations on ____, 1997, and no stop order suspending the effectiveness of the Registration Statement has been issued and to our knowledge no proceeding for that purpose is pending or threatened by the Commission; 9. The Registration Statement and the Prospectus and any amendments or supplements thereto (other than the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus as to which we express no opinion) comply as to form in all respects with the requirements of the Securities Act and the Rules and Regulations; 10. Other than as described in the Prospectus and to our knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to this Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; 11. The descriptions in the Registration Statement and Prospectus of legal or governmental proceedings, contracts and other documents are accurate in all material respects and such descriptions fairly present the information required to be disclosed, and to our knowledge, there are no legal or governmental proceedings or any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required; 12. The descriptions in the Registration Statement and the Prospectus under the captions "Risk Factors -- Concentration of Stock Ownership; Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale," Description of Common Stock" and "Shares Eligible for Future Sale," solely to the extent they reflect matters of federal law arising under the laws of the United States or of the Delaware General Corporation Law or legal conclusions relating to such laws, accurately summarize and fairly present the legal and regulatory matters described therein; and 13. Neither the Company nor the US Subsidiary is nor will they be immediately after receiving the proceeds from the sale of the Shares, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 2 40 In addition, although we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, we have participated in conferences with officers and other representatives of the Company, at which conferences representatives of the Representatives, counsel to the Underwriters and representatives of the independent certified public accountants of the Company were present, and at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and based upon the foregoing nothing has come to our attention that has caused us to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the date hereof, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that we express no belief with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 3 41 SCHEDULE A [U.S. Underwriters] 42 SCHEDULE B [International Managers] 43 Exhibit III [Form of Opinion of Issuer's German Counsel] 1. SCM Microsystems GmbH, a ______ (the "Company") has been duly organized and is validly existing as ___________ in good standing under the laws of Germany, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of property or the conduct of its business, as known by us, requires such qualification except to the extent that the failure to so qualify would not have a material adverse effect on the Company, and has all power and authority (corporate and other) necessary to own or hold its properties and conduct its business; 2. All of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid, non-assessable and are owned of record by SCM Microsystems, Inc., a Delaware corporation ('SCM Microsystems"), free and clear of all liens, encumbrances, equities or claims; 3. Other than as described in the Prospectus there are no pre-emptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the capital stock of the Company pursuant to the Company's organizational documents or pursuant to any agreement or other instrument; 4. Except as disclosed in the Prospectus, to our knowledge, there are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, could individually or in the aggregate have a material adverse effect on the Company and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The statements in the Prospectus under the heading "Risk Factors - -- Proprietary Technology and Intellectual Property" and "Business -- Proprietary Technology and Intellectual Property," insofar as such statements constitute summary descriptions of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents or proceedings and such statements do not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 6. to such counsel's knowledge, the Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and rights described in the Prospectus as being owned by it or necessary for the conduct of its business; and to such counsel's knowledge, except as described in the Prospectus, the Company has not received any notice of infringement of or conflict with and such counsel knows of no infringement of or conflict with asserted rights of others with respect to any such patents, trademarks, service marks or other proprietary information or materials which could result in any material adverse effect on the Company and to the knowledge of such counsel there is no infringement or violation by others of any of the Company's patents, licenses, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could materially affect the use thereof by the Company; 7. the patents have been licensed to the Company as described in the Prospectus, and such licenses are valid, binding and enforceable; and the Company has rights to the products and technology covered thereby as described in the Prospectus; 8. The Company has full corporate power and authority to enter into the Underwriting Agreement and the International Underwriting Agreement and to perform its obligations thereunder, and the Underwriting Agreement and the International Underwriting Agreement have each been duly and validly authorized, executed and delivered by the Company; 9. The execution, delivery and performance of the Underwriting Agreement and the International Underwriting Agreement and the consummation of the transactions contemplated by the Underwriting Agreement and the International Underwriting Agreement will not result in a breach or violation of any of (A) the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust note agreement or other agreement or instrument known to us to which the Company is a 44 party or by which any of its properties is or may be bound, (B) the organizational documents of the Company, or (C) any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties nor will such execution, delivery and performance result in the creation of a lien; 10. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by the Underwriting Agreement or the International Underwriting Agreement. 11. The Prospectus used in connection with the application to list the International Stock on the Neuer Markt of the Frankfurt Stock Exchange and any amendments or supplements thereto comply as to form in all respects with the requirements of German law. 12. The International Stock has been approved for listing on the Neuer Markt of the Frankfurt Stock Exchange. In addition, although we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, we have participated in the preparation of the Registration Statement and the Prospectus (including the German translation version thereof), including review and discussion of the contents thereof, and nothing has come to our attention that has caused us to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus (including the German translation version thereof), as of its date and as of the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus (including the German translation version thereof), as of its respective date, and as of the date hereof, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that we express no belief with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 2 45 SCHEDULE A [U.S. Underwriters] 46 SCHEDULE B [International Managers] 47 Exhibit IV [Form of Intellectual Property Counsel Opinion] 1. The statements in the Prospectus under the heading "Risk Factors - Proprietary Technology and Intellectual Property" and "Business - Proprietary Technology and Intellectual Property," insofar as such statements constitute summary descriptions of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents or proceedings and such statements do not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 2. to such counsel's knowledge, the Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and rights described in the Prospectus as being owned by it or necessary for the conduct of its business; and to such counsel's knowledge, except as described in the Prospectus, the Company has not received any notice of infringement of or conflict with and such counsel knows of no infringement of or conflict with asserted rights of others with respect to any such patents, trademarks, service marks or other proprietary information or materials which could result in any material adverse effect on the Company and to the knowledge of such counsel there is no infringement or violation by others of any of the Company's patents, licenses, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could materially affect the use thereof by the Company; and 3. the patents have been licensed to the Company as described in the Prospectus, and such licenses are valid, binding and enforceable; and the Company has rights to the products and technology covered thereby as described in the Prospectus. 48 SCHEDULE A [U.S. Underwriters] 49 SCHEDULE B [International Managers] 50 Exhibit V [Form of Opinion of Selling Stockholders' Counsel] 1. The Underwriting Agreement, the International Underwriting Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement to be executed by the Selling Stockholder each have been duly and validly executed and delivered by or on behalf of each Selling Stockholder. 2. The Underwriting Agreement, the International Underwriting Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement executed and delivered by the Selling Stockholders each constitute the legal, valid and binding obligation of the Selling Stockholders enforceable against each of the Selling Stockholders in accordance with their respective terms except as the validity, legality and binding effect of each may be limited or otherwise effected by (A) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or laws affecting the enforcement of creditors' rights and remedies generally and (B) the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in law or equity) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. 3. Each of the Selling Stockholders is the record owner of and has marketable title to the Shares to be sold by such Selling Stockholder and, to our knowledge, each Selling Stockholder has full legal right and power to enter into the Underwriting Agreement and the International Underwriting Agreement and to sell, transfer and deliver in the manner provided in the Underwriting Agreement and the International Underwriting Agreement the Shares to be sold by the Selling Stockholders. 4. The transfer and sale by the Selling Stockholders of the Shares to be sold by the Selling Stockholders as contemplated in the Underwriting Agreement and the International Underwriting Agreement will not violate any agreement, judgment, decree, order, statute, rule or regulation which, to the knowledge of such counsel, the Selling Stockholders are a party or by which either Selling Stockholder is bound or subject. 5. All of the Selling Stockholders' rights in the Shares to be sold by such Selling Stockholder, have been transferred to the Underwriters who have severally purchased such Shares, free and clear of adverse claims, assuming that the Underwriters purchased the same in good faith without notice of any adverse claims. 6. To our knowledge, no consent, approval, authorization, license, certificate, permit or order of any court, governmental or regulatory agency, authority or body or financial institution is required in connection with the performance of the Underwriting Agreement or the International Underwriting Agreement by such Selling Stockholder or the consummation of the transactions contemplated therein, including the delivery and sale of the Shares to be delivered and sold by such Selling Stockholder, except such as have been obtained and except such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. In addition, we have participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed. While we have not undertaken to independently verify and 51 do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to our attention which lead us to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which we express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements and notes schedules thereto and other financial data, as to which we express no opinion) on the date thereof and the date hereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2 52 SCHEDULE A [U.S. Underwriters] 53 SCHEDULE B [International Managers] 54 Exhibit VI [Form of Lock-Up Agreement] ----------------------- Print Stockholder Name SCM MICROSYSTEMS, INC. LOCK-UP AGREEMENT Cowen & Company Hambrecht & Quist LLC As representatives of the several Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Re: SCM Microsystems, Inc. Ladies and Gentlemen: In order to induce Cowen & Company ("Cowen") and Hambrecht & Quist LLC (together, the "Representatives"), to enter into a certain underwriting agreement with SCM Microsystems, Inc., a Delaware corporation (the "Company"), with respect to the public offering of shares of the Company's Common Stock, par value $ 0.001 per share ("Common Stock"), the undersigned hereby agrees that for a period of 180 days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in connection with such public offering, the undersigned will not, without the prior written consent of Cowen, directly or indirectly, (i) offer, sell, assign, transfer, encumber, pledge, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned Shares") or (ii) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall not apply to shares of the Company's Common Stock (i) acquired through the Company's directed shares program or (ii) acquired on the open market and that shares so acquired may be sold or otherwise disposed of without regard to this Agreement. Notwithstanding the foregoing, if the undersigned is an individual, he or she may transfer any Shares either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the undersigned and/or a member of his or her immediate family or to a charitable organization; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding 55 the Shares transferred subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. For purposes of this Agreement, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor and "charitable organization" shall mean an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, if the undersigned is a partnership, the partnership may transfer any Shares to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, and any partner who is an individual may transfer such Shares by gift, will or intestate succession to his or her spouse or lineal descendants or ancestors; and if the undersigned is a corporation, the corporation may transfer such Shares to any stockholder or subsidiary of such corporation and any stockholder who is an individual may transfer Shares by gift, will or intestate succession to his or her immediate family or to a charitable organization; provided, however, that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. The undersigned agrees that the provisions of this Agreement shall be binding also upon the successors, assigns, heirs and personal representatives of the undersigned. The undersigned agrees and consents to the placing of legends and/or the entry of stop transfer instructions with the Company's transfer agent against the transfer of any shares of Common Stock or Beneficially Owned Shares held by the undersigned except in compliance with this Agreement. It is understood that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, you will release us from our obligations under this Agreement. This Agreement shall terminate and be of no further force or effect in the event that the offering contemplated by the Underwriting Agreement is not completed on or before October 30, 1997. Very truly yours, ---------------------------------------- (Signature) ---------------------------------------- (Title) ---------------------------------------- (Date) EX-1.2 3 FORM OF INTERNATIONAL UNDERWRITING AGREEMENT 1 EXHIBIT 1.2 R&W Draft 9/3/97 750,000 Shares SCM MICROSYSTEMS, INC. Common Stock INTERNATIONAL UNDERWRITING AGREEMENT _____________, 1997 COWEN INTERNATIONAL L.P. HAMBRECHT & QUIST LLC WESTDEUTSCHE LANDESBANK GIROZENTRALE As Lead Managers of the several International Managers c/o Cowen International L.P. One Angel Court London EC2R 7HJ Dear Sirs: 1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the "Company"), and the selling stockholders named in Schedule B hereto (the "Selling Stockholders") propose to sell, pursuant to the terms of this Agreement, to the several International Managers named in Schedule A hereto (the "International Managers," or, each, an "International Manager"), an aggregate of 750,000 shares of Common Stock, $0.001 par value per share (the "Common Stock"), of the Company. The aggregate of 750,000 shares so proposed to be sold is hereinafter referred to as the "Firm Stock." The Company also proposes to sell to the International Managers, upon the terms and conditions set forth in Section 3 hereof, up to an additional 112,500 shares of Common Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are hereinafter collectively referred to as the "Stock." Cowen International L.P. ("Cowen"), Hambrecht & Quist LLC and Westdeutsche Landesbank Girozentrale are acting as Lead Managers of the several International Managers and in such capacity are hereinafter referred to as the "Lead Managers." It is understood by all parties that the Company and the Selling Stockholders are concurrently entering into an agreement dated the date hereof (the "U.S. Underwriting Agreement") providing for the sale by the Company and the Selling Stockholders of an aggregate of 2,620,000 shares of Common Stock (the "U.S. Stock") through arrangements with certain U.S. Underwriters in the United States and Canada (the "U.S. Underwriters"), for whom Cowen & Company and Hambrecht & Quist LLC are acting as Representatives (the "Representatives"). The International Managers and the U.S. Underwriters simultaneously are entering into an agreement among the International and U.S. underwriting syndicates (the "Agreement Among U.S. Underwriters and International Managers") which provides for, among other things, the transfer of shares of 1 2 Common Stock between the two syndicates. Two forms of prospectus are to be used in connection with the offer and sale of shares of Common Stock contemplated by the foregoing, one relating to the Stock and the other relating to the U.S. Stock. In addition, the International version of the prospectus will be translated into German for purposes of the application to list the International Stock on the Neuer Markt of the Frankfurt Stock Exchange. Except as used in the first paragraph hereof and in Section 3 and 8 herein, and except as the context may otherwise require, references herein to the Stock shall include all the shares of Common Stock which may be sold pursuant to both this Agreement and the U.S. Underwriting Agreement, and references herein to any prospectus whether in preliminary or final form, and whether as amended or supplemented, shall include the U.S. and the International versions thereof and the German translation version of the International version. 2a. Representations and Warranties of the Company and its Subsidiaries. The Company hereby represents and warrants to, and agrees with, the several International Managers that: (a) A registration statement on Form S-1 (File No. 333-29073) in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective with respect to the Stock, including any pre-effective prospectuses included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") promulgated thereunder, copies of which have heretofore been delivered to you, has been prepared by the Company in conformity with the requirements of the Securities Act and has been filed with the Commission under the Securities Act; one or more amendments to such registration statement, including in each case an amended pre-effective prospectus, copies of which amendments have heretofore been delivered to you, have been so prepared and filed. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Stock may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Stock that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, (A) if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Securities Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the requirements of Section 10(a) of the Securities Act are delivered pursuant to Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in this Agreement means the "prospectus subject to completion" (as such term is defined in Rule 434(g) under the Securities Act) as supplemented by (a) the addition of Rule 430A information or other information contained in the form of prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b) the information contained in the term sheets described in Rule 434(b)(3) under the Securities Act, and (ii) the date of such prospectuses shall be deemed to be the date of the term sheets. The term "Pre-effective Prospectus" as used in this Agreement means the 2 3 prospectus subject to completion dated September __, 1997, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. (b) The Commission has not issued or, to the Company's knowledge, threatened to issue any order preventing or suspending the use of any Pre-effective Prospectus, and, at its date of issue, each Pre-effective Prospectus complied in all material respects with the applicable provisions of the Securities Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, other than any noncompliance, untrue statement or omission in a Pre-effective Prospectus that has been corrected in the Prospectus; and, when the Registration Statement becomes effective and at all times subsequent thereto up to and including each of the Closing Dates (as hereinafter defined), the Registration Statement and the Prospectus and any amendments or supplements thereto contained and will contain all material statements and information required to be included therein by the Securities Act and complied and will comply in all material respects with the applicable provisions of the Securities Act and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, contained or will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations and warranties shall not apply to information contained in or omitted from any Pre-effective Prospectus or the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Lead Managers on behalf of the several International Managers, directly or through you, specifically for use in the preparation thereof. With respect to the preceding sentence, the Company acknowledges that the only information furnished in writing by the Lead Managers on behalf of the several International Managers for use in the Pre-effective Prospectus, the Registration Statement and the Prospectus is the paragraph with respect to stabilization on the inside front cover page of the Prospectus and the statements contained under the caption "Underwriting" in the Prospectus. (c) The Registration Statement is effective under the Securities Act and no stop order suspending effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, are threatened under the Securities Act; any required filing of the Prospectus and any amendment or supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been or will be made in the manner and within the time period required by Rule 424(b). (d) There is no document, contract or other agreement of a character required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required by the Securities Act or the Rules and Regulations. Each agreement described in the Registration Statement and the Prospectus or listed in the Exhibits to the Registration Statement is in full force and effect and is valid and enforceable by and against the Company or its subsidiaries in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by applicable bankruptcy, insolvency and other similar laws affecting conditions, rights and rules of law governing specific performance, injunctive relief and other equitable remedies. Neither the Company nor any subsidiary is in default in the 3 4 observance or performance of any material term or obligation to be performed by it under any such agreement, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in any such case which default or event would have a material adverse effect on the Company and its subsidiaries taken as a whole. No default exists, and, to the knowledge of the Company, no event has occurred which, with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company or any of its subsidiaries of any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their respective properties or businesses may be bound or affected, in any case which default or event could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole. (e) None of the Company or its subsidiaries is in violation of any franchise, license, permit, judgment, decree, order, statute or rule or regulation, which could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole, or any term or provision of its certificate of incorporation or by-laws. (f) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, nor entered into any transactions not in the ordinary course of business, and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiaries considered as a whole, except for issuances of Common Stock pursuant to the Company's 1997 Stock Plan, 1997 Employee Stock Purchase Plan, 1997 Director Option Plan, 1997 Stock Option Plan for French Employees and the 1997 Employee Stock Purchase Plan for Non-U.S. Employees (collectively, the "1997 Plans"). (g) The financial statements, together with the related notes and schedules, set forth in the Prospectus and elsewhere in the Registration Statement fairly present, the financial position and the results of operations and changes in financial position of the Company and its consolidated subsidiaries at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. The summary and selected financial and statistical data set forth in the Prospectus under the captions "Summary Consolidated Financial Data," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations" and "-- Quarterly Results of Operations" fairly present, on the basis stated in the Registration Statement, the information set forth therein as at the respective dates and for the respective periods specified, and such data have been presented on a basis consistent with the financial statements so set forth in the Prospectus and other financial information. (h) To the Company's knowledge, KPMG Peat Marwick LLP, who have expressed their opinions on the audited financial statements and related schedules included in the 4 5 Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. (i) The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of organization, with power and authority (corporate and other) to own or lease their properties and to conduct their businesses as described in the Registration Statement and the Prospectus; each of the Company and its subsidiaries is in possession of and operating in compliance with all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of its business, all of which are valid and in full force and effect; and each of the Company and its subsidiaries is duly qualified to do business and in good standing as a foreign corporation in all other jurisdictions where its ownership or leasing of properties or the conduct of its businesses requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company and its subsidiaries considered as a whole. The Company has and each of its subsidiaries have all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public regulatory or governmental agencies and bodies to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. The Company owns or controls, directly or indirectly, only the corporations, associations or other entities named in Schedule C hereto. (j) The Company's authorized and outstanding capital stock is on the date hereof, and will be on the Closing Dates, as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company conform to the description thereof in the Prospectus and have been duly authorized and validly issued and are fully paid and nonassessable; and have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any pre-emptive rights or similar rights to subscribe for or purchase securities. Except as disclosed in and or contemplated by the Prospectus and the consolidated financial statements of the Company and related notes thereto included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any pre-emptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except for options granted subsequent to the date of information provided in the Prospectus pursuant to the Company's employee and stock option plans as disclosed in the Prospectus. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, as set forth in the Prospectus, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. All outstanding shares of capital stock of each subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable and are owned directly by the Company or by another wholly owned subsidiary of the Company free and clear of any liens, encumbrances, equities or claims. 5 6 (k) The Stock to be issued and sold by the Company to the International Managers hereunder and the U.S Stock to be issued and sold by the Company to the U.S. Underwriters under the U.S. Underwriting Agreement has been duly and validly authorized and, when issued and delivered against payment therefor as provided herein and therein, will be duly and validly issued, fully paid and nonassessable and free of any pre-emptive or similar rights and will conform to the description thereof in the Prospectus and the International Managers and the U.S. Underwriters will receive good title to the Stock and the U.S. Stock, respectively, free and clear of all liens, security interests, pledges, charges, claims and encumbrances. (l) Except as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any subsidiary is subject, which, if determined adversely to the Company or any such subsidiary, could individually or in the aggregate be reasonably expected to (i) prevent or adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Pre-effective Prospectus in any jurisdiction or (iv) result in a material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole and the Company is not aware of any valid basis for any such legal or governmental proceeding; and, to the Company's knowledge, no such proceedings are threatened or contemplated against the Company or any subsidiary by governmental authorities or others. Neither the Company nor any subsidiary is a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. The description of the Company's litigation under the heading "Legal Proceedings" in the Prospectus is true and correct and complies with the Rules and Regulations and no other suit or proceeding before any court or governmental authority known to the Company is required to be disclosed in the Prospectus that is not so disclosed. (m) The execution, delivery and performance of this Agreement and the U.S. Underwriting Agreement and the consummation of the transactions herein and therein contemplated (A) will not result in any violation of the provisions of the certificate of incorporation, by- laws or other organizational documents of the Company or its subsidiary, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its subsidiaries or any of their respective properties or assets, and (B) will not conflict with or result in a breach or violation of any of the terms or provision of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of their respective properties is or may be bound nor will such delivery and performance result in the creation of a security interest, lien, encumbrance, charge or claim. (n) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance of this Agreement and the U.S. Underwriting Agreement by the Company or its subsidiaries and the consummation of the transactions contemplated hereby and thereby (including the issuance, sale and delivery of the Stock), except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer Markt of the Frankfurt Stock Exchange or under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange 6 7 Act") or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Stock by the International Managers and the U.S. Stock by the U.S. Underwriters. (o) The Company has the full corporate power and authority to enter into this Agreement and the U.S. Underwriting Agreement and to perform its obligations hereunder and thereunder (including to issue, sell and deliver the Stock and the U.S. Stock), and this Agreement and the U.S. Underwriting Agreement have each been duly and validly authorized, executed and delivered by the Company and each constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws and except as may be limited by applicable bankruptcy, insolvency and other similar laws affecting conditions, rights and rules of law governing specific performance, injunctive relief and other equitable remedies. (p) The Company and its subsidiaries are in all material respects in compliance with, and conduct their respective businesses in conformity with, all applicable federal, state, local and foreign laws, rules and regulations or any court or governmental agency or body; to the knowledge of the Company, otherwise than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such federal or state laws, rules or regulations has been adopted which, when made effective, could reasonably be expected to have a material adverse effect on the operations of the Company and its subsidiaries considered as a whole. (q) The Company and its subsidiaries have filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns and have paid all taxes shown as due thereon or with respect to any of their properties, and there is no tax deficiency that has been or to the knowledge of the Company is reasonably likely to be, asserted against the Company or any of its subsidiaries or any of their respective properties or assets that would materially and adversely affect the financial position, business or operations of the Company and its subsidiaries considered as a whole. (r) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise, except for persons and entities who have expressly waived such right or who have been given proper notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. (s) Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of the Common Stock in violation of Regulation M of the Exchange Act, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of the Common Stock in violation of Regulation M of the Exchange Act. (t) Each of the Company and each of its subsidiaries owns, or possesses adequate and enforceable rights, either as owner or licensee, to use all patents, trademarks (including "SwapBox(TM)," "SwapSmart(TM)," "SwapAcces(TM)" and "SmartOS(TM)"), trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, 7 8 inventions, trade secrets, know-how and other similar rights described in the Prospectus as being owned or licensed by them and except as described in the Prospectus the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and its subsidiaries with respect to the foregoing. The Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with in any material respect any patents, trademarks, service marks, trade name, copyright, trade secrets, know-how, licenses or other intellectual property or franchise right of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, know-how, license in or other intellectual property right or franchise right of any person. (u) The Company is not involved in any labor dispute nor, to the knowledge of the Company, is any such dispute threatened. Except as described in the Prospectus, the Company is not aware that (A) any executive, key employee or significant group of employees of the Company or any subsidiary plans to terminate employment with the Company or any such subsidiary or (B) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company and its subsidiaries. Neither the Company nor any subsidiary has or expects to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or any subsidiary makes or ever has made a contribution and in which any employee of the Company or any subsidiary is or has ever been a participant. With respect to such plans, the Company and each subsidiary is in compliance in all material respects with all applicable provisions of ERISA. (v) No transaction has occurred, and no relationship, direct or indirect, exists, between or among the Company or its subsidiaries, on the one hand, and any of its stockholders, officers, directors, customers or suppliers of the Company or its subsidiaries or any affiliate or affiliates of any such stockholder, officer, director, customer or supplier, on the other hand, that is required to be described and is not so described in the Prospectus. (w) The Company and its subsidiaries have, and the Company and its subsidiaries as of the Closing Dates will have, good and marketable title to all personal property owned by them which is material to the business of the Company or of its subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as would not have a material adverse effect on the Company and its subsidiaries considered as a whole; and any real property and buildings held under lease by the Company and its subsidiaries are, or will be as of each of the Closing Dates, held by them under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company and its subsidiaries considered as a whole, in each case except as described in or contemplated by the Prospectus. (x) The Company and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage after giving effect to the transactions described in the Prospectus; and neither the Company nor any subsidiary of the Company has any reason to believe that it will not be able to renew its existing 8 9 insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their business at a cost that would not have a material adverse effect on the Company and its subsidiaries considered as a whole, except as described in or contemplated by the Prospectus. (y) Other than as contemplated by this Agreement and the U.S. Underwriting Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement or the U.S. Underwriting Agreement. (z) The Stock has been duly authorized for (i) quotation on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System, subject to official Notice of Issuance, and (ii) listing on the Neuer Markt of the Frankfurt Stock Exchange, and a registration statement has been filed on Form 8-A pursuant to Section 12 of the Exchange Act, which registration statement complies in all material respects with the Exchange Act. (aa) The books, records and accounts of the Company and its subsidiaries accurately and fairly reflect, in all material respects, the transactions in, and dispositions of, the assets of, and the results of operation of, the Company and its subsidiaries. The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (bb) To the Company's knowledge, neither the Company nor any of its subsidiaries nor any employee or agent of the Company or any of its subsidiaries has made any payment of funds of the Company or any of its subsidiaries or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (cc) Neither the Company nor any of its subsidiaries is or, after application of the net proceeds of this offering as described under the caption "Use of Proceeds" in the Prospectus, will become an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. (dd) Each certificate signed by any officer of the Company and delivered to the International Managers or counsel for the International Managers shall be deemed to be a representation and warranty by the Company as to the matters covered thereby. (ee) Neither the Company nor any of its subsidiaries, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee 9 10 from corporate funds; or has violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977. (ff) An application for admission of the International Stock (i) for trading on the regulated market ("Geregelter Markt") of the Frankfurt Stock Exchange ("FSE") to be submitted to the Admissions Committee of the FSE, and (ii) to the "neuer Markt" of the FSE to be submitted to the Executive Board of the Deutsche Borse AG, the operator of the "Neuer Markt", copies of which have heretofore been delivered to you (both of which applications hereinafter referred to as the "Application for Admission") have been [will be] prepared by the Company in conformity with the requirements of the German Securities Act ("BorsG"), the Regulations on Admissions to the Stock Exchange ("BorsZulVO"), the Regulations of the FSE ("BorsO"), and the rules and regulations of the Neuer Markt segment of the FSE. All representations and warranties set forth above (a) through (ff) with regard to the registration and the listing of the U.S.Stock with the SEC and at NASDAQ, respectively, apply mutatis mutandis to the Company's involvement in the listing of the International Stock at the Neuer Markt of the FSE. 2b. Representations and Warranties and Agreements of the Selling Stockholders. Each Selling Stockholder represents and warrants to, and agrees with, the several International Managers that such Selling Stockholder: (a) Now has, and on the Closing Date will have, valid and marketable title to the Stock and the U.S. Stock to be sold by such Selling Stockholder, free and clear of any lien, claim, security interest or other encumbrance, including, without limitation, any restriction on transfer, and has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement (each as hereinafter defined). (b) Now has, and on the Closing Date will have, upon delivery of and payment for each share of Stock hereunder and U.S. Stock under the U.S. Underwriting Agreement, full right, power and authority, and approval required by law to sell, transfer, assign and deliver the Stock being sold by such Selling Stockholder hereunder and the U.S. Stock being sold by such Selling Stockholder under the U.S. Underwriting Agreement, and each of the several International Managers will acquire valid and marketable title to all of the Stock being sold to the International Managers by such Selling Stockholder, free and clear of any liens, encumbrances, equities claims, restrictions on transfer or other defects whatsoever. (c) For a period of 180 days after the date of this Agreement, without the consent of Cowen & Company, such Selling Stockholder will not offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of any Stock or securities convertible into or exchangeable for Stock, including, without limitation Stock which may be deemed to be beneficially owned by such Selling Shareholder in accordance with the Rules and Regulations, except for the Stock being sold hereunder and the U.S. Stock being sold under the U.S. Underwriting Agreement. (d) Has duly executed and delivered a power of attorney, in substantially the form heretofore delivered by the Lead Managers (the "Power of Attorney"), appointing _________________ and __________________ and each of them, as attorney-in-fact (the "Attorneys-in-fact") with authority to execute and deliver this Agreement and the U.S. Underwriting Agreement on behalf of 10 11 such Selling Stockholder, to authorize the delivery of the shares of Stock to be sold by such Selling Stockholder hereunder and the shares of U.S. Stock being sold by such Selling Stockholder under the U.S. Underwriting Agreement and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the U.S. Underwriting Agreement. (e) Has duly executed and delivered a custody agreement, in substantially the form heretofore delivered by the Lead Managers ( the "Custody Agreement"), with as custodian (the "Custodian"), pursuant to which certificates in negotiable form for the shares of Stock and the U.S. Stock to be sold by such Selling Stockholder hereunder and under the U.S. Underwriting Agreement have been placed in custody for delivery under this Agreement and the U.S. Underwriting Agreement. (f) Has, by execution and delivery of each of this Agreement, the U.S. Underwriting Agreement, the Power of Attorney and the Custody Agreement, created valid and binding obligations of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms, except to the extent that rights to indemnity hereunder may be limited by federal or state securities laws or the public policy underlying such laws. (g) The performance of this Agreement, the U.S. Underwriting Agreement, the Custody Agreement and the Power of Attorney, and the consummation of the transactions contemplated hereby and thereby will not result in a breach or violation by such Selling Stockholder of any of the terms or provisions of, or constitute a default by such Selling Stockholder under, any material indenture, mortgage, deed of trust, trust (constructive or other), loan agreement, lease, franchise, license or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its properties is bound, or any judgement of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties, or to such Selling Stockholder's knowledge, any statute, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Stockholder or any of its properties. Each Selling Stockholder agrees that the shares of Stock and U.S. Stock represented by the certificates held in custody under the Custody Agreement are for the benefit of and coupled with and subject to the interests of the International Managers, the U.S. Underwriters, the Selling Stockholders, and the Company hereunder, and that the arrangement for such custody and the appointment of the Attorneys-in-fact are irrevocable; that the obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death or incapacity, liquidation or distribution of such Selling Stockholder, or any other event, that if such Selling Stockholder should die or become incapacitated or any other event occurs, before the delivery of the Stock hereunder and the U.S. Stock under the U.S. Underwriting Agreement, certificates for the Stock and the U.S. Stock to be sold by such Selling Stockholder shall be delivered on behalf of such Selling Stockholder in accordance with the terms and conditions of this Agreement, the U.S. Underwriting Agreement and the Custody Agreement, and action taken by the Attorneys-in-fact or any of them under the Power of Attorney shall be as valid as if such death, incapacity, or other event had not occurred, whether or not the Custodian, the Attorneys-in-fact or any of them shall have notice of such death, incapacity or other event. 11 12 3 Purchase by, and Sale and Delivery to, International Managers--Closing Dates. The Company and the Selling Stockholders agree, severally and not jointly, to sell to the International Managers the Firm Stock with the number of shares to be sold by the Company and each Selling Stockholder being the number of shares set forth opposite his, her or its name in Schedule B, and on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the International Managers agree, severally and not jointly, to purchase the Firm Stock from the Company and the Selling Stockholders, the number of shares of Firm Stock to be purchased by each International Manager being set opposite its name in Schedule A, subject to adjustment in accordance with Section 12 hereof. The number of shares of Stock to be purchased by each International Manager from each Selling Stockholder hereunder shall bear the same proportion to the total number of shares of Stock to be purchased by such International Manager hereunder as the number of shares of stock being sold by each Selling Stockholder bears to the total number of shares of Stock being sold by all Selling Stockholders, subject to adjustment by the Lead Managers to eliminate fractions. The purchase price per share to be paid by the International Managers to the Company and the Selling Stockholders will be the price per share set forth in the "Per Share" row of the table on the cover page of the Prospectus under the heading "Proceeds to Company" and "Proceeds to Selling Stockholders," respectively (the "Purchase Price"). The Company and the Selling Stockholders will deliver the Firm Stock to the Lead Managers for the respective accounts of the several International Managers (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company and the Selling Stockholders given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the First Closing Date (as defined below) or, if no such direction is received, in the names of the respective International Managers or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine), against payment of the aggregate Purchase Price therefore by wire transfer in immediately available funds (same day funds), to the Company and _________________________ as Custodian for the Selling Stockholders, all at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304. The time and date of the delivery and closing shall be at 10:00 A.M., New York Time, on _________, 1997. The time and date of such payment and delivery are herein referred to as the "First Closing Date". The First Closing Date and the location of delivery of, and the form of payment for, the Firm Stock may be varied by agreement among the Company, Cowen and the Selling Stockholders. The First Closing Date may be postponed pursuant to the provisions of Section 12. The Company and the Selling Stockholders shall make the certificates for the Stock available to the Lead Managers for examination on behalf of the International Managers not later than 10:00 A.M., New York time, on the business day preceding the First Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. It is understood that the Lead Managers, individually and not as Lead Managers of the several International Managers, may (but shall not be obligated to) make payment to the Company or to the Selling Stockholders on behalf of any International Manager or International Managers, for the Stock to be purchased by such International Manager or International Managers. Any such payment by a Lead Manager shall not relieve such International Manager or International Managers from any of its or their other obligations hereunder. 12 13 The several International Managers agree to make an initial public offering of the Firm Stock at the initial public offering price set forth on the cover page of the Prospectus as soon after the effectiveness of the Registration Statement or the Application for Admission as in their judgment is advisable. The Lead Managers shall promptly advise the Company and the Selling Stockholders of the making of the initial public offering. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Stock as contemplated by the Prospectus, the Company hereby grants to the International Managers an option to purchase, severally and not jointly, up to an aggregate of 112,500 shares of Optional Stock. The price per share to be paid for the Optional Stock shall be the Purchase Price. The option granted hereby may be exercised as to all or any party of the Optional Stock at any time, and from time to time, not more than thirty (30) days subsequent to the effective date of this Agreement. No Optional Stock shall be sold and delivered unless the Firm Stock previously has been, or simultaneously is, sold and delivered. The right to purchase the Optional Stock or any portion thereof may be surrendered and terminated at any time upon notice by the International Managers to the Company. The option granted hereby may be exercised by the International Managers by giving written notice from Cowen to the Company setting forth the number of shares of the Optional Stock to be purchased by them and the date and time for delivery of and payment for the Optional Stock. Each date and time for delivery of and payment for the Optional Stock (which may be the First Closing Date, but not earlier) is herein called an "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than ten (10) business days after written notice is given. (The Option Closing Date and the First Closing Date are herein called the "Closing Dates".) Optional Stock shall be purchased for the account of each International Manager in the same proportion as the number of shares of Firm Stock set forth opposite such International Manager's name in Schedule A hereto bears to the total number of shares of Firm Stock (subject to adjustment by the International Managers to eliminate odd lots). Upon exercise of the option of the International Managers, the Company agrees to sell to the International Managers the number of shares of Optional Stock set forth in the written notice of exercise and the International Managers agree, severally and not jointly and subject to the terms and conditions herein set forth, to purchase the number of such shares determined as aforesaid. The Company will deliver the Optional Stock to the International Managers (in the form of definitive certificates, issued in such names and in such denominations as the Lead Managers may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the Option Closing Date or, if no such direction is received, in the names of the respective International Managers or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine), against payment of the aggregate Purchase Price therefor by wire transfer in immediately available funds (same day funds), payable to the Company, all at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304. The Company shall make the certificates for the Optional Stock available to the International Managers for examination not later than 10:00 A.M., New York Time, on the business day preceding the Option Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. The Option Closing Date and the location of delivery of, and the form of payment for, the Option Stock may be varied by agreement between the Company and Cowen. The Option Closing Date may be postponed pursuant to the provisions of Section 12. 13 14 4 Covenants and Agreements of the Company. The Company covenants and agrees with the several International Managers that: (a) The Company will (i) if the Company and the Lead Managers have determined not to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Lead Managers have determined to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (iii) if the Company and the Lead Managers have determined to deliver Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Lead Managers promptly as to the time at which the Registration Statement becomes effective, will advise the Lead Managers promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Lead Managers promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Lead Managers a reasonable time prior to the proposed filing thereof or to which the Lead Managers shall reasonably object in writing or which is not in compliance with the Securities Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon the request of the Lead Managers, any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Lead Managers may be necessary to enable the several International Managers to continue the distribution of the Stock and the several U.S. Underwriters to continue the distribution of the U.S. Stock and will use its best efforts to cause the same to become effective as promptly as possible. (c) If, at any time after the effective date of the Registration Statement when a prospectus relating to the Stock is required to be delivered under the Securities Act, any event relating to or affecting the Company or any of its subsidiaries occurs as a result of which the Prospectus or any other prospectus as then in effect would contain any untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Lead Managers thereof and will prepare an amended or supplemented prospectus which will correct such statement or omission; and in case any International Manager is required to deliver a prospectus relating to the Stock nine (9) months or more after the effective date of the Registration Statement, the Company upon the request of the Lead Managers and at the expense of 14 15 such International Manager will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. (d) The Company will deliver to each of the Lead Managers, at or before the Closing Dates, one signed copy of the Registration Statement, as originally filed with the Commission, and one signed copy of all amendments thereto including all financial statements and exhibits thereto and will deliver to the Lead Managers such number of unsigned copies of the Registration Statement, including such financial statements but without exhibits, and all amendments thereto, as the Lead Managers may reasonably request. The Company will deliver or mail to or upon the order the Lead Managers, from time to time until the effective date of the Registration Statement, as many copies of the Pre-effective Prospectus as the Lead Managers may reasonably request. The Company will deliver or mail to or upon the order of the Lead Managers on the date of the initial public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Stock is required under the Securities Act, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Lead Managers may reasonably request; provided, however, that the expense of the preparation and delivery of any prospectus required for use nine (9) months or more after the effective date of the Registration Statement shall be borne by the International Managers required to deliver such prospectus. (e) The Company will use its best efforts to cause, and provide all information, documentation, and other materials (whether contained or to be provided in the German Prospectus or otherwise) to the FSE and the Lead Managers as may be required or appropriate for, the Application for Admission to become and remain effective. (f) The Company will make generally available to its stockholders as soon as practicable, but not later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement which will be in reasonable detail (but which need not be audited) and which will comply with Section 11(a) of the Securities Act, covering a period of at least twelve (12) months beginning after the "effective date" (as defined in Rule 158 under the Securities Act) of the Registration Statement. (g) The Company will cooperate with the Lead Managers to enable the Stock to be registered or qualified for offering and sale by the International Managers and by dealers under the securities laws of such jurisdictions as the Lead Managers may designate and at the request of the Lead Managers will make such applications and furnish such consents to service of process or other documents as may be required of it as the issuer of the Stock for that purpose; provided, however, that the Company shall not be required to qualify to do business or to file a general consent (other than that arising out of the offering or sale of the Stock) to service of process in any such jurisdiction where it is not now so subject. The Company will, from time to time, prepare and file such statements and reports as are or may be required of it as the issuer of the Stock to continue such qualifications in effect for so long a period as the Lead Managers may reasonably request for the distribution of the Stock. The Company will advise the Lead Managers promptly after the Company becomes aware of the suspension of the qualifications or registration of (or any such exception relating to) the Common Stock of the Company for offering, sale or trading in any jurisdiction or of any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any orders suspending such 15 16 qualifications, registration or exception, the Company will, with the cooperation of the Lead Managers use its best efforts to obtain the withdrawal thereof. (h) The Company will furnish to its stockholders annual reports containing financial statements certified by independent public accountants. (i) The Company will maintain a transfer agent and registrar for its Common Stock. (j) For a period of one year after the date hereof, prior to filing its quarterly statements on Form 10-Q, the Company will have its independent auditors perform a limited quarterly review of its quarterly numbers. (k) The Company will not offer, sell, assign, transfer, encumber, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the Company in accordance with the Rules and Regulations) during the 180 days following the date on which the price of the Common Stock to be purchased by the International Managers is set, other than (i) the Company's sale of Common Stock hereunder, (ii) issuances of Common Stock, stock options, stock purchase rights or other similar rights issued pursuant to the 1997 Plans as described in the Prospectus, and (iii) any Common Stock or preferred stock issued by the Company in any transaction of the type described in Rule 145 under the Securities Act or otherwise issued by the Company in exchange for technology or other non-cash assets of any third party. (l) The Company will file with the Commission any reports on Form SR required pursuant to Rule 463 of Rules and Regulations, and will deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission. (m) The Company will apply the net proceeds from the sale of the Stock as set forth in the description under "Use of Proceeds" in the Prospectus. (n) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Stock under the Securities Act and the Neuer Markt of the Frankfurt Stock Exchange in connection with the sale of the Stock pursuant to this Agreement. (o) Prior to each of the Closing Dates the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its subsidiaries for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (p) Prior to the Closing Dates the Company will issue no press release or other public communications directly or indirectly and hold no press conference with respect to the Company (other than customary product related sales and marketing communications) or any of its subsidiaries, the financial condition, results of operations, business, prospects, assets or liabilities of the Company any of them, or the offering of the Stock, without your prior written consent, which shall not be unreasonably withheld. 16 17 (q) During the period of five (5) years hereafter, the Company will furnish to the Lead Managers, and upon request of the Lead Managers, to each of the International Managers: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, or the NASD or any securities exchange; (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock; and (iv) from time to time such other information concerning the Company as you may reasonably request. (r) The covenants and agreements set forth above (a) through (d) and (f) through (q) apply mutatis mutandis to the Company's involvement in the listing of the Stock at the FSE. (s) The Company will adopt the German Code for Mergers and Acquisitions ("Ubernahmekodex"). (t) The Company will maintain a Securities Caretaker ("Betreuer") as long as the International Stock is listed at the Neuer Markt of the FSE. (u) The Selling Stockholders will comply with the holding requirements for their Stock established by the FSE for securities listed at the Neuer Markt. 5 Payment of Expenses. (a) The Company will pay (directly or by reimbursement) all costs, fees and expenses incurred in connection with the performance of the obligations of the Company and of the Selling Stockholders under this Agreement and the U.S. Underwriting Agreement and in connection with the transactions contemplated hereby, including but not limited to (i) all expenses and taxes incident to the issuance and delivery of the Stock to the Lead Managers; (ii) all expenses incident to the registration of the Stock and the U.S. Stock under the Securities Act; (iii) the costs of preparing stock certificates (including printing and engraving costs); (iv) all fees and expenses of the registrar and transfer agent of the Stock and the U.S. Stock; (v) all necessary issue, transfer and other taxes in connection with the issuance and sale of the Stock to the International Managers; (vi) fees and expenses of the Company's counsel and the Company's independent accountants; (vii) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Pre-effective Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, the Selling Stockholders' Power of Attorney, the Custody Agreement, the "Agreement Among U.S. Underwriters and International Managers" between the Lead Managers and the Representatives, the "Agreement Among U.S. Underwriters" between the Representatives and the U.S. Underwriters, the Master Selected Dealers' Agreement, the U.S. Underwriters' Questionnaire and the Blue Sky memoranda (including related fees and expenses of counsel to the Underwriters) and this Agreement; (viii) all filing fees, attorneys' fees and expenses incurred by the Company or the U.S. Underwriters in connection with exemptions from the qualifying or registering (or obtaining qualification or registration of) all or any part of the Stock for offer and sale 17 18 and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Representatives may designate; (ix) all fees and expenses paid or incurred in connection with filings made with the NASD and the listing of the Stock on the Neuer Markt of the FSE; and (x) all other costs and expenses incurred by the Company and the Selling Stockholders incident to the performance of their obligations hereunder which are not otherwise specifically provided for in this Section. (b) In addition to their other obligations under Section 6(a) hereof, the Company and the Selling Stockholders agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon (i) any statement or omission or any alleged statement or omission by the Company or the Selling Stockholders or (ii) any breach or inaccuracy in their representations and warranties contained in this Agreement, they will reimburse each International Manager on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's and each Selling Stockholder's obligation to reimburse each International Manager for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each International Manager shall promptly return it to the Company or such Selling Stockholder, as the case may be, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Citibank, N.A., New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to an International Manager in a timely manner as provided below shall bear interest at the Prime Rate from the due date for such reimbursement. This expense reimbursement agreement will be in addition to any other liability which the Company or any Selling Stockholder may otherwise have. The request for reimbursement will be sent to the Company with a copy to each Selling Stockholder. (c) In addition to its other obligations under Section 6(b) hereof, each International Manager severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 6(b) hereof which relates to information furnished to the Company pursuant to Section 6(c) hereof, it will reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the International Managers' obligation to reimburse the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director, controlling person or Selling Stockholder) shall promptly return it to the International Managers together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the 18 19 date of such request. This indemnity agreement will be in addition to any liability which such International Manager may otherwise have. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in paragraph (b) and/or (c) of this Section 5, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in paragraph (b) and/or (c) of this Section 5 and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of Section 6. 6 Indemnification and Contribution. (a) The Company and SCM Microsystems GmbH jointly and severally agree to indemnify and hold harmless each International Manager and each person, if any, who controls such International Manager within the meaning of the Securities Act and the respective officers, directors, partners, employees, representatives and agents of each of such International Manager (collectively, the "Manager Indemnified Parties" and, each, a "Manager Indemnified Party"), against any losses, claims, damages, liabilities or expenses (including the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any Federal, state or foreign statute, regulation or at common law, (i) on the ground or alleged ground that any Pre-effective Prospectus, the Registration Statement, the Application for Admission or the Prospectus (or any Pre-effective Prospectus, the Registration Statement or the Prospectus as from time to time amended or supplemented) includes or allegedly includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any International Manager, directly or through the Lead Managers, specifically for use in the preparation thereof and provided that the foregoing indemnity agreement with respect to any Pre- effective Prospectus shall not inure to the benefit of any International Manager from whom the person asserting any such losses, claims, damages or liabilities purchased Stock, or any person controlling such International Manager, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such International Manager to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Stock to such person, and the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities, unless such failure to deliver the Prospectus (as so amended or supplemented) resulted from the Company's failure to perform its obligations pursuant to Section 4(c) above or (ii) for any act or failure to act or any alleged act or failure to act 19 20 by any International Manager in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or expense arising out of or based upon matters covered by clause (i) above (provided that the Company shall not be liable under this clause (ii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, or liability or expense resulted directly from any such acts or failures to act undertaken or omitted to be taken by such International Manager through its gross negligence or willful misconduct). The Company will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and reasonably acceptable to the International Managers. In the event the Company elects to assume the defense of any such suit and retain such counsel, any Manager Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) the Company shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include both any such Manager Indemnified Party and the Company, and such Manager Indemnified Parties have been advised by counsel to the International Managers that one or more legal defenses may be available to it or them which may not be available to the Company, in which case the Company shall not be entitled to assume the defense of such suit without the written consent of the Manager Indemnified Parties party to such suit notwithstanding its obligation to bear the fees and expenses of such counsel. In circumstances where the Company does not assume the defense of a suit for which indemnification is sought by one or more Manager Indemnified Parties, the Company will be obligated to bear the fees and expenses of only one firm on behalf of all Manager Indemnified Parties (plus local counsel, if, in the judgment of the primary counsel to the Manager Indemnified Parties use of such local counsel is necessary). This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Manager Indemnified Party. (b) Each Selling Stockholder severally and not jointly agrees to indemnify and hold harmless each Manager Indemnified Party against any losses, claims, damages, liabilities or expenses (including, unless such Selling Stockholder elects to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any Federal, state or foreign statute, regulation or at common law, on the ground or alleged ground that any Pre-Effective Prospectus, the Registration Statement, the Application for Admission or the Prospectus (or any Pre-Effective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any International Manager, directly or through the Lead Managers specifically for use in the preparation thereof; provided however that with respect to any untrue statement or omission or alleged untrue statement or omission made in any Pre-Effective Prospectus, the indemnity agreement contained in this subsection (b) shall not inure to the benefit of any Manager Indemnified Party from whom the person asserting any such losses, claims, damages or liabilities purchased the shares 20 21 of Stock concerned to the extent that any such loss, claim, damage or liability of such Manager Indemnified Party results from the fact that a copy of the Prospectus was not sent or given to such person at or prior to the written confirmation of the sale of such shares of Stock, as required by the Securities Act, and if the untrue statement or omission concerned has been corrected in the Prospectus. Such Selling Stockholder shall be entitled to participate at his own expense in the defense, or, if he so elects, to assume the defense of any suit brought to enforce any such liability, but, if such Selling Stockholder elects to assume the defense, such defense shall be conducted by counsel chosen by him. In the event that any Selling Stockholder elects to assume the defense of any such suit and retain such counsel, the Manager Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) such Selling Stockholder shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include both such Manager Indemnified Parties and such Selling Stockholder and such Manager Indemnified Parties have been advised by counsel that one or more legal defenses may be available to it or them which may not be available to such Selling Stockholder, in which case such Selling Stockholder shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. This indemnity agreement is not exclusive and will be in addition to any liability which such Selling Stockholder might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Manager Indemnified Party. The Company and the Selling Stockholders may agree, as among themselves and without limiting the rights of the International Managers under this Agreement, as to their respective amounts of such liability for which they each shall be responsible. Notwithstanding any other provision of this Agreement or the U.S. Underwriting Agreement, the liability of each Selling Stockholder to the International Managers and U.S. Underwriters under this Agreement, the U.S. Underwriting Agreement or otherwise shall be limited to an amount equal to the aggregate initial public offering price of the shares of Common Stock sold by such Selling Stockholder in the initial public offering. (c) Each International Manager severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act (collectively, the "Company Indemnified Parties") and each Selling Stockholder (the "Selling Stockholder Indemnified Parties") against any losses, claims, damages, liabilities or expenses (including, unless the International Manager or International Managers elect to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which arise out of or are based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Pre-effective Prospectus, the Registration Statement, the Application for Admission, or the Prospectus (or any Pre-effective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by such International Manager, directly or through the Lead Managers, specifically for use in the 21 22 preparation thereof. Such International Manager shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but, if such International Manager elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event that any International Manager elects to assume the defense of any such suit and retain such counsel, the Company Indemnified Parties or Selling Stockholders Indemnified Parties and any other International Manager or International Managers or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, respectively. The International Manager against whom indemnity may be sought shall not be liable to indemnify any person for any settlement of any such claim effected without such International Manager's consent. This indemnity agreement is not exclusive and will be in addition to any liability which such International Manager might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to any Company Indemnified Party or Selling Stockholder Indemnified Party. (d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to herein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the International Managers on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Stockholders on the one hand and the International Managers on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the International Managers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the International Managers, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the International Managers agree that it would not be just and equitable if contribution were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending, settling or compromising any such 22 23 claim. Notwithstanding the provisions of this subsection (d), no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the shares of the Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Manager has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The International Managers' obligations to contribute are several in proportion to their respective underwriting obligations and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act or the equivalent legal provision under German law) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission to so notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party except to the extent that any such delay results in the loss of the ability to assert any affirmative or negative defense the loss of which is materially prejudicial to the disposition of this matter. 7 Survival of Indemnities, Representations, Warranties, etc. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and its subsidiaries, the Selling Stockholders and the several International Managers, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any International Manager, the Selling Stockholders, the Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Stock until all applicable statutes of limitation have expired. 8 Conditions of International Managers Obligations. The respective obligations of the several International Managers hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of each of the Closing Dates, of the representations and warranties made herein by the Company and the Selling Stockholders to compliance at and as of each of the Closing Dates by the Company and the Selling Stockholders with their covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and to the following additional conditions: (a) The Registration Statement and the Application for Admission shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Lead Managers, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Lead Managers. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in the manner and within the time period required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case may be. 23 24 (b) The Lead Managers shall have been satisfied that there shall not have occurred any change prior to each of the Closing Dates, in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiaries considered as a whole, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the reasonable opinion of the Lead Managers, is material, or omits to state a fact which, in the reasonable opinion of the Lead Managers, is required to be stated therein or is necessary to make the statements therein not misleading or (ii) it is impracticable in the reasonable judgment of the Lead Managers to proceed with the public offering or purchase the Stock as contemplated hereby. (c) The Lead Managers shall be satisfied that no legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's or the Selling Stockholders' ability to perform their respective obligations under this Agreement shall have been instituted or threatened and there shall have occurred no material adverse development in any existing such action, suit or proceeding. (d) At the time of execution of this Agreement, the Lead Managers shall have received from KPMG Peat Marwick LLP, independent certified public accountants, a letter, dated the date hereof, in form and substance satisfactory to the International Managers to the effect set forth in Exhibit I hereto. (e) The Lead Managers shall have received from KPMG Peat Marwick LLP, independent certified public accountants, letters, dated each of the Closing Dates, to the effect that such accountants reaffirm, as of each of the Closing Dates, and as though made on each of the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 8. (f) The Lead Managers shall have received (i) from Wilson Sonsini Goodrich & Rosati, Professional Corporation, United States securities counsel for the Company; (ii) from ______________, German counsel for the Company; and (iii) from ____________, intellectual property counsel to the Company, an opinion, dated each of the Closing Date, to the effect set forth in Exhibits II, III and IV hereto, respectively. (g) The Lead Managers shall have received from Rogers & Wells, counsel for the International Managers, their opinion dated each of the Closing Dates with respect to the incorporation of the Company, the validity of the Stock, the Registration Statement and the Prospectus and such other related matters as it may reasonably request, and the Company shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. (h) The Lead Managers shall have received from ___________, counsel for the Selling Stockholders, an opinion dated the Closing Date, to the effect set forth in Exhibit V. (i) The Lead Managers shall have received a certificate or certificates, dated each of the Closing Dates, of the chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: 24 25 (i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (ii) Neither any Pre-effective Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the time when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) The representations and warranties of the Company in this Agreement are true and correct at and as of each of the Closing Dates, and the Company has complied with all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Dates; and (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), properties, business, management, net worth or results of operations of the Company and its subsidiaries considered as a whole; (ii) the business and operations conducted by the Company and its subsidiaries have not sustained a loss by strike, fire, flood, accident or other calamity (whether or not insured) of such a character as to interfere materially with the conduct of the business and operations of the Company and its subsidiaries considered as a whole; (iii) no legal or governmental action, suit or proceeding is pending or to the knowledge of the signers threatened against the Company which is material to the Company, whether or not arising from transactions in the ordinary course of business, or which may materially and adversely affect the transactions contemplated by this Agreement; (iv) since such dates and except as so disclosed, the Company has not incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock (except pursuant to the 1997 Plans), made any material change in its short-term or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the Closing Date. (j) The Selling Stockholders shall have furnished to the Lead Managers certificates as to the accuracy, at and as of each of the Closing Dates, of the representations and warranties made herein by them and as to compliance at and as of each of the Closing Dates by them with their covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and as to satisfaction of the other conditions to the obligations of the International Managers hereunder. (k) Cowen & Company shall have received, on behalf of the several International Managers, the written agreements, substantially in the form of Exhibit V hereto, of the officers, directors and certain holders of Common Stock that each will not offer, sell, assign, 25 26 transfer, encumber, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by such officer, director or holder in accordance with the Rules and Regulations) during the 180 days following the date of the final Prospectus except as provided therein. (l) The Nasdaq National Market shall have approved the U.S. Stock for listing, subject only to official notice of issuance. (m) The International Stock to be issued and sold by the Company and the Selling Stockholders shall have been duly authorized for listing on the Neuer Markt of the Frankfurt Stock Exchange. (n) The Closing under the U.S. Underwriting Agreement shall have occurred concurrently with the Closing hereunder on the Closing Date. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are reasonably satisfactory in form and substance to the Lead Managers. The Company will furnish to the Lead Managers conformed copies of such opinions, certificates, letters and other documents as the Lead Managers shall reasonably request. If any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Lead Managers by notifying the Company of such termination in writing or by telegram at or prior to each of the Closing Dates, but [Cowen], on behalf of the Lead Managers, shall be entitled to waive any of such conditions. 9 Effective Date. This Agreement shall become effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other provisions, at 11:00 a.m. New York City time on the first full business day following the effectiveness of the Registration Statement or at such earlier time after the Registration Statement becomes effective as the Lead Managers may determine on and by notice to the Company or by release of any of the Stock for sale to the public. For the purposes of this Section 9, the Stock shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Stock or upon the release by you of notices (i) advising International Managers that the shares of Stock are released for public offering or (ii) offering the Stock for sale to securities dealers, whichever may occur first. 10 Termination. This Agreement (except for the provisions of Section 5) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Lead Managers and may be terminated by the Lead Managers at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to the liability of defaulting International Managers. This Agreement may be terminated after it becomes effective by the Lead Managers by notice to the Company (i) if at or prior to the First Closing Date trading in securities on any of the New York Stock Exchange or the Nasdaq National Market System shall have been suspended (other than any short term suspension of trading pursuant to any "circuit breaker" provisions of 26 27 the New York Stock Exchange) or minimum or maximum prices shall have been established on any such exchange or market, or a banking moratorium shall have been declared by New York or United States authorities; (ii) trading of any securities of the Company shall have been suspended on any U.S. or foreign exchange or in any U.S. or foreign over-the-counter market; (iii) if at or prior to the First Closing Date there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or (B) any material change in financial markets or any calamity or crisis which, in the reasonable judgment of the Lead Managers, makes it impractical or inadvisable to offer or sell the Stock on the terms contemplated by the Prospectus; (iv) if there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or any of its subsidiaries or the transactions contemplated by this Agreement, which, in the reasonable judgment of the Lead Managers, makes it impracticable or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus; (v) if there shall be any litigation or proceeding, pending or threatened, which, in the reasonable judgment of the Lead Managers, makes it impracticable or inadvisable to offer or deliver on the terms contemplated by the Prospectus; or (vi) if there shall have occurred any of the events specified in the immediately preceding clauses (i) - (v) together with any other such event that makes it, in the reasonable judgment of the Lead Managers, impractical or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus. 11 Reimbursement of International Managers. Notwithstanding any other provisions hereof, if this Agreement shall not become effective by reason of any election of the Company or the Selling Stockholder pursuant to the first paragraph of Section 10 or shall be terminated by the Lead Managers under Section 8 (excluding Section 8(g)) or Section 10, the Company will bear and pay the expenses specified in Section 5 hereof and, in addition to their obligations pursuant to Section 6 hereof, the Company will reimburse the reasonable out-of-pocket expenses of the several International Managers (including reasonable fees and disbursements of counsel for the International Managers) incurred in connection with this Agreement and the proposed purchase of the Stock, and promptly upon demand the Company will pay such amounts to you as Lead Managers. 12 Substitution of International Managers. If any International Manager or International Managers shall default in its or their obligations to purchase shares of Stock hereunder and the aggregate number of shares which such defaulting International Manager or International Managers agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares underwritten, the other International Managers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the shares which such defaulting International Manager or International Managers agreed but failed to purchase. If any International Manager or International Managers shall so default and the aggregate number of shares with respect to which such default or defaults occur is more than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Lead Managers and the Company for the purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate. If the remaining International Managers or substituted International Managers are required hereby or agree to take up all or part of the shares of Stock of a defaulting International Manager or International Managers as provided in this Section 12, (i) the Company and the Selling Stockholders shall have the right to postpone the Closing Dates for a period of not more than five (5) full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents or 27 28 arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining International Managers or substituted International Managers shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting International Manager of its liability to the Company, the Selling Stockholders or the other International Managers for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of any non-defaulting International Manager, the Selling Stockholders or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 6. 13 Notices. All communications hereunder shall be in writing and, if sent to the International Managers shall be mailed, delivered or facsimilied and confirmed to you, as their Lead Managers c/o Cowen & Company at Financial Square, New York. New York 10005 except that notices given to an International Manager pursuant to Section 6 hereof shall be sent to such International Manager at the address furnished by the Lead Managers or, if sent to the Company, shall be mailed, delivered or facsimilied and confirmed c/o SCM Microsystems, Inc., 131 Albright Way, Los Gatos, California 95030, Attention: President. 14 Successors. This Agreement shall inure to the benefit of and be binding upon the several International Managers, the Company and the Selling Stockholders and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions hereby contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company and the Selling Stockholders contained in this Agreement shall also be for the benefit of the person or persons, if any, who control any International Manager or International Managers within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the indemnities of the several International Managers shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 15 Applicable Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York. 16 Authority of Lead Managers. In connection with this Agreement, you will act for and on behalf of the several International Managers, and any action taken under this Agreement by Cowen, as Lead Manager, will be binding on all the International Managers; and any action taken under this Agreement by any of the Attorneys-in-fact will be binding all the Selling Stockholders. 17 Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 28 29 18 General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the party or parties to this Agreement directly affected by such amendment, modification or waiver. 19 Counterparts. This Agreement may be signed in two (2) or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 29 30 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, SCM MICROSYSTEMS, INC. By:_____________________________________ Name: Title: For purposes of agreeing to the indemnification provisions set forth in Section 6 of this agreement: SCM MICROSYSTEMS GmbH By:_____________________________________ Name: Title: Accepted and delivered in SELLING STOCKHOLDERS - as of LISTED IN SCHEDULE B the date first above written. COWEN INTERNATIONAL L.P. By:_____________________________________ HAMBRECHT & QUIST LLC WESTDEUTSCHE LANDESBANK GIROZENTRALE Acting on their own behalf and as Lead Managers of the several International By:_____________________________________ Managers referred to in Attorney-in-fact the foregoing Agreement. By: COWEN INTERNATIONAL L.P. By:___________________________________ Its general partner By:_____________________________ Name: Title: 30 31 SCHEDULE A INTERNATIONAL MANAGERS
Number of Number of Firm Shares Optional Shares to be to be Name Purchased Purchased - ---- --------- --------- Cowen International L.P. ...................................... Hambrecht & Quist LLC ......................................... Westdeutsche Landesbank Girozentrale .......................... --------- --------- Total ========= =========
31 32 SCHEDULE B SELLING STOCKHOLDERS 32 33 SCHEDULE C SUBSIDIARIES 33 34 SCHEDULE D LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS 34 35 EXHIBIT I [Form of Accountant's Letter] The Accountants shall confirm that they are independent accountants to the Company within the meaning of the Securities Act and the Rules, that the response to Item 10 of the Registration Statement is correct insofar as it relates to them and stating that: a. in their opinion the audited financial statements and financial statement schedules included in the Registration Statement and the Prospectus and reported on by them comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Rules and Regulations; b. on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data," carrying out certain procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the stockholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (1) the amounts in "Summary Consolidated Financial Data," and "Selected Consolidated Financial Data" included in the Registration Statement and the Prospectus do not agree with the corresponding amounts in the audited or unaudited financial statements from which such amounts were derived; or (2) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any change in the capital stock of the Company, increase in the long-term debt of the Company or any decreases in net income or in stockholders' equity in the Company, as compared with the amounts shown on the Company's audited balance sheet for the fiscal year ended December 31, 1996 included in the Registration Statement; and c. they have performed certain other procedures as may be permitted under generally acceptable auditing standards as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representatives agrees with the accounting records of the Company; and d. based upon the procedures set forth in clauses (ii) and (iii) above and a reading of the amounts included in the Registration Statement under the headings "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus and a reading of the financial 35 36 statements, from which certain of such data were derived, nothing has come to their attention that gives them reason to believe that the "Selected Consolidated Financial Data" included in the Registration Statement and Prospectus do not comply as to the form in all material respects with the applicable accounting requirements of the Securities Act and the Rules or that the information set forth therein is not fairly stated in relation to the financial statements included in the Registration Statement or Prospectus from which certain of such data were derived are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and Prospectus. 36 37 Exhibit II [Form of Opinion of Wilson Sonsini Goodrich & Rosati] 1. The Company and each of the corporations set forth in Exhibit A hereto (the "US Subsidiaries") have been duly incorporated and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in [list] which, to such counsel's knowledge are the only jurisdictions in which such qualification is necessary, and have all corporate power necessary to own or hold their respective properties and conduct their businesses as described in the Prospectus; 2. The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and nonassessable and all of the Shares to be issued and sold by the Company to the U.S. Underwriters pursuant to the Underwriting Agreement and to the International Managers pursuant to the International Underwriting Agreement have been duly and validly authorized and, when issued and delivered against payment therefor as provided for in the Underwriting Agreement or the International Underwriting Agreement, as the case may be, shall be duly and validly issued, fully paid and non-assessable and free of any pre-emptive or similar rights; and all of the issued shares of capital stock of the US Subsidiary have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; 3. Other than as described in the Prospectus there are no pre-emptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's Certificate of Incorporation or By-Laws or pursuant to any agreement or other instrument known to us; 4. Except as disclosed in the Prospectus, to our knowledge, there are no legal or governmental proceedings pending to which the Company or the US Subsidiary is a party or of which any property or assets of the Company or the US Subsidiary is the subject which, if determined adversely to the Company or the US Subsidiary, could, individually or in the aggregate, reasonably be expected to have a material adverse effect on the Company and its subsidiaries taken as a whole; and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The Company and the US Subsidiary have full corporate power and authority to enter into the Underwriting Agreement and the International Underwriting Agreement and to perform their respective obligations thereunder (including to issue, sell and deliver the Shares), and each of the Underwriting Agreement and the International Underwriting Agreement has been duly and validly authorized, executed and delivered by the Company and the US Subsidiary and is a valid and binding obligation of each of the Company and the US Subsidiary, enforceable against each of them in accordance with their respective terms. 6. The execution, delivery and performance of the Underwriting Agreement and the International Underwriting Agreement by the Company and the consummation of the transactions contemplated by the Underwriting Agreement and the International Underwriting Agreement by the Company will not result in a breach or violation of (A) any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument that is filed as an exhibit to the Registration Statement, (B) the Certificate of Incorporation or By-laws or the 38 certificate of incorporation or by-laws of the US Subsidiary, or (C) any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or the US Subsidiary or any of their properties or result in the creation of a lien; 7. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company or the US Subsidiary of the transactions contemplated by the Underwriting Agreement or the International Underwriting Agreement, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer Markt of the Frankfurt Stock Exchange or under the Securities Act or the Exchange Act or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Shares by the U.S. Underwriters or the International Managers; 8. The Registration Statement was declared effective under the Securities Act as of ____, 1997, the Prospectus was filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations on ____, 1997, and no stop order suspending the effectiveness of the Registration Statement has been issued and to our knowledge no proceeding for that purpose is pending or threatened by the Commission; 9. The Registration Statement and the Prospectus and any amendments or supplements thereto (other than the financial statements and the notes thereto and the schedules and other financialand statistical data included in the Registration Statement or the Prospectus as to which we express no opinion) comply as to form in all respects with the requirements of the Securities Act and the Rules and Regulations; 10. Other than as described in the Prospectus and to our knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to this Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; 11. The descriptions in the Registration Statement and Prospectus of legal or governmental proceedings, contracts and other documents are accurate in all material respects and such descriptions fairly present the information required to be disclosed, and to our knowledge, there are no legal or governmental proceedings or any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required; 12. The descriptions in the Registration Statement and the Prospectus under the captions "Risk Factors -- Concentration of Stock Ownership; Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale," Description of Common Stock" and "Shares Eligible for Future Sale," solely to the extent they reflect matters of federal law arising under the laws of the United States or of the Delaware General Corporation Law or legal conclusions relating to such laws, accurately summarize and fairly present the legal and regulatory matters described therein; and 13. Neither the Company nor the US Subsidiary is nor will they be immediately after receiving the proceeds from the sale of the Shares, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 2 39 In addition, although we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, we have participated in conferences with officers and other representatives of the Company, at which conferences representatives of the Representatives, counsel to the Underwriters and representatives of the independent certified public accountants of the Company were present, and at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and based upon the foregoing nothing has come to our attention that has caused us to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus, as of its respective date, and as of the date hereof, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that we express no belief with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 3 40 SCHEDULE A [U.S. Underwriters] 41 SCHEDULE B [International Managers] 42 Exhibit III [Form of Opinion of Issuer's German Counsel] 1. SCM Microsystems GmbH, a ______ (the "Company") has been duly organized and is validly existing as ___________ in good standing under the laws of Germany, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of property or the conduct of its business, as known by us, requires such qualification except to the extent that the failure to so qualify would not have a material adverse effect on the Company, and has all power and authority (corporate and other) necessary to own or hold its properties and conduct its business; 2. All of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid, non-assessable and are owned of record by SCM Microsystems, Inc., a Delaware corporation ('SCM Microsystems"), free and clear of all liens, encumbrances, equities or claims; 3. Other than as described in the Prospectus there are no pre-emptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the capital stock of the Company pursuant to the Company's organizational documents or pursuant to any agreement or other instrument; 4. Except as disclosed in the Prospectus, to our knowledge, there are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, could individually or in the aggregate have a material adverse effect on the Company and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The statements in the Prospectus under the heading "Risk Factors -- Proprietary Technology and Intellectual Property" and "Business -- Proprietary Technology and Intellectual Property," insofar as such statements constitute summary descriptions of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents or proceedings and such statements do not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 6. to such counsel's knowledge, the Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and rights described in the Prospectus as being owned by it or necessary for the conduct of its business; and to such counsel's knowledge, except as described in the Prospectus, the Company has not received any notice of infringement of or conflict with and such counsel knows of no infringement of or conflict with asserted rights of others with respect to any such patents, trademarks, service marks or other proprietary information or materials which could result in any material adverse effect on the Company and to the knowledge of such counsel there is no infringement or violation by others of any of the Company's patents, licenses, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could materially affect the use thereof by the Company; 7. the patents have been licensed to the Company as described in the Prospectus, and such licenses are valid, binding and enforceable; and the Company has rights to the products and technology covered thereby as described in the Prospectus; 8. The Company has full corporate power and authority to enter into the Underwriting Agreement and the International Underwriting Agreement and to perform its obligations thereunder, and the Underwriting Agreement and the International Underwriting Agreement have each been duly and validly authorized, executed and delivered by the Company; 9. The execution, delivery and performance of the Underwriting Agreement and the International Underwriting Agreement and the consummation of the transactions contemplated by the Underwriting Agreement and the International Underwriting Agreement will not result in a breach or violation of any of (A) the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust note agreement or other agreement or instrument known to us to which the Company is a 43 party or by which any of its properties is or may be bound, (B) the organizational documents of the Company, or (C) any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties nor will such execution, delivery and performance result in the creation of a lien; 10. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by the Underwriting Agreement or the International Underwriting Agreement. 11. The Prospectus used in connection with the application to list the International Stock on the Neuer Markt of the Frankfurt Stock Exchange and any amendments or supplements thereto comply as to form in all respects with the requirements of German law. 12. The International Stock has been approved for listing on the Neuer Markt of the Frankfurt Stock Exchange. In addition, although we have not undertaken, except as otherwise indicated herein, to determine independently, and do not assume any responsibility for, the accuracy or completeness of the statements in the Registration Statement, we have participated in the preparation of the Registration Statement and the Prospectus (including the German translation version thereof), including review and discussion of the contents thereof, and nothing has come to our attention that has caused us to believe that the Registration Statement at the time the Registration Statement became effective, or the Prospectus (including the German translation version thereof), as of its date and as of the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that any amendment or supplement to the Prospectus (including the German translation version thereof), as of its respective date, and as of the date hereof, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that we express no belief with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). 2 44 SCHEDULE A [U.S. Underwriters] 45 SCHEDULE B [International Managers] 46 Exhibit IV [Form of Intellectual Property Counsel Opinion] 1. The statements in the Prospectus under the heading "Risk Factors - Proprietary Technology and Intellectual Property" and "Business - Proprietary Technology and Intellectual Property," insofar as such statements constitute summary descriptions of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents or proceedings and such statements do not omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; 2. to such counsel's knowledge, the Company owns or possesses all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and rights described in the Prospectus as being owned by it or necessary for the conduct of its business; and to such counsel's knowledge, except as described in the Prospectus, the Company has not received any notice of infringement of or conflict with and such counsel knows of no infringement of or conflict with asserted rights of others with respect to any such patents, trademarks, service marks or other proprietary information or materials which could result in any material adverse effect on the Company and to the knowledge of such counsel there is no infringement or violation by others of any of the Company's patents, licenses, trade secrets, trademarks, service marks or other proprietary information or materials which in the judgment of such counsel could materially affect the use thereof by the Company's and 3. the patents have been licensed to the Company as described in the Prospectus, and such licenses are valid, binding and enforceable; and the Company has rights to the products and technology covered thereby as described in the Prospectus. 47 SCHEDULE A [U.S. Underwriters] 48 SCHEDULE B [International Managers] 49 Exhibit V [Form of Opinion of Selling Stockholders' Counsel] 1. The Underwriting Agreement, the International Underwriting Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement to be executed by the Selling Stockholder each have been duly and validly executed and delivered by or on behalf of each Selling Stockholder. 2. The Underwriting Agreement, the International Underwriting Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up Agreement executed and delivered by the Selling Stockholders each constitute the legal, valid and binding obligation of the Selling Stockholders enforceable against each of the Selling Stockholders in accordance with their respective terms except as the validity, legality and binding effect of each may be limited or otherwise effected by (A) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or laws affecting the enforcement of creditors' rights and remedies generally and (B) the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in law or equity) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. 3. Each of the Selling Stockholders is the record owner of and has marketable title to the Shares to be sold by such Selling Stockholder and, to our knowledge, each Selling Stockholder has full legal right and power to enter into the Underwriting Agreement and the International Underwriting Agreement and to sell, transfer and deliver in the manner provided in the Underwriting Agreement and the International Underwriting Agreement the Shares to be sold by the Selling Stockholders. 4. The transfer and sale by the Selling Stockholders of the Shares to be sold by the Selling Stockholders as contemplated in the Underwriting Agreement and the International Underwriting Agreement will not violate any agreement, judgment, decree, order, statute, rule or regulation which, to the knowledge of such counsel, the Selling Stockholders are a party or by which either Selling Stockholder is bound or subject. 5. All of the Selling Stockholders' rights in the Shares to be sold by such Selling Stockholder, have been transferred to the Underwriters who have severally purchased such Shares, free and clear of adverse claims, assuming that the Underwriters purchased the same in good faith without notice of any adverse claims. 6. To our knowledge, no consent, approval, authorization, license, certificate, permit or order of any court, governmental or regulatory agency, authority or body or financial institution is required in connection with the performance of the Underwriting Agreement or the International Underwriting Agreement by such Selling Stockholder or the consummation of the transactions contemplated therein, including the delivery and sale of the Shares to be delivered and sold by such Selling Stockholder, except such as have been obtained and except such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the several Underwriters. In addition, we have participated in conferences with officers and other representatives of the Company, representatives of the Representatives and representatives of the independent public accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed. While we have not undertaken to independently verify and 50 do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except as specified in the foregoing opinion), on the basis of the foregoing, no facts have come to our attention which lead us to believe that the Registration Statement at the time it became effective (except with respect to the financial statements and notes and schedules thereto and other financial data, as to which we express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus as amended or supplemented (except with respect to the financial statements and notes schedules thereto and other financial data, as to which we express no opinion) on the date thereof and the date hereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2 51 SCHEDULE A [U.S. Underwriters] 52 SCHEDULE B [International Managers] 53 Exhibit VI [Form of Lock-Up Agreement] ----------------------- Print Stockholder Name SCM MICROSYSTEMS, INC. LOCK-UP AGREEMENT Cowen & Company Hambrecht & Quist LLC As representatives of the several Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Re: SCM Microsystems, Inc. Ladies and Gentlemen: In order to induce Cowen & Company ("Cowen") and Hambrecht & Quist LLC (together, the "Representatives"), to enter into a certain underwriting agreement with SCM Microsystems, Inc., a Delaware corporation (the "Company"), with respect to the public offering of shares of the Company's Common Stock, par value $ 0.001 per share ("Common Stock"), the undersigned hereby agrees that for a period of 180 days following the date of the final prospectus filed by the Company with the Securities and Exchange Commission in connection with such public offering, the undersigned will not, without the prior written consent of Cowen, directly or indirectly, (i) offer, sell, assign, transfer, encumber, pledge, contract to sell, register for sale, grant an option to purchase or otherwise dispose of, other than by operation of law, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as the same may be amended or supplemented from time to time (such shares, the "Beneficially Owned Shares") or (ii) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall not apply to shares of the Company's Common Stock (i) acquired through the Company's directed shares program or (ii) acquired on the open market and that shares so acquired may be sold or otherwise disposed of without regard to this Agreement. Notwithstanding the foregoing, if the undersigned is an individual, he or she may transfer any Shares either during his or her lifetime or on death by will or intestacy to his or her immediate family or to a trust the beneficiaries of which are exclusively the undersigned and/or a member of his or her immediate family or to a charitable organization; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding 54 the Shares transferred subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. For purposes of this Agreement, "immediate family" shall mean spouse, lineal descendant, father, mother, brother or sister of the transferor and "charitable organization" shall mean an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, if the undersigned is a partnership, the partnership may transfer any Shares to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, and any partner who is an individual may transfer such Shares by gift, will or intestate succession to his or her spouse or lineal descendants or ancestors; and if the undersigned is a corporation, the corporation may transfer such Shares to any stockholder or subsidiary of such corporation and any stockholder who is an individual may transfer Shares by gift, will or intestate succession to his or her immediate family or to a charitable organization; provided, however, that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Shares except in accordance with this Agreement. The undersigned agrees that the provisions of this Agreement shall be binding also upon the successors, assigns, heirs and personal representatives of the undersigned. The undersigned agrees and consents to the placing of legends and/or the entry of stop transfer instructions with the Company's transfer agent against the transfer of any shares of Common Stock or Beneficially Owned Shares held by the undersigned except in compliance with this Agreement. It is understood that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, you will release us from our obligations under this Agreement. This Agreement shall terminate and be of no further force or effect in the event that the offering contemplated by the Underwriting Agreement is not completed on or before October 30, 1997. Very truly yours, -------------------------------------- (Signature) -------------------------------------- (Title) -------------------------------------- (Date) 2 EX-10.20 4 FORM OF AMENDMENT TO THE PARTNERSHIP AGREEMENT 1 EXHIBIT 10.20 AMENDMENT AGREEMENT This Amendment Agreement ("Agreement") is made as of ______________, 1997 (the "Effective Date") by and between SCM Microsystems, Inc. (the "Company"), SCM Microsystems GmbH, a wholly-owned subsidiary of the Company (the "Subsidiary") and Technologie-Beteiligungs-Gesellschaft mbH der Deutschen Ausgleichsbank ("TBG"). WHEREAS, the Subsidiary and TBG have entered into a Participation Agreement dated October 22, 1993 (the "1993 Participation Agreement") and a Participation Agreement dated June 8, 1995 (the "1995 Participation Agreement") (each a Participation Agreement, and together, the "Participation Agreements"); WHEREAS, the Subsidiary has borrowed an aggregate of DM 4,000,000 from the TBG pursuant to the Participation Agreements (the "Principal Amount"); WHEREAS, the Company is currently undertaking an initial public offering of its Common Stock (the "IPO"); WHEREAS, the Subsidiary, the Company and TBG agree to amend the Participation Agreements in order to facilitate the IPO; NOW THEREFORE, in consideration of the mutual promises made herein, the Subsidiary, the Company and TBG (collectively referred to as "the Parties") hereby agree as follows: 1. Termination. The Subsidiary, the Company and TBG hereby terminate Sections 9 and 12.1 of the 1993 Participation Agreement and Sections 9 and 12.1 of the 1995 Participation Agreement pursuant to Section 14.1 of each respective Participation Agreement. 2. Payment of the Principal Amount. Notwithstanding the repayment provisions of the Participation Agreements, in the event that the Company completes an IPO while amounts remain outstanding under the Participation Agreements, the Company agrees to pay the Principal Amount, together with accrued interest as provided in Section 3 below, to TBG within 45 days following completion of the IPO. In addition, the Company may pre-pay the Principal Amount and accrued interest at any time without penalty. 3. Payment of Interest. The Company agrees to pay interest on the Principal Amount as follows: 5% interest per annum in regard of the DM 1,000,000 borrowed by the Subsidiary pursuant to the 1993 Participation Agreement and 6% interest per annum in regard of the DM 3,000,000 borrowed by the Subsidiary pursuant to the 1995 Participation Agreement. Interest will accumulate and will be paid at such time as the Principal Amount is repaid. 4. Warrant. In consideration of TBG's agreement to terminate Sections 9 and 12.1 of each Participation Agreement, concurrent with the execution of this Agreement the Company will issue to TBG a warrant representing the right to purchase 138,000 (one hundred thirty eight thousand) shares of the Company's Common Stock (the "Warrant"). The Warrant will be exercisable at $5.72 per share of the 2 Company's Common Stock (the "Exercise Price") and will expire two years from the Effective Date. The form of Warrant to be issued is attached hereto as Exhibit A. The shares of the Company's Common Stock issuable upon the exercise of the Warrant will, upon issuance and receipt of the Exercise Price therefor, be fully paid and nonassessable. During the period within which the Warrant may be exercised, the Company shall at all times have authorized and reserved for issuance sufficient shares of its Common Stock to provide for the exercise of the Warrant. 5. Investment Representations of TBG. 5.1. Experience. TBG has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. 5.2. Investment. TBG is acquiring the Warrant and the shares of Common Stock issuable upon exercise of the Warrant (the "Shares") for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. TBG understands that the Warrant and the Shares have not been, and will not be, registered under the Securities Act of 1933, as amended (the "Act"). 5.3. Rule 144. TBG acknowledges that the Warrant and the Shares must be held indefinitely unless subsequently registered under the Act or unless an exemption from such registration is available. TBG is aware of the provisions of Rule 144 promulgated under the Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three-month period not exceeding specified limitations. 6. Confidential Information. TBG shall maintain the confidentiality of all confidential and proprietary information of the Company made available to it pursuant to Section 6 of each Participation Agreement. 7. No Other Modifications. Except as modified by this Agreement, the Participation Agreements shall remain unmodified and in full force and effect. 8. Amendments. This Agreement may only be amended by a written instrument signed by each of the parties. 9. Governing Law. This Agreement shall be governed by the laws of the Federal Republic of Germany. -2- 3 10. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. SCM MICROSYSTEMS GMBH By_______________________________ SCM MICROSYSTEMS, INC. By_______________________________ TECHNOLOGIE-BETEILIGUNGS- GESELLSCHAFT M.B.H. By_______________________________ -3- 4 EXHIBIT A SCM MICROSYSTEMS, INC. COMMON STOCK WARRANT NO. 1997C-1 VOID AFTER___________________, 1999 THIS WARRANT AND THE SHARES WHICH MAY BE PURCHASED UPON THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT. THIS CERTIFIES THAT, for value received, Technologie-Beteiligungs-Gesellschaft m.b.H. (the "HOLDER") is entitled to subscribe for and purchase 138,000 (one hundred thirty eight thousand) shares of fully paid and nonassessable Common Stock of SCM Microsystems, Inc., a Delaware company (the "COMPANY"), at an exercise price of US$5.72 per share. Such number of shares and exercise price shall be subject to adjustment as provided in Section 3 below. 1. Method of Exercise; Payment. (a) Cash Exercise. The purchase rights represented by this Warrant may be exercised by the Holder, in whole or in part, by the surrender of this Warrant (with the notice of exercise form attached hereto as EXHIBIT A duly executed) at the principal office of the Company, and by the payment to the Company, by certified, cashier's or other check, of an amount equal to the aggregate Exercise Price for the number of shares of Common Stock being purchased. (b) Net Issue Exercise. In lieu of exercising this Warrant in a cash exercise, the Holder may elect to exercise this Warrant, in whole or in part, on a "net exercise" basis, and upon such net exercise shall be entitled to receive shares equal to the value of the portion of this Warrant so canceled. Such net exercise shall be effected by surrender of this Warrant at the principal office of the Company together with notice of election to exercise by means of a net issuance exercise, in which event the Company shall issue to the Holder a number of shares of the Common Stock of the Company computed using the following formula: X = Y (A-B) ------ A Where X = the number of shares of Common Stock to be issued to the Holder. Y = the number of shares of Common Stock purchasable under this Warrant to be canceled upon such net exercise. 5 A = the Fair Market Value of one share of Common Stock on the date of exercise. B = the Exercise Price (as adjusted to the date of such calculation). For purposes of this Warrant, the Fair Market Value of the Common Stock shall mean such fair market value as is reasonably determined by the Board of Directors of the Company in good faith from time to time, provided that upon an exercise of the Warrant after the effectiveness of the Company's initial public offering, Fair Market Value shall mean the closing price quoted on any exchange on which the Common Stock is listed as published in the Wall Street Journal for the ten trading days prior to the date of determination of fair market value. (c) Stock Certificates. In the event of any exercise of the rights represented by this Warrant, certificates for the Common Stock so purchased shall be delivered to the Holder within a reasonable time and, unless this Warrant has been fully exercised or has expired, a new Warrant representing the shares with respect to which this Warrant shall not have been exercised shall also be issued to the Holder within such time. (d) Fractional Shares. The Warrant may not be exercised for fractional shares. 2. Representations and Warranties of the Company. The Company represents and warrants to the Holder as follows: (a) Stock Fully Paid; Reservation of Shares. All of the Common Stock issuable upon the exercise of the rights represented by this Warrant will, upon issuance and receipt of the Exercise Price payable therefor, be fully paid and nonassessable. During the period within which the rights represented by this Warrant may be exercised, the Company shall at all times have authorized and reserved for issuance a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. (b) Corporate Power. The Company will have at the Closing Date all requisite legal and corporate power to execute and deliver this Warrant, to sell and issue the shares of Common Stock hereunder and to carry out and perform its obligations under the terms of this Warrant. (c) Authorization. All corporate action on the part of the Company, its directors and stockholders necessary for the authorization, execution, delivery and performance of this Warrant by the Company, the authorization, sale, issuance and delivery of the shares of Common Stock and the performance of the Company's obligations hereunder has been taken or will be taken promptly after the date hereof. This Warrant, when executed and delivered by the Company, shall constitute a valid and binding obligation of the Company enforceable in accordance with its terms. 3. Adjustment of Exercise Price and Number of Shares. (a) Stock Splits, Etc. In the event that the Company shall, at any time after the original issuance date of this Warrant, subdivide the outstanding shares of Common Stock or issue a -2- 6 stock dividend on its outstanding shares of Common Stock payable in shares of Common Stock, then the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such subdivision or the issuance of such stock dividend shall be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the Company shall, at any time after the original issuance date of this Warrant, combine the outstanding shares of Common Stock then the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such combination shall be proportionately decreased, and the Exercise Price shall be proportionately increased, effective at the close of business on the date of such subdivision, stock dividend or combination, as the case may be. (b) Reclassifications, Etc. In the case of any reclassification, recapitalization or change of the Common Stock (other than any action for which adjustment is made pursuant to Section 3(a) hereof), the Company shall execute a new warrant providing that the Holder of this Warrant shall have the right to exercise such new warrant and to procure upon such exercise and payment of the same aggregate Exercise Price, in lieu of the shares of Common Stock theretofore exercisable upon exercise of this Warrant, the kind and amount of shares, other securities, money or property receivable upon such reclassification, recapitalization or change of the Common Stock. (c) Notice of Adjustments. Whenever the number of shares of Common Stock purchasable hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 3, the Company shall provide notice to the Holder setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the number of shares of Common Stock which may be purchased and the Exercise Price therefor after giving effect to such adjustment. 4. Representations and Warranties by the Holder. The Holder represents and warrants to the Company as follows: (a) This Warrant and the shares of Common Stock issuable upon exercise hereof are being acquired for the Holder's own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Act. Upon exercise of this Warrant, the Holder shall, if so requested by the Company, confirm in writing, in a form satisfactory to the Company, that the securities issuable upon exercise of this Warrant are being acquired for investment and not with a view toward distribution or resale. (b) The Holder understands that the Warrant and the shares of Common Stock issuable on exercise hereof have not been registered under the Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Act pursuant to Section 4(2) thereof, and that they must be held by the Holder indefinitely, and that the Holder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Act or is exempted from such registration. The Holder further understands that the shares of Common Stock issuable on exercise hereof have not been qualified under the blue sky laws of any jurisdiction by reason of their issuance in a transaction exempt from the qualification -3- 7 requirements of such blue sky laws, which exemption depends upon, among other things, the bona fide nature of the Holder's investment intent expressed above. (c) The Holder has such knowledge and experience in financial and business matters that the Holder is capable of evaluating the merits and risks of the purchase of this Warrant and the shares of Common Stock purchasable pursuant to the terms of this Warrant and of protecting the Holder's interests in connection therewith. (d) The Holder is able to bear the economic risk of the purchase of the Common Stock issuable on exercise of this Warrant. (e) The Holder understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company's securities. (f) The Holder knows of no public solicitation or advertisement of an offer in connection with the proposed issuance and sale of the Warrant or the Shares. 5. Restrictive Legend. The Common Stock issuable on exercise of this Warrant shall (unless registered under the Act) be stamped or imprinted with a legend in substantially the following form: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY." The Company need not register a transfer of this Warrant or shares of Common Stock issued on exercise of this Warrant unless the conditions specified in the legend above are satisfied and, at the discretion of the Company, the Company has received such representations from the transferee as the Company reasonably deems necessary to ensure compliance with applicable securities laws. 6. Rights of Stockholders. No holder of this Warrant shall be entitled as a Warrant holder, to vote or receive dividends or be deemed the holder of the shares of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor -4- 8 shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 7. Expiration of Warrant. This Warrant shall expire and shall no longer be exercisable on 5:00 p.m., German local time, on July __, 1999. 8. Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) fifteen (15) days after deposit with the U.S. Postal Service, the Postal Service of the Federal Republic of Germany, or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) two (2) business days after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one (1) business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by Federal Express or similar overnight courier, freight prepaid, and shall be addressed (i) if to the Holder, at the Holder's address as set forth beneath the Holder's signature to this Warrant, and (ii) if to the Company, at the address of its principal corporate offices (attention: Company Secretary), or at such other address as the Company shall have furnished to the other parties hereto in writing. 9. Governing Law. This Warrant and all actions arising out of or in connection with this Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state. Issued this ____ day of_____________, 1997. SCM MICROSYSTEMS, INC. By:_________________________ Title:______________________ ACCEPTED: _______________________________ By:____________________________ Title:_________________________ -5- 9 EXHIBIT A NOTICE OF EXERCISE TO: SCM Microsystems, Inc. 131 Albright Way Los Gatos, CA 95032 Attention: President 1. The undersigned hereby elects to purchase __________ shares of Common Stock of SCM Microsystems, Inc. (the "COMPANY") pursuant to the terms of the attached Warrant. 2. Method of Exercise (Please initial the applicable blank): ___ The undersigned elects to exercise the attached Warrant by means of a cash payment, and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any. ___ The undersigned elects to exercise the attached Warrant by means of the net exercise provisions of Section 1(b) of the Warrant. 3. Please issue a certificate or certificates representing said shares of Common Stock in the name of the under signed or in such other name as is specified below: --------------------------------------- (Name) --------------------------------------- --------------------------------------- (Address) 4. The undersigned hereby represents and warrants as follows: (a) The shares of Common Stock being acquired hereby (the "SECURITIES") are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares. (b) All representations and warranties of the undersigned set forth in Section 4 of the attached Warrant are true and correct as of the date hereof. (c) The undersigned is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The undersigned is purchasing the Securities for the undersigned's own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "ACT"). (d) The undersigned understands that the Securities have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of its investment intent as expressed herein. In this connection, the undersigned understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if its representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax 10 statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (e) The undersigned further understands that the Securities must be held indefinitely unless subsequently registered under the Act or unless an exemption from registration is otherwise available. Moreover, the undersigned understands that the Company is under no obligation to register the Securities. In addition, the undersigned understands that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (f) The undersigned is familiar with the provisions of Rule 144, promulgated under the Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. The Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things, except as otherwise provided by section (k) of such Rule 144: (1) the availability of certain public information about the Company, (2) the resale occurring not less than one (1) year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, (3) in the case of an affiliate, or of a non-affiliate who has held the securities less than two (2) years, the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three (3) month period not exceeding the specified limitations stated therein, if applicable. (g) The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. By:_________________________ Title:______________________ Date:_______________________ -2- 11 EXHIBIT B FORM OF TRANSFER (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _______________________________________________ the right represented by the attached Warrant to purchase ____________ shares of the Common Stock of SCM Microsystems, Inc. to which the attached Warrant relates, and appoints ______________ Attorney to transfer such right on the books of SCM Microsystems, Inc. with full power of substitution in the premises. Dated: ____________________ ________________________________________ (Signature must conform in all respects to the name of the Holder as specified on the face of the Warrant) ________________________________________ ________________________________________ (Address) Signed in the presence of: ______________________________________ EX-10.24 5 DEVELOPMENT AND SUPPLY AGREEMENT DATED 10/09/96 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 [*] prototypes of the module. Half of the prototypes shall, in addition to the foregoing description, be equipped with [ * ]. For this purpose, BetaDigital shall provide [ * ] which have already been delivered shall be offset against this amount. Upon availability of a new version of the [ * ] BetaDigital shall provide such new version; SCM shall be obligated to incorporate the newest version of the [ * ] into the development of the [ * ] and later serial fabrication. BetaDigital shall supply [ * ]. Each module shall be provided with the label [ * ] 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 [ * ], 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 [ * ] arising in connection with the development of the module, including the [ * ]; said use right shall be [ * ]. * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2 The provisions of Sections 69 a and 69 b UrhG [German Copyright Act] and Sections 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 [ * ] and shall do so in such a manner that serial fabrication shall be [ * ]. 7. Acceptance of the prototypes shall take place with the help of the performance description in section 1, above, within a period of [ * ] following delivery of the prototypes. 8. The [ * ] 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 [ * ] in accordance with the [ * ] provided. The delivery of [ * ] shall not include a right on the part of SCM to utilize, use or transfer any existing copyrights. 9. The development, manufacture and delivery of prototypes shall be carried [ * ]. * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3 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 [ * ] 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 [ * ] 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 [ * ] 4. The per module price of the pilot series shall be DM [*]. It shall be understood that this price does not include the [ * ] 5. Delivery shall be made at the expense and risk of [ * ] to Nokia Satellite Systems AB, Manvagen, 59183 Motola, 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 ([ * ] 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. 4 III. ORDER QUANTITY [ * ] 1. BetaDigital shall [ * ] order [ * ] modules (less the pilot series) between[ * ] and [ * ]. The following shall fall within said order quantity [ * ]: - 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 [ * ], the parties hereby agree among themselves upon a price per module of DM [ * ]. It shall be understood that this price does not include the [ * ] to be provided by BetaDigital. 3. SCM shall [ * ] 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 [*] 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 [ * ], the parties hereby agree among themselves upon a price determination by BetaDigital as follows: [ * ] - It is intended that the price determination [ * ] in advance by BetaDigital--[ * ] after sending the [ * ], if possible. 5. If the order quantity [ * ] 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 processing, BetaDigital shall receive [ * ] in accordance with the components provided. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5 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 [ * ], 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 [ * ] 1. The lot size shall be [ * ] units. 2. The delivery times shall be a maximum of [ * ] 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 [ * ] 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 [ * ] 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 [ * ] 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 [ * ] a timely manner. Acceptance shall be carried out by [ * ] in the capacity of representative of BetaDigital. Checking shall be done by means of random samples [ * ] 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 [ * ] 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. 6 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 [ * ] German marks for personal injury and property damage and up to a maximum of DM [ * ] 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 [ * ] 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 [ * ], 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 [ * ] 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 hereof. 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. 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. 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 * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.28 6 TECHNOLOGY OPTION AGREEMENT 1 EXHIBIT 10.28 [LOGO] AGREEMENT between Mr. Wolfgang Neifer Rosenstrasse 9a 85354 Freising - - Licensor - and SCM Microsystems GmbH Luitpoldstrasse 6 85276 Pfaffenhofen - - Licensee - PREAMBLE The Licensor is the holder or co-holder of the industrial property rights and industrial property right applications listed in the appendix to this agreement (hereinafter referred to as the "industrial property rights"). In view of the planned hiring of the Licensor in an employment relationship as a salaried employee of the Licensee, the Licensor hereby grants the Licensee an option to exploit the industrial property rights subject to the conditions set forth below. 1. INDUSTRIAL PROPERTY RIGHTS The Licensor hereby declares that the list in the appendix to this agreement contains all industrial property rights of which he is the solely entitled holder, to the extent that they relate to subject matters which affect the activities of the Licensee. The Licensor shall provide the Licensee with copies with all industrial property right documents by no later than the time of signing the agreement, including documents for not yet published applications. 2. OPTION The Licensor hereby grants the Licensee an option to conclude a license agreement to exploit the industrial property rights. For a period of six months after signing this agreement, the option shall include the right to conclude an exclusive license agreement. During this period, the Licensor shall not offer or grant a third party a license to one or more industrial property rights. Following an expiration of six months, an option shall exist to conclude a non-exclusive license agreement to the industrial property rights for an indefinite period. The Licensor shall not grant third parties an exclusive license to one or more industrial property rights. 2 [LOGO] 3. MAINTENANCE OF INDUSTRIAL PROPERTY RIGHTS It shall be the responsibility of the Licensor to maintain the industrial property rights and take all measures necessary to acquire and defend them. The Licensee shall reimburse the Licensor for the costs incurred in acquiring, maintaining and defending industrial property rights concerning which a license agreement is concluded. The Licensee shall determine the patent law firm. If the Licensor intends to relinquish an industrial property right, he shall first offer the Licensee the right to assume it in exchange for reimbursement of all costs incurred to that point in time in acquiring, maintaining and defending it. 4. TERMS OF THE LICENSE AGREEMENT The license agreement shall be concluded subject to customary terms and conditions. A license rate of 1-2% of the invention-specific sales portion (less industrial property right costs) shall be viewed as customary. "Invention-specific" shall be those portions of a product or a process which are substantially characterized by the invention. In the case of particularly high sales, a graduated scale shall be created by application mutatis mutandis of guideline 11 of the Act of 7/25/57 on Employee Inventions. The Licensee may grant sub-licences to licence agreements which have been concluded and extend the license to affiliated firms of the SCM group. 5. INVENTIONS DURING THE EMPLOYMENT RELATIONSHIP In the case of inventions which the Licensor makes during the term of the employment relationship, the provisions in this regard of a separate employment contract shall apply. 6. TERM OF THE AGREEMENT This agreement shall begin when it is signed by both parties and shall end at the end of the employment relationship which is the subject matter of the separate employment contract. The term of license agreements which are concluded shall be independent of this agreement and shall be based upon the respective license agreement. Pfaffenhofen, 1/31/97 (Place, date) 1/31/97 [sig] [signature] - ------------------------- ------------------------- SCM Microsystems GmbH (signature of the Licensor) 3 ADDENDUM TO THE AGREEMENT BETWEEN SCM AND NEIFER, DATED JANUARY 31, 1997. Both parties agree to extend the term of the option defined in Section 2 of the Agreement from six to nine months. /s/ signature /s/ W. Neifer ----------------------------- Dipl.Ing. W. Neifer SCM EX-10.32 7 LICENCE AGREEMENT, DATED SEPTEMBER 1997 1 EXHIBIT 10.32 PATENT LICENSE AGREEMENT This Patent License Agreement is made and entered into as of September 5, 1997, by and between GEMPLUS SCA, incorporated under the laws of France, having its head office located Pare d'Activite de la Plaine de Jouques, Avenue du Pic de Bertagne, 13420 Gemanos, France, represented by Mr. Marc LASSUS, (hereinafter referred to as "GEMPLUS" which for purposes of this Patent License Agreement includes all current subsidiaries, parents or affiliates controlling, controlled by or under common control with GEMPLUS), and SCM MICROSYSTEMS, INC., a Delaware corporation, having its head office located 131 Albright Way, Los Gatos, CA 95032, USA, represented by Mr. Robert SCHNEIDER, (hereinafter referred to as "SCM" which for purposes of this Patent License Agreement includes all current subsidiaries, parents or affiliates controlling, controlled by or under common control with SCM MICROSYSTEMS, INC.) PREAMBLE Whereas SCM has marketed and is still selling PCMCIA products which GEMPLUS alleges to be infringing certain intellectual property rights belonging to GEMPLUS. Whereas GEMPLUS has started a legal action against SCM before the Court of Marseille, claiming patent infringement. Whereas SCM and GEMPLUS desire to resolve the matter in friendly terms by entering into certain agreements, including this Patent License Agreement. NOW THEREFORE GEMPLUS AND SCM HEREBY AGREE AS FOLLOWS: SECTION 1 - DEFINITIONS The following definitions shall apply to this Agreement: "GEMPLUS PATENTS" shall mean the patents and patent applications as listed in Exhibit A attached to this Agreement, and/or any divisions, extensions, continuations, continuations-in-part or reissues thereof. 2 "SCM PATENTS" shall mean the SCM patents and patent applications as listed in Exhibit B attached to this Agreement, and/or any divisions, extensions, continuations, continuations-in-part or reissues thereof. "SCM PATENTS" shall include certain patents and/or patent applications not owned by SCM, but for which SCM has been granted or has the option to be granted access through license rights with a right to sublicense, but shall exclude patents and/or patent applications for which SCM has no current right(s) to sublicense provided that (i) SCM identifies to Gemplus such non-sublicensable patents or patent applications within ten (10) days of the date of this Agreement, and (ii) SCM uses reasonable efforts to obtain sublicense rights for such patents or patent applications requested by Gemplus. SCM patents shall also exclude inventions listed on Exhibit B hereto as "planned-for-filing" unless an application covering such invention(s) is filed on or before December 31, 1997. "LICENSED PATENTS" shall mean either SCM PATENTS or GEMPLUS PATENTS, as the case may be. "LICENSED PRODUCTS" means any and all products and/or devices which employ or are produced by the practice of inventions claimed in the Licensed Patents, and if made, used or sold in the absence of the license granted under this Agreement would infringe one or more of the Licensed Patents. [*] means the [*] of any Licensed Product, [ * ]. "Sell", "sold", "sale" means to sell, lease, issue or otherwise dispose of the Licensed Products to end users, either directly or through the use of distributors. A sale shall be deemed to have occurred as of the date of shipment by SCM or on the date of dispatch of a bill or invoice, whichever occurs first. "TERRITORY" shall mean any country where any of the GEMPLUS PATENTS is filed. SECTION 2 - GRANT OF LICENSE 2.1. GEMPLUS hereby grants to SCM and SCM hereby accepts from GEMPLUS, upon terms and conditions specified herein, a non-exclusive, worldwide, non- transferable license under the GEMPLUS PATENTS, to develop, make, have made for sale by it, directly or through its original equipment manufacturers ("OEMs") and other distribution channels, to use and to sell products and/or devices which employ or are produced by the practice of inventions claimed in GEMPLUS PATENTS, and if made, used or sold in the absence of the license granted under this Agreement would infringe one or more of the GEMPLUS PATENTS. Such license is to be effective throughout the period of pendency of the GEMPLUS PATENTS and to the end of the full term of each of the GEMPLUS PATENTS. The License granted to SCM is granted without the right to sublicense. 2.2 SCM MICROSYSTEMS INC. hereby grants to GEMPLUS and GEMPLUS hereby accepts from SCM, upon terms and conditions specified herein, a non-exclusive, worldwide, non-transferable license, under the SCM PATENTS, to develop, make, have made for sale by it, directly or through its original equipment manufacturers ("OEMs") and other distribution channels, to use and to sell products and/or devices which employ or are produced by the practice of inventions claimed in the SCM PATENTS, and if made, used or sold in the absence of the license granted under this Agreement would infringe one or more of the SCM PATENTS. Such license is to be effective throughout the period of pendency of the SCM PATENTS and to the end of the full term of each of the SCM PATENTS. [*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION, CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3 The license granted to GEMPLUS is granted without the right to sublicense. SECTION 3 - CONSIDERATION 3.1 In consideration of the license granted by GEMPLUS to SCM under Section 2.1 above, SCM hereby agrees to pay a running royalty per each unit of Licensed Product manufactured and/or sold by SCM in the Territory and calculated on the [*] of such Licensed Product, according to TABLE 1 below. Up to a cumulative royalty amount of US $[*] to be calculated according to Table 1 below, the royalties shall be deemed to have been prepaid. Any royalty beyond the initial prepaid US $[*] shall be due and paid to GEMPLUS as provided for below: The royalty rate applied to Licensed Products is calculated according to the application field for which the Licensed Product is to be used. Two Application Fields are defined: - - Application Field called [*], defined as Licensed Products used in [*] applications and/or appliances; - - Application Field called [*], defined as Licensed Products used in connection with any application not defined as [*], such as, without limitation, [*] applications. TABLE 1
Cumulative [ * ] of Product [*] Royalty Rate (%) [*] Royalty Rate (%) - ------------------------------- -------------------- ------------------------ [*] [*] [*]
3.2 The license from SCM to GEMPLUS under Section 2.2 above is granted in consideration for a lumpsum of [*], fully prepaid. 3.3 Royalty payments All royalties to GEMPLUS shall be in US$ and shall be exclusive of taxes and SCM agrees to bear and be responsible for the payment of all such taxes, including, but not limited to, all sales, use, rental receipt personal property or other taxes and their equivalents which may be levied or assessed in connection with this Agreement excluding only taxes based on GEMPLUS's net income. - -------------------- * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILLED SEPARATELY WITH THE COMMISSION, CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4 Within thirty (30) days after the end of each calendar quarter, SCM shall submit a royalty report which shall be certified by an authorized representative of SCM and shall state the number of Licensed Products manufactured and/or sold in the Territory and the corresponding aggregate royalties. All royalty payments are due to GEMPLUS for each calendar quarter within thirty (30) days after receipt of the royalty report. It is agreed by the Parties that all computations relating to determination of the amounts of royalties due and payable under the Agreement shall be made in accordance with internationally recognized and generally accepted accounting principles. During the term of this Agreement, SCM shall maintain complete and accurate records with respect to the sales of Licensed Products. GEMPLUS shall be entitled upon ten (10) days prior written notice to audit the records of SCM at any time during the term of this Agreement but no more than once a year and for the sole purpose of confirming the accuracy of payments due hereunder. Any such audit shall be performed during normal business hours and at GEMPLUS's expenses, provided, however, if such audit reveals any underpayment of five percent (5%) or more of the amount that should have been paid to GEMPLUS for the period audited, then SCM shall bear the expense of such audit. If any payment due to GEMPLUS is delayed, GEMPLUS reserves the right to charge interest on a date to date basis from the original due date at one percentage point higher than the prime interest rate as quoted by the head office of Citibank N.A., New York, at the close of banking on such date, and to suspend shipments or require cash on delivery for any subsequent deliveries hereunder. SECTION 4 - IMPROVEMENTS 4.1.1. If at any time during the term of this Agreement any improvement to any GEMPLUS PATENTS is specified by GEMPLUS, GEMPLUS may file an application for such improvement and the provisions of this License Agreement shall apply to any such application and patented improvements provided that such improvement is made within 5 years after the effective date of this Agreement. Both parties will consider the possibility to enter into a new licensing agreement regarding improvements patented after the five year period. 4.1.2. If at any time during the term of this Agreement any improvement to any SCM PATENT, is specified by SCM, SCM may file an application for such improvement and the provisions of this License Agreement shall apply to such application and patented improvements provided that such improvements are made within 5 years of the effective date of this Agreement. Both parties will consider to enter into a new licensing agreement regarding improvements patented after the five year period. For the purposes of this Section 4, an improvement is defined as any patentable improvement to the LICENSED PATENTS which legally depends on the LICENSED PATENTS, meaning that such patentable improvement cannot be used, implemented and 5 5 otherwise disposed of without infringing one or more of the claims of the initial LICENSED PATENTS. Section 5 - Maintaining obligations GEMPLUS and SCM hereby undertake to use reasonable commercial efforts to maintain at all times and at their respective expenses their respective LICENSED PATENTS in the countries where may have been filed except where the final Patent(s) are not issued by the relevant patent office. Section 6 - Warranty and liability GEMPLUS warrants and represents that: (i) it owns and has all valid right, title and interest in and to the GEMPLUS PATENTS, (ii) it will diligently prosecute the applications for the GEMPLUS PATENTS, and (iii) there is no existing or threatened litigation pending against GEMPLUS with respect to the GEMPLUS PATENTS. SCM warrants and represents that: (i) except as set forth in the definition of "SCM PATENTS" in Section 1 of this Agreement and in Exhibit B attached hereto, SCM owns or possesses sufficient legal rights, title and interest in and to the SCM PATENTS, (ii) it will diligently prosecute the applications for the SCM PATENTS, and (iii) there is no existing or threatened litigation pending against SCM with respect to the SCM PATENTS. The parties agree that nothing in this Agreement is or shall be construed as: (i) a warranty or representation by either party as to the validity or scope of the LICENSED PATENTS; (ii) any warranty or representation by either party that anything made, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement of patents, copyrights, and other rights of third parties; (iii) an obligation on the part of either party to bring or prosecute actions or suits against third parties for infringement; or (iv) granting by implication, estoppel or otherwise any licenses under the patents owned by either party other than the LICENSED PATENTS. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, GEMPLUS AND SCM MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF DEVICES THAT PRACTICE THE LICENSED PATENTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER RIGHTS. Any warranty made by one party to its customers, users of Licensed Products or any third-parties are made by such party alone and shall not bind the other party or be deemed or trusted as having been made by the other party, and service of any such warranty shall be the sole responsibility of the party having made the warranty. Section 7 - Name - Trademarks 6 Each party shall legibly mark the Licensed Products with the relevant patent or application numbers or markings to satisfy the laws of each country of the Territory with the intent that neither party shall be precluded from claiming any loss or damages in any action. Nothing in this Agreement shall be construed as granting to SCM any right or privilege to use the trademarks, tradenames or logos of GEMPLUS, and nothing in this Agreement shall be construed as granting to GEMPLUS any right or privilege to use the trademarks, tradenames or logos of SCM. SECTION 8. TERM -- TERMINATION 8.1 This Agreement shall come into force and effect on the date of its signature by both parties and shall expire, unless earlier terminated as provided for in paragraph 8.2 below, or as otherwise stated in this Agreement, on the expiration date of the last to expire of the LICENSED PATENTS. 8.2 Either party (the "Terminating Party") shall have the right to terminate this Agreement -- (i) upon written notice if the other party (the "Terminated Party") defaults in the performance of any of the material terms or conditions of this Agreement and shall fail to remedy such default within (30) days after receipt of notice in writing from the other party of the default complained of, which notice shall specify the details of such default and of the intention of the party serving the notice to terminate this Agreement under this paragraph, unless such default is so remedied; or -- (ii) immediately without notice, if the Terminated Party becomes insolvent or goes into liquidation or receivership or is admitted to the benefits of any procedure for the settlement or postponement of any debts or is declared bankrupt or ceases to do business. 8.3 Effect of Termination: Upon termination of this Agreement by one party under paragraph 8.2, the license granted by the Terminating Party under its LICENSED PATENTS and/or its patented improvements if any, shall terminate and be of no further effect, but any license granted by the Terminated Party under its LICENSED PATENTS and its patented improvements if any, shall survive in accordance with the terms of this Agreement. 8.4 Surviving any expiration or termination of this Agreement are (i) SCM's obligation to continue submitting reports and making payment of royalties accrued prior to expiration or termination, as described in Section 3; (ii) The provisions of Sections 3.3, 6, 7, 9, 10 and 12. 7 7 Section 9 - Limitation of liability In no event shall either party be liable to the other party or any third parties for indirect, special or consequential damages, including without limitation, any damage or injury to business earnings, profits or goodwill suffered by any person arising from any use of the LICENSED PATENTS, no matter what theory of liability. The provisions of this Section 9 allocate the risks under this Agreement between GEMPLUS and SCM and the parties have relied upon the limitations set forth herein in determining whether to enter into this Agreement. Section 10 - Applicable law - Disputes This Agreement shall be governed by and construed in accordance with the laws of France, without any reference to the choice-of-law provisions. Section 11 - Notices All notices, reports, requests, approvals and other communications required or permitted under this Agreement must be in writing. They will be considered as given (a) when delivered personally, (b) when sent by facsimile, or (c) twenty-four (24) hours after having been sent by commercial overnight courier with written verification of receipt. All such notices shall be addressed as follows: SCM MICROSYSTEMS, INC. 131 Albright Way, Los Gatos, CA 95032, USA and if to GEMPLUS, addressed to: GEMPLUS SCA, Legal Department Parc d'Activites de la Plaine de Jouques, Avenue du Pic de Bartagne, 13420 Gemenos, France or to such other addresses either Party shall from time to time, furnish in writing to the other for such purpose. Section 12 - Miscellaneous 12.1. This Agreement and the Exhibits thereto constitutes the complete and final agreement between the parties with respect to the subject matter hereof and supersedes all previous understanding relating to the subject matter hereof whether oral or written. 12.2. Any modifications of or amendment to this Agreement requires written form signed by duly authorized representatives of both parties. 12.3. If any provision of this Agreement should now or in the future be considered as ineffective or void, this shall not affect the validity of the remaining provisions. Any invalid provisions shall be replaced by lawful and legally effective provisions suited to achieve the 8 legal and economic results intended by the ineffective provisions. This shall also apply for any omission in this Agreement to be remedied. 12.4. This Agreement shall not be assignable without the prior written consent of the other party. This Agreement shall be binding upon all legal successors and assigns of the parties. 12.5. Each Party undertakes to treat the terms and conditions of this Agreement as strictly confidential and not disclose them to any third party other than its attorneys, accountants, bankers and investors or potential investors, neither completely nor partially, without the prior written consent of the other Party or otherwise as required by Law. 12.6. SCM and GEMPLUS agree to comply with all Export Administration Regulations of the United States Department of State, and all other United States government regulations relating to the export of technical data and equipment and products produced therefrom, which are applicable to SCM or GEMPLUS with regard to any distribution of the Licensed Products by SCM or GEMPLUS under the Licensed Patents. 12.7. Nothing herein contained shall be construed to require SCM or GEMPLUS to exploit the rights licensed hereunder. 12.8. It is understood and agreed that, notwithstanding any other provisions of this Agreement, breach of this Agreement may cause the other party irreparable damage for which recovery of money would be inadequate, and that the non-breaching party shall therefore be entitled, in addition to any other remedies available to it at law or in equity, to seek injunctive relief to protect such party's rights under this Agreement. 12.9. The failure of either party to enforce any provision of this Agreement shall not be deemed to be a waiver of that provision. 12.10 Any dispute under this Agreement shall be settled by arbitration under the Rules of ICC Arbitration. The arbitrator shall have authority to act as amiable compositeur, and the place of arbitration shall be Brussels, London or Luxembourg, as mutually agreed by the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized respective representatives. SCM MICROSYSTEMS, INC. GEMPLUS, SCA By: By: ------------------------- -------------------------- Name: Name: ----------------------- ------------------------ Title: Title: ---------------------- ----------------------- 9 EXHIBIT A GEMPLUS PATENTS LICENSED TO SCM ------------------------------------------------------------------ GEMPLUS REFERENCE PATENT REFERENCE FILING DATE ------------------------------------------------------------------ [*] [*] [*] ------------------------------------------------------------------ EXHIBIT B SCM PATENTS LICENSED TO GEMPLUS ------------------------------------------------------------------ PATENT REFERENCE FILING DATE ------------------------------------------------------------------ [*] [*] - --------------- * CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.33 8 WARRENT ISSUANCE AND COMMON STOCK AGREEMENT 1 EXHIBIT 10.33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SCM MICROSYSTEMS, INC. ---------------------- WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT ---------------------- SEPTEMBER 5, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SCHEDULE OF EXHIBITS Exhibit A and B - Form of Common Stock Purchase Warrants Exhibit C - Schedule of Exceptions to Representations and Warranties of the Company Exhibit D - Form of Amendment to Amended and Restated Stockholders' Agreement Exhibit E - Form of Settlement and Mutual General Release Agreement Exhibit F - Form of License Agreement Exhibit G - Form of Memorandum of Understanding -i- 3 SCM MICROSYSTEMS, INC. WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT THIS WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of September 5, 1997, by and between SCM Microsystems, Inc., a Delaware corporation (the "Company"), and Gemplus, a legal entity under the laws of France (the "Purchaser"). On or before the First and Second Closing (as defined below), the Purchaser may designate in writing one of its wholly-owned subsidiaries which shall take title to the Warrants issuable, and Common Shares purchasable, hereunder and, in such event, the term "Purchaser" shall be deemed to include such subsidiary. RECITALS The Company and the Purchaser are currently involved in a patent infringement dispute ("Dispute") pending in France, which the parties desire to settle by entering into a settlement and mutual general release agreement in the form attached to this Agreement (the "Settlement Agreement") providing that the Company and Purchaser will settle and forever discharge and release each other from all present and future liability arising out of the Dispute; As part of the settlement of the Dispute, and in consideration of the Purchaser's agreement to withdraw its lawsuit currently pending in France against the Company and release the Company from any liability arising out of the Dispute in accordance with the Settlement Agreement, the Company desires to (i) issue to the Purchaser warrants having a one-year term, to purchase 200,000 shares of Common Stock of the Company at an exercise price of $13.00 per share and an additional 200,000 shares of Common Stock at an exercise price of $14.00 per share (together, the "Warrants"); (ii) enter into a patent cross-license agreement pursuant to which the Company and the Purchaser shall grant each other non-exclusive license rights under certain of each other's patents; and (iii) enter into a non-binding memorandum of understanding with the Purchaser setting forth the principal terms of a product development and supply agreement for the development, manufacture, marketing and distribution rights of products incorporating the parties' respective technologies; Following settlement of the Dispute with the Purchaser upon the terms described above, the Company and the Purchaser desire to establish a long-term relationship and, accordingly, the Company shall offer to sell and issue to the Purchaser, upon the effectiveness of the Company's registration statement on Form S-1 and initial public offering of shares of its Common Stock thereunder (the "IPO"), up to 200,000 shares of the Company's Common Stock (the "Common Shares") for an aggregate purchase price of $1,800,000 and to register such Common Shares and the Common Stock issuable upon exercise of the Warrants pursuant to a registration statement to be filed by the Company within 180 days after the IPO, and to provide the Purchaser the opportunity to purchase an additional 200,000 shares of the Company's Common Stock being registered as part of the IPO at a price equal to the IPO price to the public but in no event greater than $15.00 per share; and 1 4 In connection with the Purchaser's acquisition of the Warrants as described above, and the subsequent issuance and sale of the Common Shares as described above, the Company desires to include Purchaser as a party to the Company's Amended and Restated Stockholders' Agreement and thereby grant to Purchaser substantially similar rights as provided to the other investors that are parties thereto; NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. Authorization of Issuance of Warrants and Sale of Common Shares.. 1.1 Authorization of Warrants; Amended and Restated Certificate of Incorporation. Pursuant to the terms and conditions hereof, the Company has authorized the issuance to the Purchaser of two warrants to purchase up to a total of 400,000 shares of Common Stock of the Company. 1.2 Issuance of Warrants. Subject to the terms and conditions hereof, at the First Closing (as is defined in Section 2.1 below), the Company shall issue to the Purchaser warrants to purchase up to 200,000 shares of Common Stock of the Company at an exercise price of $13.00 per share, and up to 200,000 additional shares of Common Stock of the Company at an exercise price of $14.00 per share, pursuant to the terms and conditions set forth in two Common Stock Purchase Warrants, in the forms attached hereto as Exhibits A and B (together, the "Warrants"). The shares of Common Stock issuable upon exercise of the Warrants are collectively referred to herein as the "Warrant Shares". 1.3 Authorization of Common Shares; Amended and Restated Certificate of Incorporation. Pursuant to the terms and conditions hereof, the Company has authorized the sale and issuance to the Purchaser of 200,000 shares of its Common Stock (the "Common Shares"). 1.4 Sale of Common Shares. Subject to the terms and conditions hereof, at the Second Closing (as is defined in Section 2.2 below), for an aggregate purchase price of $1,800,000 the Company will issue and sell to the Purchaser, and the Purchaser will purchase from the Company, the Common Shares. 2. Closing Matters 2.1 First Closing. The closing of the issuance of the Warrants pursuant to Section 1.2 above (the "First Closing") shall be held at the offices of Morrison & Foerster LLP, at 755 Page Mill Road, Palo Alto, California 94304 on September 5, 1997, or on such later date as shall be acceptable to the Company and the Purchaser (the "First Closing Date"). 2.2 Second Closing. The closing of the purchase and sale of the Common Shares pursuant to Section 1.4 above (the "Second Closing") shall be held at the offices of Wilson Sonsini Goodrich & Rosati at 650 Page Mill Road, Palo Alto, California 94304 on the date that the conditions set forth in Section 5.1(b) below are satisfied, or on such later date as shall be acceptable to the Company and the Purchaser (the "Second Closing Date"). 2 5 2.3 Delivery. At the First Closing, the Company shall deliver to the Purchaser warrant certificates representing the Warrants, pursuant to Section 1.2 above. At the Second Closing, the Company shall deliver to Purchaser a certificate registered in the Purchaser's name representing the aggregate number of Common Shares to be issued and sold by the Company to the Purchaser and the Purchaser shall deliver to the Company by check or wire transfer payment for the Common Shares being purchased in the amount as set forth in Section 1.4 above. 3. Representations and Warranties of the Company. The Company represents and warrants and agrees with the Purchaser that, except as set forth on the Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be deemed to be representations and warranties as if made hereunder: 3.1 Organization and Standing. The Company is a corporation duly organized and validly existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. 3.2 Corporate Power. The Company has all requisite legal and corporate power to enter into this Agreement, the Warrants, that certain waiver and amendment to the Amended and Restated Stockholders' Agreement to be entered into among the Company, the Purchaser and certain existing stockholders of the Company in the form attached hereto as Exhibit D (the "Amendment to Stockholders' Agreement"), the settlement and mutual general release agreement to be entered into among the Company and the Purchaser in the form attached hereto as Exhibit E (the "Settlement and Mutual General Release Agreement"), the license agreement to be entered into among the Company and the Purchaser in the form attached hereto as Exhibit F (the "License Agreement"), and the memorandum of understanding between the Company and the Purchaser in the form attached hereto as Exhibit G (the "MOU"), and to issue the Warrants hereunder and to sell the Common Shares and to carry out and perform its obligations under the terms of this Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, the License Agreement and the MOU. 3.3 Capitalization. At the First Closing Date and Second Closing Date, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, of which 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, 462,985 shall be designated Series E Preferred Stock and 1,600,000 shall be designated Series F Preferred Stock. Immediately prior to the issuance of the Common Shares and Warrants hereunder, 1,866,710 shares of Common Stock, 854,038 shares of Series A Preferred Stock, 1,211,914 shares of Series B Preferred Stock, 653,642 shares of Series C Preferred Stock, 765,864 shares of Series D Preferred Stock, 463,285 shares of Series E Preferred Stock and 849,790 shares of Series F Preferred Stock will be issued and outstanding. Except for the (a) the conversion privileges of the Preferred Stock of the Company, (b) the right of first refusal granted to the stockholders of the Company pursuant to the Stockholders' Agreement, (c) warrants exercisable for up to an aggregate of 51,191 shares of Series D Preferred Stock, and (d) options to purchase up to an aggregate of 1,017,426 shares of Common Stock of the Company held by employees and consultants of the Company, there are no outstanding options, warrants, rights (including 3 6 conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. 3.4 Authorization (a) All corporate action on the part of the Company, its officers, directors and stockholders necessary for (i) the issuance of the Warrants pursuant to this Agreement, (ii) the issuance and sale of the Warrant Shares upon exercise of the Warrants and (iii) the execution, performance and delivery by the Company of this Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, and the License Agreement, have been taken or will be taken prior to the First Closing hereunder, and all corporate action on the part of the Company, its officers, directors and stockholders necessary for the sale and issuance of the Common Shares pursuant to this Agreement have been taken or will be taken prior to the Second Closing hereunder. This Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, and the License Agreement, are valid and binding obligations of the Company enforceable against it in accordance with their terms except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and rules or laws concerning equitable remedies and (ii) with respect to the indemnification provisions of the Stockholders' Agreement, as limited by applicable law. (b) The Warrant Shares issuable upon exercise of the Warrants have been duly reserved for issuance, and upon issuance in accordance with the terms of the Warrants, will be validly and duly issued, fully paid and nonassessable and will be free of any liens or encumbrances; provided, however, that such Warrants and the Warrant Shares may be subject to restrictions on transfer under the Stockholders' Agreement and under applicable state or federal securities laws as set forth herein or otherwise required by such laws at the time a transfer is proposed. The Common Shares to be issued and sold hereunder, when issued in compliance with the provisions of this Agreement and the Certificate of Incorporation, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that such Common Shares may be subject to restrictions on transfer under the Stockholders' Agreement and under applicable state or federal securities laws as set forth herein or otherwise required by such laws at the time a transfer is proposed. 3.5 Securities Laws; Governmental Consent, etc. No consent, approval or authorization of, or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, the License Agreement and the MOU, or the issuance of the Warrants and Warrant Shares to be issued and sold pursuant to this Agreement and the Warrants, or the offer, sale or issuance of the Common Shares to be issued and sold pursuant to this Agreement, or the consummation of any other transaction contemplated hereby or thereby, except, if required, qualifications or filings under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws which qualifications or filings, if required, will be obtained or made and will be effective within the time periods required by law. The issuance of the Warrants and the Warrant Shares as provided in this Agreement and the offer, 4 7 sale and issuance of the Common Shares are and will be exempt from the registration and prospectus delivery requirements of the Securities Act and have been registered or qualified, or will be registered or qualified in a timely manner (or are exempt from registration or qualification) under all applicable state registration or qualification requirements. 3.6 Material Permits; Compliance with Laws The Company has all permits, licenses, orders and approvals of any federal, state, local or foreign governmental or regulatory body (collectively, the "Permits") that are material to or necessary in the conduct of its business as now conducted; and all Permits are in full force and effect, no violations have been recorded in respect of any such Permits, and no proceeding is pending or threatened to revoke or limit any such Permits. The Company is conducting, and has conducted, its business and operations in compliance in all material respects with all governmental laws, rules and regulations applicable thereto and is not in violation or default in any material respect under any statute, regulation, order, decree or governmental authorization applicable to it or any of its properties or business as presently conducted or proposed to be conducted, including without limitation environmental and health and safety laws, rules and regulations. 3.7 Title to Property and Assets. The Company owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds valid leasehold interests free of any liens, claims or encumbrances. 3.8 Compliance with Other Instruments. The Company is not in violation or default of any provisions of its Certificate of Incorporation or Bylaws, or of any instrument or contract to which it is a party or by which it is bound, except where such violation or default would not have a material adverse effect on the financial condition or results of operations of the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company. 3.9 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or its assets that questions the validity of this Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, the License Agreement or the MOU, or the right of the Company to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse changes in the financial condition or results of operations of the Company, nor is the Company aware that there is any basis for the foregoing. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or agency or instrumentality. 3.10 Subsidiaries. Except for SCM Microsystems GmbH, which is a wholly-owned subsidiary of the Company, the Company does not own or control, directly or indirectly, any 5 8 interest in any corporation, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.11 Material Contracts and Other Commitments. The Company does not have any contract, agreement, lease or other commitment, written or oral, absolute or contingent, other than (i) contracts for the purchase of supplies and services that were entered into in the ordinary course of business and that do not involve future payments by the Company in excess of $100,000; (ii) sales contracts entered into in the ordinary course of business; (iii) license agreements entered into in the ordinary course of business; and (iv) contracts terminable at will by the Company on no more than sixty (60) days notice without cost or liability to the Company. For purposes of this section, employment contracts and contracts with labor unions and agreements pursuant to which the Company licenses its intellectual property to third parties shall not be considered contracts or agreements entered into in the ordinary course of business. 3.12 Intellectual Property and Other Rights. The Company has all franchises, permits, licenses and other similar authority necessary for the conduct of its business as now being conducted by it (including products and technology currently under development), the lack of which would materially and adversely affect the financial condition and results of operations of the Company. The Company is not in default under any such franchises, permits, licenses or other similar authority, except where such default would not materially and adversely affect the financial condition and results of operations of the Company. To its knowledge, the Company has sufficient title and ownership of all patents, patent rights, trademarks, trademark rights, trade names, trade name rights and copyrights material to the conduct of its business as now conducted (including products and technology currently under development) without any conflict with or infringement of the rights of others except, in all instances, the lack of title and ownership which would not have a material adverse effect on the financial condition or results of operations of the Company. The Company has not received any communications alleging that the Company has violated or would violate any of the patents, trademarks, trade names or copyrights of any other person or entity. 3.13 Financial Condition. (a) The Company has delivered to the Purchaser its (i) unaudited financial statements for the period ended June 30, 1997, and (ii) audited financial statements for the year ended December 31, 1996 (collectively, the "Financial Statements"). The Financial Statements (i) are complete and correct in all material respects, (ii) fairly present the financial condition of the Company as of the date of the balance sheets contained therein (the "Balance Sheets"), and the statement of operations contained therein accurately presents the operating results of the Company during the periods indicated therein, (iii) are in accordance with the books and records of the Company, and (iv) have been prepared in accordance with generally accepted accounting principles consistently applied; provided, however, that the unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. (b) As of June 30, 1997, the Company had no liabilities of any nature (matured or unmatured, fixed or contingent) required by generally accepted accounting principles to be provided for in the Balance Sheets which were not provided for in the Balance Sheets. 6 9 3.14 Changes. Since June 30, 1997, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business which have not been, in the aggregate, materially adverse; or (b) to the Company's knowledge, any other event or condition of any character which might materially and adversely affect the assets, financial condition, operating results or business of the Company (as such business is presently conducted). 3.15 Employees. The Company does not have any collective bargaining agreements with any of its employees, and, to the Company's knowledge, no labor union organizing activity is pending or threatened with respect to the Company. To the Company's knowledge, no employee is obligated under any agreement or judgment that would materially conflict with such employee's obligation to use his or her best efforts to promote the interests of the Company or that would materially conflict with the Company's business. To the Company's knowledge, no employee is in material violation of the terms of any employment agreement, proprietary information agreement, noncompetition agreement or any other agreement relating to such employee's relationship with any previous employer. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement, or other employee compensation agreement. The Company does not maintain, sponsor, or contribute to any program or arrangement that is an "employee pension benefit plan," and "employee welfare benefit plan," or a "multiemployer plan," as those terms are defined in Sections 3(2), 3(1) and 3(37) of the Employee Retirement Income Security Act of 1974, as amended. 3.16 Registration Rights. Except as set forth in the Stockholders' Agreement and Section 6.1 of this Agreement, the Company is not under any obligation to register pursuant to the Securities Act any of its currently outstanding securities or any of its securities that may hereafter be issued. 3.17 Tax Matters. The Company has accurately and timely filed all federal income tax returns and all state and municipal tax returns that are required to be filed by it and has paid or made provision for the payment of all amounts due pursuant to such returns. The federal income tax returns of the Company have not been audited by the Internal Revenue Service, and there are no waivers in effect of the applicable statute of limitations for any period. No deficiency assessment or proposed adjustment of federal income taxes or state or municipal taxes of the Company is pending and the Company has no knowledge of any proposed liability for any tax to be imposed. 3.18 Interested Party Transactions. No officer or director of the Company has, either directly or indirectly, (a) an interest in any corporation, partnership, proprietorship, association or 7 10 other person or entity that, as presently contemplated, will furnish or sell services or products to the Company or purchase services or products from the Company or whose services or products are similar to those to be furnished or sold by the Company or (b) a beneficial interest in any contract, agreement or commitment to which the Company is a party or may be bound. No employee, shareholder, officer or director of the Company is indebted (or committed to make loans or extend or guarantee credit) to the Company nor is the Company indebted to any of them. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.19 Disclosure. No statement by the Company contained in this Agreement and the exhibits attached hereto, the Financial Statements and any written statement or certificate furnished or to be furnished to the Purchasers pursuant hereto or in connection with the transactions contemplated hereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 4. Representations and Warranties of Purchaser and Restrictions on Transfer Imposed by the Securities Act of 1933 and Applicable State Securities Laws. 4.1 Representations and Warranties by Purchaser. Purchaser represents and warrants to the Company as follows: (a) The Common Shares, the Warrants, and the Warrant Shares are being acquired for the Purchaser's own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act or the applicable securities laws. (b) The Purchaser understands that the Common Shares, the Warrants, and the Warrant Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof and Regulation D promulgated thereunder, that the Company has no present intention of registering the Warrants or the Warrant Shares, that the Common Shares, the Warrants, or the Warrant Shares must be held by the Purchaser indefinitely, and that the Purchaser must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from registration. (c) During the negotiation of the transactions contemplated herein, the Purchaser and its representatives and legal counsel have been afforded full and free access to corporate books, financial statements, records, contracts, documents and other information concerning the Company and to its offices and facilities, have been afforded an opportunity to ask such questions of the Company's officers, employees, agents, accountants and representatives concerning the Company's business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, in order to evaluate the merits and risks of the prospective investments contemplated herein. 8 11 (d) The Purchaser and its representatives have been solely responsible for the Purchaser's own "due diligence" investigation of the Company and its management and business, for its own analysis of the merits and risks of this investment, and for its own analysis of the fairness and desirability of the terms of the investment. In taking any action or performing any role relative to the arranging of the proposed investment, the Purchaser has acted solely in its own interest, and neither the Purchaser, nor any of its agents or employees, has acted as an agent of the Company. The Purchaser has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of the purchase of the Common Shares and Warrants pursuant to the terms of this Agreement and of protecting Purchaser's interests in connection therewith. (e) The Purchaser is an "Accredited Investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. The Purchaser is able to bear the economic risk of the purchase of the Common Shares and Warrants pursuant to the terms of this Agreement, including a complete loss of the Purchaser's investment in the Common Shares and Warrants. (f) The Purchaser has the full right, power and authority to enter into and perform the Purchaser's obligations under this Agreement, the Warrants and the Stockholders' Agreement, and this Agreement, the Warrants and the Stockholders' Agreement constitute valid and binding obligations of the Purchaser enforceable in accordance with their terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and rules or laws concerning equitable remedies. (g) No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Purchaser is required in connection with the valid execution and delivery of this Agreement, the Warrants or the Stockholders' Agreement. 4.2 Legends. Each certificate representing the Common Shares or the Warrant Shares may be endorsed with the following legends: (a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT, OR (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF COUNSEL TO THE CORPORATION THAT SUCH 9 12 REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR DISTRIBUTION." (b) Any other legends required by applicable blue sky or securities laws. The Company need not register a transfer of any Common Shares or Warrant Shares, and may also instruct its transfer agent not to register the transfer of the Common Shares or Warrant Shares, unless the conditions specified in the foregoing legends are satisfied. 4.3 Removal of Legend and Transfer Restrictions. (a) Any legend endorsed on a certificate pursuant to subsection 4.2(a) and the stop transfer instructions with respect to such Common Shares or Warrant Shares shall be removed and the Company shall issue a certificate without such legend to the holder thereof if such Common Shares or Warrant Shares are registered under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available, if such legend may be properly removed under the terms of Rule 144 promulgated under the Securities Act or if such holder provides the Company with an opinion of counsel for such holder, reasonably satisfactory to legal counsel for the Company, to the effect that a sale, transfer or assignment of such Common Shares or Warrant Shares may be made without registration. (b) Any legend endorsed on a certificate pursuant to subsection 4.2(b) and the stop transfer instructions with respect to such Common Shares or Warrant Shares shall be removed upon receipt by the Company of an order of an appropriate state securities authority authorizing such removal. 5. Conditions to Closing. 5.1 Conditions to Obligations of the Company. (a) First Closing. The obligation of the Company to issue the Warrants to Purchaser at the First Closing is subject to the fulfillment on or prior to the First Closing Date of the following conditions, any of which may be waived by the Company: (1) Representations and Warranties. The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct when made, and shall be true and correct on such First Closing Date with the same force and effect as if they had been made on and as of said date. (2) Consents and Waivers. The Company shall have obtained any and all consents (including all governmental or regulatory consents, approvals or authorizations required in connection with the valid execution and delivery of this Agreement and the Amendment to Stockholders' Agreement), permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement, the Warrants, the Amendment to Stockholders' Agreement, the Settlement and Mutual General Release Agreement, the License Agreement and the MOU. 10 13 (3) Stockholders' Agreement. The Company, the Purchaser and the other parties holding at least a majority of the Registrable Securities (as defined in the Stockholders Agreement) and listed as signatories thereto shall have executed and delivered the Amendment to Stockholders' Agreement in the form attached hereto as Exhibit D. (4) Settlement and Mutual General Release Agreement. The Company and the Purchaser (including, if necessary, its affiliates, subsidiaries or authorized representatives) shall have executed and delivered the Settlement and Mutual General Release Agreement in the form attached hereto as Exhibit E. (5) License Agreement. The Company and the Purchaser (including, if necessary, its affiliates, subsidiaries or authorized representatives) shall have executed and delivered the License Agreement in the form attached hereto as Exhibit F. (6) Memorandum of Understanding. The Company and the Purchaser (including, if necessary, its affiliates, subsidiaries or authorized representatives) shall have executed the MOU attached hereto as Exhibit G setting forth the principal terms of a product development and supply agreement governing the development, manufacture and distribution rights of the Company and the Purchaser with respect to products incorporating the parties' respective technologies. The parties shall use their reasonable efforts to agree upon and execute such an agreement within ninety (90) days after the Closing. (7) Legal Investment. At the time of the First Closing, the issuance of the Warrants by the Company to the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. (b) Second Closing. The obligation of the Company to sell and issue the Common Shares to the Purchaser at the Second Closing is subject to the fulfillment on or prior to the Second Closing Date of the following conditions, any of which may be waived by the Company: (1) Incorporation of Conditions. The conditions set forth in subsection 5.1(a)(1) through (a)(7) above shall have been fulfilled. (2) Legal Investment. At the time of the Second Closing, the issuance and sale of the Common Shares by the Company to the Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. (3) Effectiveness of Initial Public Offering. The SEC shall have declared effective, and the Company begun its initial public offering of shares of its Common Stock pursuant to, the Company's Registration Statement No. 333-29073 on Form S-1 (the "Effective Date"). 5.2 Conditions to Obligations of the Purchaser. (a) First Closing. The Purchaser's obligation at the First Closing to execute and deliver the Stockholders' Agreement, the Settlement and Mutual General Release 11 14 Agreement, the License Agreement and the MOU, is subject to the fulfillment on or prior to the First Closing Date of the following conditions, any of which may be waived by the Purchaser: (1) Representations and Warranties Correct; Performance of Obligations. The representations and warranties made by the Company in Section 3 above shall be true and correct when made, and shall be true and correct on the First Closing Date with the same force and effect as if they had been made on and as of said date and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the First Closing Date. (2) Incorporation of Conditions. The conditions set forth in subsections (a)(2) through (a)(7) of Section 5.1 above shall have been fulfilled. (3) Common Stock Purchase Warrants. The Company shall have executed and delivered the Warrants on the form attached hereto as Exhibits A and B. (4) Compliance Certificate. The Company shall have delivered to the Purchaser a certificate, executed by the President of the Company, dated as of the First Closing Date, certifying the fulfillment of the conditions specified in subsection (a)(1) of this Section 5.2 and in subsection (a)(2) of Section 5.1 above. (5) Secretary's Certificate. The Company shall have delivered to the Purchaser a certificate, executed by the Secretary of the Company, dated as of the First Closing Date, certifying the authenticity of attached copies of the Company's Certificate of Incorporation, Bylaws and resolutions of the Board of Directors approving the transactions contemplated hereby. (6) Opinion of Company Counsel. The Purchaser shall have received a legal opinion of counsel to the Company in form and substance acceptable to the Purchaser and the Company. (b) Second Closing. The Purchaser's obligation to purchase the Common Shares at the Second Closing is subject to fulfillment on or prior to the Second Closing Date of the following conditions, any of which may be waived by the Purchaser: (1) Incorporation of Conditions. The conditions set forth in subsections (a)(1) through (a)(6) of this Section 5.2, and in subsections (b)(2) and (b)(3) of Section 5.1 above, shall have been fulfilled. 6. Miscellaneous. 6.1 Filing of Registration Statement on Form S-3 for Common Shares. The Company acknowledges and agrees that it shall, within one hundred eighty (180) days after the Effective Date (as defined in Section 5.1(b)(3) above) file with the SEC a registration statement on Form S-3 registering not less than the aggregate number of Warrant Shares issuable upon exercise of the Warrants and Common Shares purchased by the Purchaser at the Second Closing. 12 15 6.2 Directed Shares in IPO. Subject to the fulfillment on or prior to the Second Closing Date of the conditions set forth in subsections (b)(1) through (b)(3) of Section 5.1 above, the Company shall provide Purchaser the opportunity to purchase in the IPO up to 200,000 shares of Common Stock of the Company being registered as part of the Company's IPO at a price equal to the IPO offering price but in no event greater than $15.00 per share. 6.3 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 6.4 Survival. The representations, warranties, covenants and agreements made herein shall survive the execution of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of the Purchaser. 6.5 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. 6.6 Entire Agreement. This Agreement, the exhibits to 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. 6.7 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be sent via facsimile, overnight courier service or mailed by certified or registered mail, postage prepaid, return receipt requested, addressed or sent (a) if to the Purchaser, at the address or facsimile number of the Purchaser set forth below such party's name on Exhibit A, or at such other address or number as the Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at 131 Albright Way, Los Gatos, California 95030 USA, Attn: President, or at such other address or number as the Company shall have furnished to the Purchaser in writing. 6.8 Severability. In case any provision of this Agreement shall be declared invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the parties shall insert in place of the invalid or unenforceable provision one of similar economic effect and intent. 6.9 Expenses. The Company and the Purchaser shall each bear their respective expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby. 6.10 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11 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. 13 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SCM MICROSYSTEMS, INC. a Delaware corporation By: --------------------------------- Steven Humphreys, President GEMPLUS a legal entity under the laws of France By: --------------------------------- ------------------------------------ (Print Name) Title: ------------------------------ COUNTERPART SIGNATURE PAGE TO COMMON STOCK PURCHASE AGREEMENT 14 17 SCHEDULE OF EXHIBITS Exhibit A and B - Form of Common Stock Purchase Warrants Exhibit C - Schedule of Exceptions to Representations and Warranties of the Company Exhibit D - Form of Waiver and Amendment to Amended and Restated Stockholders' Agreement Exhibit E - Form of Settlement and Mutual General Release Agreement Exhibit F - Form of License Agreement Exhibit G - Form of Memorandum of Understanding 15 18 EXHIBIT A AND B COMMON STOCK PURCHASE WARRANTS 19 EXHIBIT C SCHEDULE OF EXCEPTIONS The following are the exceptions to the representations and warranties made by SCM Microsystems, Inc. (the "Company") in Section 3 of the Warrant Issuance and Common Stock Purchase Agreement dated as of September 5, 1997 (the "Agreement") at and as of the First Closing and Second Closing; provided, however, that at and as of the Second Closing the representations and warranties, and this Schedule of Exceptions (except as expressly indicated herein), shall not reflect the transactions occurring at the First Closing contemplated by the Agreement. Capitalized terms used in this exhibit, unless otherwise specified, have the same meaning given them in the Agreement. Unless otherwise expressly stated, the section references used herein are to the particular subsections in Section 3 of the Agreement. 3.3 (Capitalization) Immediately prior to the issuance and sale of the Common Shares to Purchaser at the Second Closing, the capitalization of the Company as set forth in Section 3.3 of the Agreement will not reflect (i) the issuance of the Warrants to Purchaser at the First Closing and reservation of the Warrant Shares by the Company for issuance upon exercise of the Warrants; (ii) the Company's obligation to sell the Common Shares to Purchaser at the Second Closing contingent upon satisfaction of the conditions set forth in Section 5.1(b) of the Agreement; (iii) the Company's obligation under Section 6.2 of the Agreement to provide the Purchaser the opportunity to purchase in the IPO up to 200,000 shares of Common Stock of the Company; and (iv) the shares of Common Stock of the Company issued in its IPO. 3.5 (Securities Laws; Governmental Consent, etc.) Pursuant to Section 6.1 of this Agreement, within 180 days after the Effective Date (defined in Section 5.1(b)(3) of this Agreement), the Company shall file with the SEC a registration statement on Form S-3 covering not less than the aggregate number of Warrant Shares issuable upon exercise of the Warrants to be issued to the Purchaser at the First Closing and the Common Shares to be purchased by Purchaser at the Second Closing hereunder. 3.9 (Litigation) and 3.12 (Intellectual Property and Other Rights) On April 28, 1997, Purchaser served the Company with a complaint alleging that the Company's SwapSmart product infringes certain claims of a French patent held by Purchaser. In an unrelated context, Purchaser 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 Purchaser's stated licensing position, the matter can be resolved without a material adverse effect on the Company's business and operating results. 20 The Company received a cease and desist letter dated July 31, 1995, from the attorneys for Smith Corona Machines, Inc., regarding the alleged use of "SCM" by the Company in its trade name as part of its trademark SCM SwapBox for use with the combination floppy disk drive and PCCard slot product. Smith Corona asserts that such use by the Company constitutes trademark infringement and unfair competition under federal statutes and common law. Smith Corona had demand the Company discontinue such alleged trade name and trademark uses of the "SCM" mark. Gray Cary Ware and Friedenrich responded to the cease and desist on behalf of the Company by letter dated January 8, 1996, denying Smith Corona's claim. Smith Corona responded to our letter on February 22, 1996, reiterating its demand. 3.11 (Material Contracts and Other Commitments) The Company has the following material agreements: - 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. - Supply agreement for fabricated metal components with Robinson Nugent dated November 1996. The total obligations of the Company under this agreement are estimated to be $300,000. - Advanced purchase components agreement with Intellicard Systems, dated May 1996. The total obligations of the Company under this agreement are estimated to be $100,000. - Purchase agreement for smart card reader modules with Avnet France, dated October 1996. The total obligations of the Company under this agreement are estimated to be $150,000. 3.12 (Intellectual Property and Other Rights) See Item 3.9 above. 21 3.15 (Employees) The Company is aware that Purchaser has filed a criminal lawsuit against one of the Company's current employees and a former Purchaser employee alleging, among other things, theft by such employee of Purchaser's intellectual property prior to such employee's commencement of employment with the Company. 3.16 (Registration Rights) See Item 3.5 above. 22 EXHIBIT D AMENDMENT TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT 23 EXHIBIT E SETTLEMENT AND MUTUAL GENERAL RELEASE AGREEMENT 24 EXHIBIT F LICENSE AGREEMENT 25 EXHIBIT G MEMORANDUM OF UNDERSTANDING EX-10.34 9 COMMON STOCK PURCHASE WARRANT DATED SEPTEMBER 1997 1 EXHIBIT 10.34 THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF (INCLUDING ANY SECURITIES ISSUABLE UPON CONVERSION OF SUCH SHARE) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND SUCH WARRANT, SHARES AND SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AT THE TIME AMENDED, OR IN CONFORMITY WITH THE LIMITATIONS OF RULE 144 OR SIMILAR RULE AS THEN IN EFFECT UNDER SUCH ACT, OR UNLESS SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE WITH RESPECT THERETO. No. 1 Warrant to Purchase 200,000 Shares of Common Stock (Subject to Adjustment) SCM MICROSYSTEMS, INC. COMMON STOCK PURCHASE WARRANT Void after September 5, 1998 SCM Microsystems, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, Gemplus, a legal entity under the laws of France, or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m. Pacific time, on September 5, 1998 (the "Expiration Date"), 200,000 fully paid and nonassessable shares of Common Stock of the Company, as constituted on September 5, 1997 at the purchase price per share of $13.00 and otherwise in accordance with the terms hereof. The number and character of such shares of Common Stock and the purchase price therefor are subject to adjustment as provided below. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company, and any other securities or property of the Company or of any other person (corporate or otherwise) which the holder of this Warrant at any time shall be entitled to receive on the exercise hereof, in lieu of or in addition to Common Stock, or which at any time shall be issuable in exchange for or in replacement of Common Stock. (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 1 2 (c) The term "Warrant" shall mean this Warrant. 1. Initial Exercise Date; Expiration. This Warrant may be exercised at any time or from time to time. It shall expire at 5:00 p.m., Pacific time, on the earliest of (a) September 5, 1998, or (b) the consolidation or merger of the Company with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Company, or any other reorganization of the Company unless the stockholders of the Company immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder or the Company owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). 2. Exercise of Warrant; Partial Exercise, This Warrant may be exercised in full or in part by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the purchase price of the shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to be purchased hereunder. For any partial exercise hereof, the holder shall designate in the subscription the number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) that it wishes to purchase. On any such partial exercise, the Company at its expense shall forthwith issue and deliver to the holder hereof a new warrant of like tenor, in the name of the holder hereof, which shall be exercisable for such number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) represented by this Warrant which have not been purchased upon such exercise. In lieu of exercising any portion of this Warrant, the holder may at any time and from time to time elect to receive, without payment of cash or other consideration, shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) equal to the value of this Warrant (or portion hereof being canceled) by surrender of this Warrant to the Company together with notice of such election. In such event the Company shall issue to the holder a number of shares of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) computed using the following formula: X = Y(A-B) ------- A where: X = The number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to be issued to the holder. 2 3 Y = The number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) purchasable under this Warrant. A = The fair market value of one share of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as of the date of such notice of election, B = The exercise price, as adjusted to the date of such notice of election. For the purposes of this Section 2, fair market value of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the closing or last sale price, respectively, reported for the business day immediately preceding the Determination Date. (ii) If the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is not traded on an exchange or on the NASDAQ National Market System but is traded in the over-the-counter market, then the mean of the closing bid and asked prices reported for the business day immediately preceding the Determination Date. (iii) Except as provided in paragraph (iv) below, if the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is not publicly traded, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors, (iv) If the Determination Date is the date on which the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is first sold to the public by the Company in a firm commitment public offering under the Securities Act of 1933, as amended, then the initial public offering price (before deducting commissions, discounts or expenses) at which the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is sold in such offering. Notwithstanding the foregoing, this Warrant may not be exercised without payment of cash or other consideration as provided above if the Company determines in good faith that such exercise would have an material adverse effect on the Company's results of operations or financial condition with respect to accounting treatment or financial reporting. 3. When Exercise Effective. The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant is surrendered to the Company as provided in Section 2, and at such time the person in whose name any certificate for shares of Common Stock (or any shares of stock or other 3 4 securities at the time issuable upon exercise of this Warrant) shall be issuable upon such exercise, as provided in Section 2, shall be deemed to be the record holder of such Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) for all purposes. 4. Delivery on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within twenty (20) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates for the number of fully paid and nonassessable full shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to which such holder shall be entitled on such exercise, together with cash, in lieu of any fraction of a share, equal to such fraction of the current market value of one full share as determined in good faith by the Board of Directors. 5. Adjustment of Purchase Price and Number of Shares. The character of the shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) and the purchase price therefor, are subject to adjustment upon the occurrence of the following events: 5.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The exercise price of this Warrant and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be appropriately adjusted to reflect any stock dividend, stock split, combination of shares, reclassification, recapitalization or other similar event affecting the number of outstanding shares of Common Stock (or such other stock or securities). For example if there should be a 2-for-1 stock split, the exercise price would be divided by two and such number of shares would be doubled. 5.2 Adjustment for other Dividends and Distributions. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (i) securities of the Company (other than shares of Common Stock) or (ii) assets (excluding cash dividends paid or payable solely out of retained earnings), then in each case, the holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such event, shall receive, in addition to the Common Stock (or such other stock or securities) issuable on such exercise prior to such date, the securities or such other assets of the Company to which such holder would have been entitled upon such date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). 5.3 Adjustment for Reclassification or Reorganization. In case of any corporate reorganization or reclassification or change of the outstanding securities of the Company, other than as described in the second sentence of Section 1 above (any such transaction being hereinafter referred to as a "Reorganization"), then, in each case, the holder of 4 5 this Warrant, on exercise hereof at any time after the consummation or effective date of such Reorganization (the "Effective Date"), shall receive, in lieu of the Common Stock issuable on such exercise prior to the Effective Date, the stock and other securities and property (including cash) to which such holder would have been entitled upon the Effective Date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). 5.4 Certificate as to Adjustments. In case of any adjustment or readjustment in the price or kind of securities issuable on the exercise of this Warrant, the Company will promptly give written notice thereof to the holder of this Warrant in the form of a certificate, certified and confirmed by an officer of the Company, setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based. 6. No Impairment. The Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will at all times reserve and keep available a number of its authorized shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant), free from all preemptive rights therein, which will be sufficient to permit the exercise in full of this Warrant, and (c) shall take all such action as may be necessary or appropriate in order that all shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as may be issued pursuant to the valid exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. 7. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any consolidation or merger of the Company with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Company, or any other reorganization of the Company unless the stockholders of the Company immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder of the Company owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded), or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire 5 6 any shares of stock of any class or any other securities, then and in each such event the Company will mail to the holder hereof a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such consolidation, merger, sale or transfer of assets, reorganization, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or any shares of stock or other securities at the time issuable upon the exercise of this Warrant) shall be entitled to exchange their shares for securities or other property deliverable on such consolidation, merger, sale or transfer of assets, reorganization, dissolution, liquidation or winding-up, and (iii) the amount and character of any-stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 8. Exchange of Warrants. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant of like tenor, in the name of such holder or as such holder may direct, calling in the aggregate on the face thereof for the number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) called for on the face of the Warrant so surrendered. 9. Replacement of Warrants. On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. Investment Intent. Unless a current registration statement under the Securities Act of 1933, as amended, shall be in effect with respect to the securities to be issued upon exercise of this Warrant, the holder thereof, by accepting this Warrant, covenants and agrees that, at the time of exercise hereof, and at the time of any proposed transfer of securities acquired upon exercise hereof, such holder will deliver to the Company a written statement that the securities acquired by the holder upon exercise hereof are for the own account of the holder for investment and are not acquired with a view to, or for sale in connection with, any distribution thereof (or any portion thereof) and with no present intention (at any such time) of offering and distributing such securities (or any portion thereof). 11. Transfer. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof upon surrender of this Warrant with a properly executed assignment (in the form annexed hereto) at the principal office of the Company. Upon any partial transfer, the Company will at its expense issue and deliver to the holder hereof a new Warrant of like tenor, in the name of the holder hereof, which shall be exercisable for such number of shares of Common 6 7 Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) which were not so transferred, 12. No Rights or Liability as a Stockholder. This Warrant does not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the holder hereof to purchase Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant), and no enumeration herein of the rights or privileges of the holder hereof shall give rise to any liability of such holder as a stockholder of the Company. 13. Notices. All notices referred to in this Warrant shall be in writing and shall be delivered personally or by certified or registered mail, return receipt requested, postage prepaid and will be deemed to have been given when so delivered or mailed (i) to the Company, at its principal executive offices and (ii) to the holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by such holder). 14. Payment of Taxes. All shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) issued upon the valid exercise of this Warrant shall be validly issued, fully paid and nonassessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect to the issue or delivery thereof. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the holder of this Warrant. This Warrant is being delivered in the State of California and shall be governed by and construed and enforced in accordance with the internal laws of the State of California (without reference to any principles of the conflicts of laws). The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Dated: September 5, 1997 SCM MICROSYSTEMS, INC. By: ------------------------------- Steve Humphreys, President 7 8 FORM OF SUBSCRIPTION (To be signed only on exercise of warrant) TO: SCM Microsystems, Inc. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________* shares of Common Stock of SCM Microsystems, Inc. and herewith makes payment of $_______ therefor, and requests that the certificates for such shares be issues in the name of, and delivered to _____________________________________ whose address is _______________________ _________________________________________________. ________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ________________________________________ ________________________________________ (Address) Dated: ________________________________________ * Insert here the number of shares as to which the Warrant is being exercised. 9 FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _________________ the right represented by the within Warrant to purchase shares of Common Stock of SCM Microsystems, Inc., to which the within Warrant relates, and appoints __________________ Attorney to transfer such right on the books of SCM Microsystems, Inc., with full power of substitution in the premises. ________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ________________________________________ ________________________________________ (Address) Dated: ________________________________________ EX-10.35 10 COMMON STOCK PURCHASE WARRANT DATED SEPTEMBER 1997 1 EXHIBIT 10.35 THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF (INCLUDING ANY SECURITIES ISSUABLE UPON CONVERSION OF SUCH SHARE) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND SUCH WARRANT, SHARES AND SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AT THE TIME AMENDED, OR IN CONFORMITY WITH THE LIMITATIONS OF RULE 144 OR SIMILAR RULE AS THEN IN EFFECT UNDER SUCH ACT, OR UNLESS SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS AVAILABLE WITH RESPECT THERETO. No. 2 Warrant to Purchase 200,000 Shares of Common Stock (Subject to Adjustment) SCM MICROSYSTEMS, INC. COMMON STOCK PURCHASE WARRANT Void after September 5, 1998 SCM Microsystems, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, Gemplus, a legal entity under the laws of France, or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m. Pacific time, on September 5, 1998 (the "Expiration Date"), 200,000 fully paid and nonassessable shares of Common Stock of the Company, as constituted on September 5, 1997 at the purchase price per share of $14.00 and otherwise in accordance with the terms hereof. The number and character of such shares of Common Stock and the purchase price therefor are subject to adjustment as provided below. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company, and any other securities or property of the Company or of any other person (corporate or otherwise) which the holder of this Warrant at any time shall be entitled to receive on the exercise hereof, in lieu of or in addition to Common Stock, or which at any time shall be issuable in exchange for or in replacement of Common Stock. (b) The term "Company" includes any corporation which shall succeed to or assume the obligations of the Company hereunder. 1 2 (c) The term "Warrant" shall mean this Warrant. 1. Initial Exercise Date; Expiration. This Warrant may be exercised at any time or from time to time. It shall expire at 5:00 p.m., Pacific time, on the earliest of (a) September 5, 1998, or (b) the consolidation or merger of the Company with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Company, or any other reorganization of the Company unless the stockholders of the Company immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder or the Company owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded). 2. Exercise of Warrant; Partial Exercise, This Warrant may be exercised in full or in part by the holder hereof by surrender of this Warrant, with the form of subscription attached hereto duly executed by such holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the purchase price of the shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to be purchased hereunder. For any partial exercise hereof, the holder shall designate in the subscription the number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) that it wishes to purchase. On any such partial exercise, the Company at its expense shall forthwith issue and deliver to the holder hereof a new warrant of like tenor, in the name of the holder hereof, which shall be exercisable for such number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) represented by this Warrant which have not been purchased upon such exercise. In lieu of exercising any portion of this Warrant, the holder may at any time and from time to time elect to receive, without payment of cash or other consideration, shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) equal to the value of this Warrant (or portion hereof being canceled) by surrender of this Warrant to the Company together with notice of such election. In such event the Company shall issue to the holder a number of shares of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) computed using the following formula: X = Y(A-B) ------- A where: X = The number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to be issued to the holder. 2 3 Y = The number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) purchasable under this Warrant. A = The fair market value of one share of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as of the date of such notice of election, B = The exercise price, as adjusted to the date of such notice of election. For the purposes of this Section 2, fair market value of the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as of a particular date (the "Determination Date") shall mean: (i) If the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the closing or last sale price, respectively, reported for the business day immediately preceding the Determination Date. (ii) If the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is not traded on an exchange or on the NASDAQ National Market System but is traded in the over-the-counter market, then the mean of the closing bid and asked prices reported for the business day immediately preceding the Determination Date. (iii) Except as provided in paragraph (iv) below, if the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is not publicly traded, then as determined in good faith by the Company's Board of Directors upon a review of relevant factors, (iv) If the Determination Date is the date on which the Company's Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is first sold to the public by the Company in a firm commitment public offering under the Securities Act of 1933, as amended, then the initial public offering price (before deducting commissions, discounts or expenses) at which the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) is sold in such offering. Notwithstanding the foregoing, this Warrant may not be exercised without payment of cash or other consideration as provided above if the Company determines in good faith that such exercise would have an material adverse effect on the Company's results of operations or financial condition with respect to accounting treatment or financial reporting. 3. When Exercise Effective. The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant is surrendered to the Company as provided in Section 2, and at such time the person in whose name any certificate for shares of Common Stock (or any shares of stock or other 3 4 securities at the time issuable upon exercise of this Warrant) shall be issuable upon such exercise, as provided in Section 2, shall be deemed to be the record holder of such Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) for all purposes. 4. Delivery on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within twenty (20) days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder may direct, a certificate or certificates for the number of fully paid and nonassessable full shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) to which such holder shall be entitled on such exercise, together with cash, in lieu of any fraction of a share, equal to such fraction of the current market value of one full share as determined in good faith by the Board of Directors. 5. Adjustment of Purchase Price and Number of Shares. The character of the shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) and the purchase price therefor, are subject to adjustment upon the occurrence of the following events: 5.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations, etc. The exercise price of this Warrant and the number of shares of Common Stock issuable upon exercise of this Warrant (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) shall be appropriately adjusted to reflect any stock dividend, stock split, combination of shares, reclassification, recapitalization or other similar event affecting the number of outstanding shares of Common Stock (or such other stock or securities). For example if there should be a 2-for-1 stock split, the exercise price would be divided by two and such number of shares would be doubled. 5.2 Adjustment for other Dividends and Distributions. In case the Company shall make or issue, or shall fix a record date for the determination of eligible holders entitled to receive, a dividend or other distribution with respect to the Common Stock (or any shares of stock or other securities at the time issuable upon exercise of the Warrant) payable in (i) securities of the Company (other than shares of Common Stock) or (ii) assets (excluding cash dividends paid or payable solely out of retained earnings), then in each case, the holder of this Warrant on exercise hereof at any time after the consummation, effective date or record date of such event, shall receive, in addition to the Common Stock (or such other stock or securities) issuable on such exercise prior to such date, the securities or such other assets of the Company to which such holder would have been entitled upon such date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). 5.3 Adjustment for Reclassification or Reorganization. In case of any corporate reorganization or reclassification or change of the outstanding securities of the Company, other than as described in the second sentence of Section 1 above (any such transaction being hereinafter referred to as a "Reorganization"), then, in each case, the holder of 4 5 this Warrant, on exercise hereof at any time after the consummation or effective date of such Reorganization (the "Effective Date"), shall receive, in lieu of the Common Stock issuable on such exercise prior to the Effective Date, the stock and other securities and property (including cash) to which such holder would have been entitled upon the Effective Date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). 5.4 Certificate as to Adjustments. In case of any adjustment or readjustment in the price or kind of securities issuable on the exercise of this Warrant, the Company will promptly give written notice thereof to the holder of this Warrant in the form of a certificate, certified and confirmed by an officer of the Company, setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based. 6. No Impairment. The Company (a) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (b) will at all times reserve and keep available a number of its authorized shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant), free from all preemptive rights therein, which will be sufficient to permit the exercise in full of this Warrant, and (c) shall take all such action as may be necessary or appropriate in order that all shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) as may be issued pursuant to the valid exercise of this Warrant will, upon issuance, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. 7. Notices of Record Date, etc. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any consolidation or merger of the Company with or into any other corporation or the sale or other transfer in a single transaction or a series of related transactions of all or substantially all of the assets of the Company, or any other reorganization of the Company unless the stockholders of the Company immediately prior to any such transaction are holders of a majority of the voting securities of the surviving or acquiring corporation immediately thereafter (and for purposes of this calculation equity securities which any stockholder of the Company owned immediately prior to such merger or consolidation as a stockholder of another party to the transaction shall be disregarded), or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or (d) any proposed issue or grant by the Company of any shares of stock of any class or any other securities, or any right or option to subscribe for, purchase or otherwise acquire 5 6 any shares of stock of any class or any other securities, then and in each such event the Company will mail to the holder hereof a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such consolidation, merger, sale or transfer of assets, reorganization, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or any shares of stock or other securities at the time issuable upon the exercise of this Warrant) shall be entitled to exchange their shares for securities or other property deliverable on such consolidation, merger, sale or transfer of assets, reorganization, dissolution, liquidation or winding-up, and (iii) the amount and character of any-stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified. 8. Exchange of Warrants. On surrender for exchange of this Warrant, properly endorsed, to the Company, the Company at its expense will issue and deliver to or on the order of the holder thereof a new Warrant of like tenor, in the name of such holder or as such holder may direct, calling in the aggregate on the face thereof for the number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) called for on the face of the Warrant so surrendered. 9. Replacement of Warrants. On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. Investment Intent. Unless a current registration statement under the Securities Act of 1933, as amended, shall be in effect with respect to the securities to be issued upon exercise of this Warrant, the holder thereof, by accepting this Warrant, covenants and agrees that, at the time of exercise hereof, and at the time of any proposed transfer of securities acquired upon exercise hereof, such holder will deliver to the Company a written statement that the securities acquired by the holder upon exercise hereof are for the own account of the holder for investment and are not acquired with a view to, or for sale in connection with, any distribution thereof (or any portion thereof) and with no present intention (at any such time) of offering and distributing such securities (or any portion thereof). 11. Transfer. Subject to the transfer conditions referred to in the legend endorsed hereon, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof upon surrender of this Warrant with a properly executed assignment (in the form annexed hereto) at the principal office of the Company. Upon any partial transfer, the Company will at its expense issue and deliver to the holder hereof a new Warrant of like tenor, in the name of the holder hereof, which shall be exercisable for such number of shares of Common 6 7 Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) which were not so transferred, 12. No Rights or Liability as a Stockholder. This Warrant does not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. No provisions hereof, in the absence of affirmative action by the holder hereof to purchase Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant), and no enumeration herein of the rights or privileges of the holder hereof shall give rise to any liability of such holder as a stockholder of the Company. 13. Notices. All notices referred to in this Warrant shall be in writing and shall be delivered personally or by certified or registered mail, return receipt requested, postage prepaid and will be deemed to have been given when so delivered or mailed (i) to the Company, at its principal executive offices and (ii) to the holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by such holder). 14. Payment of Taxes. All shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) issued upon the valid exercise of this Warrant shall be validly issued, fully paid and nonassessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect to the issue or delivery thereof. 15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the holder of this Warrant. This Warrant is being delivered in the State of California and shall be governed by and construed and enforced in accordance with the internal laws of the State of California (without reference to any principles of the conflicts of laws). The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Dated: September 5, 1997 SCM MICROSYSTEMS, INC. By: ---------------------------------- Steve Humphreys, President 7 8 FORM OF SUBSCRIPTION (To be signed only on exercise of warrant) TO: SCM Microsystems, Inc. The undersigned, the holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, __________* shares of Common Stock of SCM Microsystems, Inc. and herewith makes payment of $_______ therefor, and requests that the certificates for such shares be issues in the name of, and delivered to _____________________________________ whose address is _______________________ _________________________________________________. _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ _______________________________________ (Address) Dated: _______________________________________ * Insert here the number of shares as to which the Warrant is being exercised. 9 FORM OF ASSIGNMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _________________ the right represented by the within Warrant to purchase shares of Common Stock of SCM Microsystems, Inc., to which the within Warrant relates, and appoints __________________ Attorney to transfer such right on the books of SCM Microsystems, Inc., with full power of substitution in the premises. _______________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) _______________________________________ _______________________________________ (Address) Dated: _______________________________________ EX-10.36 11 WAIVER TO RESTATED STOCKHOLDERS' AGREEMENT 1 EXHIBIT 10.36 WAIVER AND AMENDMENT TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT This Waiver and Amendment is entered into as of this 5th day of September, 1997, by and among SCM Microsystems, Inc., a Delaware corporation (the "Company") and certain of those parties to the Amended and Restated Stockholders' Agreement, dated April 11, 1997 (the "Stockholders' Agreement"), listed in Exhibit A hereto (the "Existing Stockholders and Note Holders"). All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Stockholders' Agreement. RECITALS 1. The Stockholders' Agreement provides at Section 2 thereof for certain rights of first offer in favor of the Existing Stockholders and Note Holders of the Company with respect to proposed new issues by the Company of its equities securities (or rights to acquire such equity securities). 2. The Company is contemplating the offer, sale and issuance to Gemplus, a legal entity under the laws of France ("Gemplus"), of (i) 200,000 shares of Common Stock of the Company at a purchase price of $9.00 per share, and (ii) Warrants to purchase up to an additional 200,000 shares of Common Stock of the Company at an exercise price of $13.00 per share and an additional 200,000 shares of Common Stock at an exercise price of $14.00 per share (together, the "Warrants"). To the extent they are then unexercised, the Warrants will expire one year after issuance or upon any earlier merger, sale or other change of voting control of the Company. In connection with such offering, the Company and the Existing Stockholders and Note Holders desire to waive certain rights of first offer set forth in Section 2 of the Stockholders' Agreement as set forth herein. 3. In addition, the Company and the Existing Stockholders and Note Holders desire to amend the Stockholders' Agreement in order to extend to Gemplus substantially the same or similar rights and benefits of the Existing Stockholders and Note Holders under the Stockholders' Agreement with respect to the Common Stock and Warrants to be purchased by Gemplus, and the Common Stock issuable upon exercise of such Warrants. 4. The parties have agreed to the terms of this waiver and amendment in consideration for the mutual promises, covenants and agreements contained herein. 1 2 WAIVER AND AMENDMENT 1. That certain right of first offer set forth in Section 2 of the Stockholders' Agreement is hereby waived as to all Existing Stockholders and Note Holders with respect to the issuance and sale to Gemplus of (i) the Gemplus Shares (as defined below); and (ii) the Gemplus Warrants (as defined below), and the Common Stock issuable or issued upon exercise thereof. The Company hereby consents to such waiver. 2. Upon the closing of the sale of the Gemplus Shares and Gemplus Warrants to Gemplus (the "Closing"), and provided Gemplus agrees in writing to become bound by all terms and conditions thereof, Gemplus shall be made a party to the Stockholders' Agreement. 3. In addition, effective upon the Closing, the Existing Stockholders and Note Holders consent to and do hereby amend the Stockholders' Agreement as follows: (a) the definitions of "Existing Stockholders" and "Stockholders" in the Stockholders Agreement shall be deemed to include Gemplus; (b) Section 1.1(e) shall be amended to read in its entirety: "(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, (iv) the Gemplus Shares, (v) all shares of Common Stock and other securities issued or issuable in respect of the Common Stock referred to in clauses (i), (ii), (iii) and (iv) by reason of a stock split, stock dividend, stock combination, recapitalization or the like." (c) Section 1.1(i) shall be amended to read in its entirety: "(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, and the shares of Common Stock shall be counted as including the number of shares of Common Stock for which the Gemplus Warrants are then exercisable." (d) New section 1.1(k) shall be added which shall read in its entirety: "(k) The term "Gemplus" shall mean Gemplus, a legal entity organized under the laws of France." (e) New Section 1.1(l) shall be added which shall read in its entirety: 2 3 "(l) The term "Gemplus Shares" shall mean (i) 200,000 shares of Common Stock of the Company issued to Gemplus, (ii) up to 400,000 shares of Common Stock of the Company issuable to Gemplus upon exercise of the Gemplus Warrants, pursuant to that certain Common Stock and Warrant Purchase Agreement dated as of September 5, 1997 between the Company and Gemplus (the "Gemplus Agreement) and (iii) all shares of Common Stock and other securities issued or issuable in respect of the Common Stock referred to in clauses (i) and (ii) by reason of a stock split, stock dividend, stock combination, recapitalization or the like. For purposes of calculating the number of Gemplus Shares under any provision of this Agreement, the Gemplus Warrants shall be deemed to have been exercised in full and the shares of Common Stock of the Company issued thereunder to Gemplus. (f) New Section 1.1 (m) shall be added to read in its entirety: "(m) The term "Gemplus Warrants" shall mean (i) a Warrant to purchase 200,000 shares of the Common Stock of the Company at an exercise price of $13.00 per share, and (ii) a Warrant to purchase 200,000 shares of the Common Stock of the Company at an exercise price of $14.00 per share, issued to Gemplus pursuant to the Gemplus Agreement and evidenced by the Warrant instruments of even date therewith. 4. The Company hereby agrees to such amendments to the Stockholders' Agreement. 5. In accordance with Section 6.1 of the Stockholders' Agreement, this Waiver and Amendment shall be effective upon its execution and delivery by the Company and Existing Stockholders and Note Holders holding a majority of the Registrable Securities (as defined in the Stockholders' Agreement). COMPANY: SCM MICROSYSTEMS, INC., a Delaware corporation By: --------------------------- Steve Humphreys, President 3 4 SCM MICROSYSTEMS, INC. COUNTERPART SIGNATURE PAGE TO WAIVER AND AMENDMENT TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT SEPTEMBER 5, 1997 "HOLDER" ------------------------- ------------------------------------- Print Name of Holder By: ---------------------------------- Signature ------------------------------------- Print Name of Signatory ------------------------------------- Print Title Address: --------------------------- --------------------------- --------------------------- EX-23.1 12 CONSENT OF KPMG PEAT MARWICK LLP 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 10 which is as of September 5, 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 September 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----