e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number 0-29440
SCM MICROSYSTEMS,
INC.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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77-0444317
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(State or other jurisdiction
of
Incorporation or organization)
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(I.R.S. Employer
Identification Number)
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Oskar-Messter-Strasse 13,
Ismaning, Germany
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85737
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(Address of Principal Executive
Offices)
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(Zip
Code)
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Registrants telephone number, including area code:
+49 89 95 95 5000
Securities Registered Pursuant to Section 12(b) of the
Act:
None
Securities Registered Pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 par value, and associated Preferred
Share Purchase Rights
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicated by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Based on the closing sale price of the Registrants Common
Stock on the NASDAQ National Market System on June 30,
2006, the last business day of the Registrants most
recently completed second fiscal quarter, the aggregate market
value of Common Stock held by non-affiliates of the Registrant
was $39,279,106. For purposes of this disclosure, shares of
Common Stock held by beneficial owners of more than 5% of the
outstanding shares of Common Stock and shares held by officers
and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates of the Registrant. This
determination is not necessarily conclusive.
At March 9, 2007, the registrant had outstanding
15,698,278 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
The Companys Proxy Statement and Notice of Annual Meeting
to be filed within 120 days after the Registrants
fiscal year end of December 31, 2006 is incorporated by
reference into Part II, Item 5 and Part III of
this Report.
SCM
Microsystems, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2006
TABLE OF CONTENTS
SCM, CHIPDRIVE, EasyTAN and SmartOS are registered trademarks
and Opening the Digital World is a trademark of SCM
Microsystems. Other product and brand names may be trademarks or
registered trademarks of their respective owners.
PART I
This Annual Report on
Form 10-K
contains forward-looking statements for purposes of the safe
harbor provisions under the Private Securities Litigation Reform
Act of 1995. For example, statements, other than statements of
historical facts regarding our strategy, future operations,
financial position, projected results, estimated revenues or
losses, projected costs, prospects, plans, market trends,
competition and objectives of management constitute
forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as believe,
could, should, would,
may, anticipate, intend,
plan, estimate, expect,
project or the negative of these terms or other
similar expressions. Although we believe that our expectations
reflected in or suggested by the forward-looking statements that
we make in this Annual Report on
Form 10-K
are reasonable, we cannot guarantee future results, performance
or achievements. You should not place undue reliance on these
forward-looking statements. All forward-looking statements speak
only as of the date of this Annual Report on
Form 10-K.
While we may elect to update forward-looking statements at some
point in the future, we specifically disclaim any obligation to
do so, even if our expectations change, whether as a result of
new information, future events or otherwise. We also caution you
that such forward-looking statements are subject to risks,
uncertainties and other factors, not all of which are known to
us or within our control, and that actual events or results may
differ materially from those indicated by these forward-looking
statements. We disclose some of the factors that could cause our
actual results to differ materially from our expectations in the
Customers, Research and Development,
Competition, Proprietary Information and Technology
and Risk Factors sections and elsewhere in this
Annual Report on
Form 10-K.
These cautionary statements qualify all of the forward-looking
statements included in this Annual Report on
Form 10-K
that are attributable to us or persons acting on our behalf.
Description
of Business
SCM Microsystems, Inc. (SCM, the
Company, we and us) was
incorporated in 1996 under the laws of the state of Delaware. We
design, develop and sell hardware, software and silicon
solutions that enable people to conveniently and securely access
digital content and services. We sell our secure digital access
products into two market segments: PC Security and Flash Media
Readers.
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For the PC Security market, we offer smart card reader
technology that enables authentication of individuals for
applications such as electronic passports, electronic healthcare
cards, secure logical access to PCs and networks, and physical
access to facilities.
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For the Flash Media Reader market, we offer digital media
readers that are used to transfer digital content to and from
various flash media. These readers are primarily used in digital
photo kiosks.
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We sell our products primarily to original equipment
manufacturers, or OEMs, who typically either bundle our products
with their own solutions, or repackage our products for resale
to their customers. Our OEM customers include: government
contractors, systems integrators, large enterprises and computer
manufacturers, as well as banks and other financial institutions
for our smart card readers; and computer electronics and
photographic equipment manufacturers for our digital media
readers. We sell and license our products through a direct sales
and marketing organization, as well as through distributors,
value added resellers and systems integrators worldwide.
On May 22, 2006 we completed the sale of our Digital
Television solutions (DTV solutions) business to
Kudelski S.A. As a result, we have accounted for the DTV
solutions business as a discontinued operation, and the
statements of operations and cash flows for all periods
presented reflect the discontinuance of this business. In
addition, our operations previously included a retail Digital
Media and Video business, which we sold in the third quarter of
2003. As a result of this sale and divestiture, beginning in the
second quarter of fiscal 2003, we have accounted for the retail
Digital Media and Video business as a discontinued operation,
and statements of operations for all periods presented reflect
the discontinuance of this business. (See Note 3 to our
consolidated financial statements that are attached to this
Annual Report on
Form 10-K.)
1
Overview
of the Market for Secure Digital Access Products
Individuals, businesses, governments and educational
institutions increasingly rely upon computer networks, the
Internet and intranets for information, entertainment and
services. The proliferation of and reliance upon electronic data
and electronic transactions has created an increasing need to
protect the integrity of digital data, as well as to control
access to electronic networks and the devices that connect to
them. For government entities and large corporate enterprises,
there is a need to restrict and manage access to shared networks
and intranets to prevent loss of proprietary data. In addition,
there is a need to manage and monitor access to information
stored on identification cards used in new government-driven
programs around the world, such as electronic passports,
drivers licenses and citizen ID and healthcare cards. In
some cases, there may also be a need to expand the capability of
electronic networks to protect or restrict access to physical
facilities for corporate employees or government personnel.
Finally, for consumers and online merchants or banks, there is a
need to authenticate credit cardholders or bank clients for
Internet transactions without jeopardizing sensitive personal
account information. In all of these areas, we believe
standards-based devices that easily connect to a PC or network
to provide secure, controlled access to digital content or
services are an easily deployed and effective solution.
PC
Security Market
The proliferation of personal computers in both the home and
office, combined with widespread access to computer networks and
the Internet, have created significant opportunities for
electronic transactions of all sorts, including
business-to-business,
e-government,
e-commerce
and home banking. In government agencies and corporate
enterprises, the desire to link disparate divisions or offices,
reduce paperwork and streamline operations is also leading to
the adoption of more computer- and network-based programs and
processes. Network-based programs are also used to track and
manage data about large groups of people, for example, citizens
of a particular country. While the benefits of computer networks
may be significant, network and Internet-based transactions also
pose a significant threat of fraud, eavesdropping and data theft
for both groups and individuals. To combat this threat, parties
at both ends of the transaction must be assured of the integrity
of the transaction. Online merchants and consumers need
assurance that customers are correctly identified and that the
authenticity and confidentiality of information such as credit
card numbers is established and maintained. Corporate,
government and other networks need security systems that ensure
the security of individuals data and protect the network
from manipulation or abuse both from within and without the
enterprise.
Increasingly, large organizations such as corporations,
government agencies and banks are adopting systems that protect
the network, the information in it and the people using it by
authenticating each user as the user logs on and off the
network. Authentication of a users identity is typically
accomplished by one of two approaches: passwords, which are
codes known only by specific users; and tokens, which are
user-specific physical devices that only authorized users
possess. Passwords, while easier to use, are also less secure
because they tend to be short and static, and are often
transmitted without encryption. As a result, passwords are
vulnerable to decoding or observation and subsequent use by
unauthorized persons. Tokens range from simple credit card-size
objects to more complex devices capable of generating
time-synchronized or challenge-response access codes. Certain
token-based systems require both possession of the token itself
and a personal identifier, such as a fingerprint or personal
identification number, or PIN, to indicate that the token is
being used by an authorized user. Such an approach, referred to
as two-factor authentication, provides much greater security
than single factor systems such as passwords or the simple
possession of a token.
One example of a token used in two-factor authentication is the
smart card, which contains an embedded microprocessor, memory
and a secure operating system. In addition to their security
capabilities, smart cards are able to store data such as account
information, healthcare records, merchant coupons, still or
video images and, in some cases, cash. Smart cards are typically
about the size of a credit card and can easily be carried in a
wallet or attached to a badge. Smaller cards designed for use
with small devices such as mobile phones are also increasingly
being utilized. Depending on the application for which they are
being used, smart cards can be designed to insert into a reader
attached to a PC or other device, or can include wireless
capabilities for contactless interface. Worldwide shipments of
smart cards topped 2.6 billion in 2005 and are estimated to
grow to nearly 3.3 billion in 2006 for applications ranging
from mobile communications to corporate security to online
banking, according to the European smart card industry
organization, Eurosmart. Demand for readers used in conjunction
with those cards
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is also expected to grow. Research firm Frost &
Sullivan predicts that reader shipments will grow from
6.9 million in 2004 to 33 million in 2010. We believe
that the combination of smart cards and readers provides a
secure solution for network access, personal identification,
electronic commerce and other transactions where authentication
of the user is critical.
To date, the largest and one of the most advanced deployments of
smart cards for digital security purposes has been the
U.S. Department of Defenses Common Access Card
(CAC) program. Beginning in October 2000, the
U.S. Department of Defense has distributed smart cards to
more than four million military personnel. These cards are being
used as the standard identification credential for military
personnel, and are also being used for secure authentication and
network access. Beginning in 2006, new deployments of the cards
have also begun to include capabilities for contactless
interface with security terminals at doorways and other
entrances to provide secure physical access at government
facilities. The U.S. governments decision to deploy
an integrated, agency-wide, common smart card platform will
continue to raise the awareness of smart card technology and
hence increase the demand for contactless smart card proximity
readers in both public and private sectors, according to IMS
Research. The firm predicts the Americas market for
electronic physical access control equipment will reach
$766.7 million in 2009, with a forecast compound annual
growth rate of 9.1%.
Because CAC cards store and protect personnel data, they are
also being used wherever a digital signature is required; for
example, processing travel orders or expense claims online,
electronic voting, contractor verification and in department
specific programs. As a result of the CAC program, other
government agencies are also employing smart cards as secure ID
tokens. The U.S. General Services Administration estimates
they will issue smart cards to two million users in various
agencies between February 2007 and December 2008.
The U.S. government is actively driving the use of smart
cards outside the boundaries of the country as well, with the
request in 2002 to 27 visa waiver countries to develop
electronic passports that will include biometric data to
authenticate the holder. Under the auspices of the International
Civil Aviation Organization (ICAO), 13 countries have been
working together to define and develop standards for
e-passports
based on contactless smart card technology. The goal of the
program is to ensure that these
e-passports
cannot be copied or altered, and that the biometric facial image
stored on the card could be used to positively identify the
holder. All of ICAOs 188 Contracting States must
begin issuing only machine readable (i.e., electronic) passports
no later than April 1, 2010. 24 of the 27 visa waiver
countries met the October 2006 deadline to begin issuing
electronic passports and altogether 40 countries worldwide have
introduced the new documents, including Australia, Belgium,
Canada, China, Denmark, Hong Kong, Japan, Korea, Macao,
Malaysia, the Netherlands, Singapore, Sweden, the
United Kingdom and the U.S.
In many countries, both local and federal governments are
beginning to use smart card technology for internal programs,
such as new or enhanced national ID cards, storing digital
certificates for online transactions, residency permits and
visas, and drivers licenses. Some examples of programs
include national ID rollouts in Thailand and China and
deployment of electronic drivers licenses in Japan.
According to IMS Research Group, more than one billion smart
cards will be used in identity programs by governments and other
public bodies worldwide by 2010.
In addition, many governments are also evaluating or making
plans to develop electronic healthcare record systems, which
would include smart card-based healthcare cards for
participants. Puerto Rico, South Africa, Taiwan and several
European countries, including Austria, Belgium, France, Germany,
Italy and Slovenia, are among the countries and regions that
have already deployed or are deploying electronic healthcare
cards to millions of healthcare users. These cards identify the
user and store insurance and medical information that can be
accessed by doctors and hospitals, for example. To date, the
largest program actively underway is in Germany, where the
government plans to begin distribution of 82 million
eHealth cards to citizens in 2007 and have the corresponding
network and card reader infrastructure in place for doctors,
hospitals, pharmacies and other healthcare providers by 2008.
Outside the government sector, many corporate enterprises are
adopting smart card technology to protect access to buildings
and computer networks. Several smart card-based employee
identification programs have already been put in place by
companies such as Boeing, Chevron, Hitachi, Microsoft, Nissan,
Pfizer, Royal Dutch/Shell Group and Sun Microsystems.
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In the financial industry, major credit card companies in many
parts of the world have embraced smart card technology as a more
secure way to safeguard transactions and eliminate fraud, the
cost of which can be significant. The majority of credit cards
issued worldwide now comply with the Europay Mastercard Visa
(EMV) standard for securing financial transactions using a smart
card. Canada, most of Europe and Asia/Pacific and some markets
in the Middle East, Africa and Latin America are rapidly moving
to EMV smart cards to reduce fraud. Smart cards are also
expected to have a growing role in online banking. Western
Europe, in particular has a high percentage of consumers banking
online, and Germany is one of the first countries to coordinate
e-government
initiatives requiring digital signatures to leverage smart cards
issued to bank customers.
Our PC
Security Products
We offer a full range of smart card reader technology solutions
to address the need for smart card-based security for a range of
applications and environments, including PCs, networks, physical
facilities and authentication programs. Our products include
smart card readers, application specific integrated circuits, or
ASICs, and small office productivity packages based on smart
cards. We sell our readers and ASICs primarily to PC original
equipment manufacturers, or OEMs, smart card solutions providers
and government systems integrators to support specific security
programs, such as secure logon for employees, secure home
banking or the Common Access Card program; as well as to OEMs
that incorporate our products into their devices, such as PCs or
keyboards. We sell our small office productivity packages
primarily to end users via retail channels and the Internet.
Smart Card Readers. We are one of the
worlds largest suppliers of smart card readers for
security-oriented applications. Our smart card readers are
hardware devices that connect either externally or internally
with a computer or other processing platform to verify the
identity of, or authenticate, the user, and thus control access.
Much like a lock works with a key, our readers work with a smart
card to admit or deny access to a computer or network, or to
authenticate the card holder for identification and access to
facilities, programs or services. Our readers are used to
authenticate users in order to support security programs and
applications for corporations, financial institutions,
governments and individuals. These security programs and
applications include secure network logon; personnel
identification for programs such as healthcare delivery,
drivers licenses and electronic passports; secure home
banking; digital signatures; and secure
e-commerce.
Our products employ an open-systems architecture that provides
compatibility across a range of hardware platforms and software
environments and accommodates remote upgrades so that
compatibility can be maintained as the security infrastructure
evolves. We have made significant investments in software
embedded in our products that enable our smart card readers and
components to read the majority of smart cards in the world,
regardless of manufacturer or application. Our smart card
readers are also available with a variety of interfaces,
including biometric (fingerprint), wireless/contactless, keypad,
USB, PCMCIA, ExpressCard and serial port, and offer various
combinations of interfaces integrated into one device in order
to further increase the level of security.
To address the varied needs of our customers, we offer an array
of smart card readers. These include readers designed for
various platforms, such as desktop and notebook computers; as
well as readers offering incremental levels of protection
against unauthorized use, from simple PC Card reader devices to
more complex PIN entry systems, which require both a smart card
and a users personal identification number to authenticate
the user. Our smart card reader product line includes:
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Secure Card Readers internal or external card
readers requiring only a smart card to provide secure
authentication;
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Secure PINpad Readers external readers with a
numeric PINpad that utilize a smart card in conjunction with a
personal identification code to ensure two factor
authentication of the user;
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Contactless Readers and Dual Interface
Readers internal and external readers that
address the demand for contactless interface used in many
security programs based on smart cards, for example public
transport,
e-banking,
e-purse and
e-passport
personalization and verification;
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Physical Access Control Terminal (PACT)
designed to address the requirements of the U.S. government
for secure access to facilities. The PACT terminal combines new
technologies such as contactless and
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biometric interface with existing control systems as well as CAC
and newer ID cards, to provide support for new connectivity
options going forward.
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eHealth terminal specifically designed to
meet the requirements of the German Health Card, to support
Germanys intended rollout of healthcare cards to
82 million citizens. The eHealth100 terminal reads and
operates both with Germanys current memory card-based
health card as well as the new chip-based card, and is compliant
for use with three different card types: the electronic health
card (eGK), the health professional card (HPC), and the Secure
Module Cards (SMC) used for secure data communication;
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ePassport readers designed to read all
electronic passports currently in use or planned for
distribution. Ranked among the highest in interoperability and
versatility in international interoperability tests. We offer
both complete ePassport readers and ePassport modules that can
be incorporated into customer terminals and designs;
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Mobile Readers unconnected devices that
enable secure network access and user authentication by
generating one-time passwords; and
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Keyboard Readers reader interfaces that are
designed to be embedded into a computer keyboard at the
manufacturer.
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Our readers are developed in compliance with relevant industry
standards related to the applications for which they will be
used. For example, many of our readers, including the SCRx31
Secure Card Reader line, conform to Europay, MasterCard and Visa
(EMV) international standards for financial transactions. We
typically customize our smart card readers with unique casing
designs and configurations to address the specific requirements
of each customer.
In addition, we also offer ASICs/Chip Sets, which provide
smart card interface capabilities for embedded platforms, such
as desktop computers or keyboards. We offer two levels of ASICs
to provide both basic smart card interface capability and
support for multiple interfaces and reader devices. All of our
ASICs comply with all relevant security standards for
applications in the smart card industry. In addition, our
advanced chip allows on-board flash upgrades for future firmware
and application enhancements.
CHIPDRIVE Productivity Solutions. We offer
several CHIPDRIVE packages, consisting of smart cards, readers
and software applications, for small and medium sized
businesses. These products support applications such as smart
card-enabled logon to
Microsoft®
Windows and smart card-based, secure electronic time recording.
Flash
Media Reader Market
Digital cameras have gained rapid popularity over the last few
years, resulting in more than half of U.S. households
owning a digital camera at the end of 2005, according to
research firm InfoTrends. InfoTrends also estimates that
U.S. output of digital photo prints exceeded
13.2 billion in 2005 and will increase to 16 billion
by 2009. Flash media cards, which store digital images on the
majority of digital cameras, are the key driver behind digital
print growth. Higher capacity memory cards allow digital camera
users to take more pictures before having to download images or
swap out the card. As card capacities increase, more time is
needed to download images. This uses more of the cameras
battery life, which already may be insufficient for many camera
owners. To print without draining the camera battery, the flash
media card can be removed and inserted into a card
reader on a PC, printer or kiosk to
download and print images.
Retail photo kiosks and minilabs, which give instant,
high-quality printouts of digital images, make printing photos
more convenient for the consumer and typically provide higher
quality prints than home printers. According to an August 2006
survey conducted by InfoTrends, 41% of digital camera owners who
print photos had obtained prints at a retail location in 2005,
and the number is expected to grow. As flash memory card
capacities increase and digital cameras continue to proliferate,
we believe consumers will increasingly use photo kiosks and
minilabs to download and print their digital pictures. Each
photo kiosk or minilab requires a variety of media card readers
to download images from the various media cards in use in
digital cameras on the market
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Our
Flash Media Reader Products
We offer digital media readers that provide an interface to the
various formats of digital media cards to download digital
images and other content. We sell our digital media readers
primarily to photo kiosk manufacturers. Our digital media
readers allow photo kiosk makers and others to build flash media
interface capabilities into their products. Our product
offerings provide interface capabilities for all major memory
card formats, including PCMCIA I and II,
CompactFlash®
I and II,
MultiMediaCardtm,
Secure Digital
Card®,
SmartMediatm,
Sony Memory
Stick®
and xD-Picture
Cardtm.
Our digital media readers leverage our interface chips to enable
each reader slot to read multiple types of cards. Our digital
media reader product line includes:
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Preconfigured Drives our 3.5 inch 5- and
6-bay drives provide
plug-and-play
interface for photo kiosks and mini labs. Marketed as
Professional Card Drive (PCD) readers, these drives are designed
to support heavy commercial usage and support multiple media
card formats in either an integrated or a modular form factor.
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Configurable Drives our single board drives
provide flexible interface solutions for print kiosks, photo
labs and other applications requiring flash media interface.
Single board drives can be configured using any combination of
media interface and drive placement to address the specific
requirements of each kiosk or other product environment.
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Business
Segment Financial Information
See Note 11 to our consolidated financial statements that
are attached to this Annual Report on
Form 10-K
for financial information regarding revenue and gross margin for
our reported business segments through 2006. See
Managements Discussion and Analysis of Financial
Conditional and Results of Operations for historical
financial information, including revenue and gross margin.
Technology
Most of the markets in which we participate are in their early
stages of development and we expect they will continue to
evolve. For example, early markets such as ours typically
require complete hardware solutions, but over time requirements
shift to critical components such as silicon or software as OEM
customers increase their knowledge and sales volumes of the
technologies being provided. We are committed to developing
products using standards compliant technologies. Our core
technologies, listed below, leverage our development efforts to
benefit customers across our product lines and markets.
Chip-Level Integration. We have
implemented a number of our core interface and processing
technologies into silicon chips for each of our two primary
product areas.
Silicon and Firmware. For our PC Security
products, we have developed interface technology that provides
interoperability between PCs and smart cards from many different
smart card manufacturers. Our interoperable architecture
includes an International Standards Organization, or ISO,
compliant layer as well as an additional layer for supporting
non-ISO compliant smart cards. Through our proprietary
integrated circuits and firmware, our smart card readers can be
updated electronically to accommodate new types of smart cards
without the need to change the readers hardware. For our
Flash Media Reader products, we have developed interface
technology that provides interoperability and compatibility
between various digital appliances, computer platforms and flash
memory cards.
Complete Hardware Solutions. We provide
complete hardware solutions for a range of secure digital access
applications, and we can customize these solutions in terms of
physical design and product feature set to accommodate the
specific requirements of each customer. For example, we have
designed and manufactured smart card readers that incorporate
specific features, such as a transparent case and removable USB
cable, to address the needs of specific OEM customers.
Customers
Our products are targeted at government contractors and systems
integrators, as well as manufacturers of computers, computer
components, consumer electronics and photographic equipment.
Sales to a relatively small
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number of customers historically have accounted for a
significant percentage of our total sales. Sales to our top ten
customers accounted for approximately 53% of revenue in 2006,
54% of revenue in 2005 and 54% of revenue in 2004. In each of
2006 and 2004, one customer accounted for more than 10% of
revenue. In 2005, two customers accounted for more than 10% of
revenue. We expect that sales of our products to a limited
number of customers will continue to account for a high
percentage of our total sales for the foreseeable future. The
loss or reduction of orders from a significant customer,
including losses or reductions due to manufacturing, reliability
or other difficulties associated with our products, changes in
customer buying patterns, or market, economic or competitive
conditions in the digital information security business, could
harm our business and operating results.
Sales and
Marketing
We utilize a direct sales and marketing organization,
supplemented by distributors, value added resellers, systems
integrators and resellers. As of December 31, 2006, we had
26 full-time employees engaged in sales and marketing
activities. Our direct sales staff solicits prospective
customers, provides technical advice and support with respect to
our products and works closely with customers, distributors and
OEMs. In support of our sales efforts, we conduct sales training
courses, targeted marketing programs and advertising, and
ongoing customer and third-party communications programs, and we
participate in trade shows.
Backlog
A significant portion of our sales are made from inventory on a
current basis. Sales are made primarily pursuant to purchase
orders for current delivery or agreements covering purchases
over a period of time. Our customer contracts generally do not
require fixed long-term purchase commitments. In view of our
order and shipment patterns and because of the possibility of
customer changes in delivery schedules or cancellation of
orders, we do not believe that such agreements provide
meaningful backlog figures or are necessarily indicative of
actual sales for any succeeding period.
Collaborative
Industry Relationships
We are party to collaborative arrangements with a number of
third parties and are a member of several industry consortia. We
evaluate, on an ongoing basis, potential strategic alliances and
intend to continue to pursue such relationships. Our future
success will depend significantly on the success of our current
arrangements and our ability to establish additional
arrangements. These arrangements may not result in commercially
successful products.
PCMCIA. We are a member of Personal Computer
Memory Card International Association, or PCMCIA, an
international standards body and trade association with more
than 100 member companies. We have been a member of PCMCIA since
1990. PCMCIA was founded in 1989 to establish standards for
integrated circuit cards and to promote interchangeability among
mobile PCs.
PC/SC Workgroup. We are an associate member of
the PC/SC workgroup, a consortium of technology companies that
seeks to set the standard for integrating smart cards and smart
card readers into the mainstream computing environment.
Silicon Trust. We are a member of Silicon
Trust, an industry forum sponsored by Infineon Technologies that
focuses on silicon based security solutions, including smart
cards, biometrics, and trusted platforms.
Smart Card Alliance. We are a member of the
Smart Card Alliance, a
U.S.-based,
multi-industry association of member firms working to accelerate
the widespread acceptance of multiple applications for smart
card technology. We are also members of Smart Card
Alliances Leadership Council and the Physical Access
Council, which focuses on issues relating to the implementation
of physical access systems. We regularly contribute to Smart
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Card Alliance research and education materials including white
papers, for example a paper defining key policy, process and
technology considerations for a secure smart card-based personal
ID system.
Teletrust. We are a member of Teletrust, a
German organization whose goal is to provide a legally accepted
means to adopt digital signatures. Digital signatures are
encrypted personal identifiers, typically stored on a secure
smart card, which allow for a high level of security through
internationally accepted authentication methods. We are a member
of 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.
We are also members of several flash media card organizations,
including CompactFlash Association, Memory Stick Developers
Forum, MultiMediaCard Association, SD Card Association, SSFDC
SmartMedia Forum, xD-Picture Card Forum, Photo Marketing
Association International and USB Implementers Forum.
Research
and Development
To date, we have made substantial investments in research and
development, particularly in the areas of smart card-based
physical and network access devices and digital connectivity and
interface devices. Our engineering design teams work
cross-functionally with marketing managers, applications
engineers and customers to develop products and product
enhancements to meet customer and market requirements. We also
strive to develop and maintain close relationships with key
suppliers of components and technologies in order to be able to
quickly introduce new products that incorporate the latest
technological advances. Our future success will depend upon our
ability to develop and to introduce new products that keep pace
with technological developments and emerging industry standards
while addressing the increasingly sophisticated needs of our
customers.
Our research and development expenses were approximately
$3.8 million, $4.1 million and $4.8 million for
the years ended December 31, 2006, 2005 and 2004,
respectively. As of December 31, 2006, we had
83 full-time employees engaged in research and development
activities, including software and hardware engineering, testing
and quality assurance and technical documentation. The majority
of our research and development activities occur in India. We
fund a small portion of our research and development activities
with technology development revenues received from OEM customers
in connection with design and development of specific products.
Manufacturing
and Sources of Supply
Through September 2005, we manufactured our products primarily
using internal resources in Singapore, supplemented by contract
manufacturers in Asia. Since October 2005, we have ceased to
manufacture any of our own components or products internally and
have shifted these activities to contract manufacturers in
Singapore and China. We have implemented a global sourcing
strategy that we believe enables us to achieve greater economies
of scale, better gross margins and more uniform quality
standards for our products. In the event any of our contract
manufacturers are unable or unwilling to continue to manufacture
our products, we may have to rely on other current manufacturing
sources or identify and qualify new contract manufacturers. Any
significant delay in our ability to obtain adequate supplies of
our products from current or alternative sources would harm our
business and operating results.
We believe that our success will depend in large part on our
ability to provide quality products and services while ensuring
the highest level of security for our products during the
manufacturing process. We have a formal quality control program
to satisfy our customers requirements for high quality and
reliable products. To ensure that products manufactured by
others are consistent with our standards, we manage all key
aspects of the production process, including establishing
product specifications, selecting the components to be used to
produce our products, selecting the suppliers of these
components and negotiating the prices for these components. In
addition, we work with our suppliers to improve process control
and product design. As of December 31, 2006, we had
11 full-time employees engaged in manufacturing and
logistics activities, focused on coordinating product management
and supply chain activities between SCM and our contract
manufacturers.
We rely upon a limited number of suppliers of several key
components of our products. For example, we currently utilize
the foundry services of Atmel and Samsung to produce our ASICs
for smart cards readers; we use chips and antenna components
from Philips in our contactless smart card readers; and we use
various mechanical
8
components in our smart card readers from TaiSol Electronics.
Wherever possible, we have added a second source of supply for
mechanical components such as printed circuit boards or casing.
However, risk remains that we may be adversely impacted by an
inadequate supply of components, price increases, late
deliveries or poor component quality. In addition, some of the
basic components we use in our products, such as flash media,
may at any time be in great demand. This can result in the
components not being available to us timely or at all,
particularly if larger companies have ordered more significant
volumes of the components; or in higher prices being charged for
the components. Disruption or termination of the supply of
components or software used in our products could delay
shipments of our products, which could have a material adverse
effect on our business and operating results. These delays could
also damage relationships with current and prospective customers.
Competition
The PC Security and Flash Media Reader markets are competitive
and characterized by rapidly changing technology. We believe
that competition in these markets is likely to intensify as a
result of anticipated increased demand for digital access
products. We currently experience competition from a number of
sources, including:
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Advanced Card Systems, Gemalto (formerly Gemplus and Axalto),
O2Micro and OmniKey in smart card readers, ASICs and universal
smart card reader interfaces for PC and network access;
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AMAG Technology, Bioscrypt, BridgePoint Systems, HID, Integrated
Engineering, Precise Biometrics, XceedID and XTec in physical
access control terminals; and
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Atech, Datafab, ePOINT, OnSpec and YE Data for digital media
readers.
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We also experience indirect competition from certain of our
customers who currently offer alternative products or are
expected to introduce competitive products in the future. We may
in the future face competition from these and other parties that
develop digital data security products based upon approaches
similar to or different from those employed by us. In addition,
the market for digital data security and access control products
may ultimately be dominated by approaches other than the
approach marketed by us.
We believe that the principal competitive factors affecting the
market for our products include:
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the extent to which products must support industry standards and
provide interoperability;
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the extent to which standards are widely adopted and product
interoperability is required within industry segments;
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technical features;
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quality and reliability;
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the ability of suppliers to develop new products quickly to
satisfy new market and customer requirements;
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ease of use;
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strength of distribution channels; and
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price.
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While we believe that we compete favorably with respect to these
factors, we may not be able to continue to successfully compete
due to these or other factors and competitive pressures we face
could materially and adversely affect our business and operating
results.
Proprietary
Technology and Intellectual Property
Our success depends significantly upon our proprietary
technology. We currently rely on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect our proprietary
rights, which afford only limited protection. Although we often
seek to protect our proprietary technology through patents, it
is possible that no new patents will be issued, that our
proprietary products or technologies are not patentable, and
that any issued patent will fail to provide us with any
competitive advantages.
9
There has been a great deal of litigation in the technology
industry regarding intellectual property rights and from time to
time we may be required to use litigation to protect our
proprietary technology. This may result in our incurring
substantial costs and there is no assurance that we would be
successful in any such litigation. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to use our proprietary
information and software without authorization. In addition, the
laws of some foreign countries do not protect proprietary and
intellectual property rights to the same extent as do the laws
of the United States. Because many of our products are sold and
a substantial portion of our business is conducted outside the
United States, our exposure to intellectual property risks
may be higher. Our means of protecting our proprietary and
intellectual property rights may not be adequate. There is a
risk that our competitors will independently develop similar
technology, duplicate our products or design around patents or
other intellectual property rights. If we are unsuccessful in
protecting our intellectual property or our products or
technologies are duplicated by others, our business could be
harmed.
In addition, we have from time to time received claims that we
are infringing upon third parties intellectual property
rights. Future disputes with third parties may arise and these
disputes may not be resolved on terms acceptable to us. As the
number of products and competitors in our target markets grows,
the likelihood of infringement claims also increases. Any claims
or litigation may be time-consuming and costly, divert
management resources, cause product shipment delays, or require
us to redesign our products, accept product returns or to write
off inventory. Any of these events could have a material adverse
effect on our business and operating results.
Employees
As of December 31, 2006, we had 156 full-time
employees, of which 83 were engaged in engineering, research and
development; 26 were engaged in sales and marketing; 11 were
engaged in manufacturing and logistics; and 36 were engaged
in general management and administration. We are not subject to
any collective bargaining agreements and, to our knowledge, none
of our employees are currently represented by a labor union. To
date, we have experienced no work stoppages and believe that our
employee relations are generally good.
Foreign
Operations
Our corporate headquarters are in Ismaning, Germany and we lease
small sales and marketing facilities in California and in Japan.
We conduct our research and development activities from our
facility in Chennai, India.
Please see Note 11 to our consolidated financial statements
attached to this Annual Report on
Form 10-K
which are included in response to Item 8 for financial
information about geographic areas in which we have operations.
Availability
of SEC Filings
We make available through our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports free of charge as soon as
reasonably practicable after we electronically file such
material with the Securities and Exchange Commission. Our
Internet address is www.scmmicro.com. The content on our website
is not incorporated by reference into this filing.
10
Our business and results of operations are subject to
numerous risks, uncertainties and other factors that you should
be aware of, some of which are described below. The risks,
uncertainties and other factors described below are not the only
ones facing our company. Additional risks, uncertainties and
other factors not presently known to us or that we currently
deem immaterial may also impair our business operations.
Any of the risk, uncertainties and other factors could have a
materially adverse effect on our business, financial condition,
results of operations, cash flows or product market share and
could cause the trading price of our common stock to decline
substantially.
We
have incurred operating losses and may not achieve
profitability.
We have a history of losses with an accumulated deficit of
$191.7 million as of December 31, 2006. We may
continue to incur losses in the future and may be unable to
achieve or maintain profitability.
Our
quarterly and annual operating results will likely
fluctuate.
Our quarterly and annual operating results have varied greatly
in the past and will likely vary greatly in the future depending
upon a number of factors. Many of these factors are beyond our
control. Our revenues, gross profit and operating results may
fluctuate significantly from quarter to quarter due to, among
other things:
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business and economic conditions overall and in our markets;
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the timing and amount of orders we receive from our customers
that may be tied to budgetary cycles, product plans or program
roll-out schedules;
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cancellations or delays of customer product orders, or the loss
of a significant customer;
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our ability to obtain an adequate supply of components on a
timely basis;
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poor quality in the supply of our components;
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delays in the manufacture of our products;
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our backlog and inventory levels;
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our customer and distributor inventory levels and product
returns;
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competition;
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new product announcements or introductions;
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our ability to develop, introduce and market new products and
product enhancements on a timely basis, if at all;
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our ability to successfully market and sell products into new
geographic or market segments;
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the sales volume, product configuration and mix of products that
we sell;
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technological changes in the markets for our products;
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reductions in the average selling prices that we are able to
charge due to competition or other factors;
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strategic acquisitions, sales and dispositions;
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fluctuations in the value of foreign currencies against the
U.S. dollar;
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the timing and amount of marketing and research and development
expenditures;
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loss of key personnel; and
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costs related to events such as dispositions, organizational
restructuring, headcount reductions, litigation or write-off of
investments.
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Due to these and other factors, our revenues may not increase or
even remain at their current levels. In particular, although we
have indicated that we believe we will be profitable for fiscal
2007 as a whole, we may not be able to reach profitability in
any quarterly period of 2007 or for the year as a whole, because
of the risks outlined above. Because a majority of our operating
expenses are fixed, a small variation in our revenues can cause
significant variations in our operational results from quarter
to quarter and our operating results may vary significantly in
future periods. Therefore, our historical results may not be a
reliable indicator of our future performance.
It is
difficult to estimate operating results prior to the end of a
quarter.
We do not typically maintain a significant level of backlog. As
a result, revenue in any quarter depends on contracts entered
into or orders booked and shipped in that quarter. Historically,
many of our customers have tended to make a significant portion
of their purchases towards the end of the quarter, in part
because they believe they are able to negotiate lower prices and
more favorable terms. This trend makes predicting revenues
difficult. The timing of closing larger orders increases the
risk of
quarter-to-quarter
fluctuation in revenues. If orders forecasted for a specific
group of customers for a particular quarter are not realized or
revenues are not otherwise recognized in that quarter, our
operating results for that quarter could be materially adversely
affected. In addition, from time to time, we may experience
unexpected increases in demand for our products resulting from
fluctuations in our customers deployment schedules as they
implement smart card-based programs. These occurrences are not
always predictable and can have a significant impact on our
results in the period in which they occur.
Our
listing on both the NASDAQ Stock Market and the Prime Standard
of the Frankfurt Stock Exchange exposes our stock price to
additional risks of fluctuation.
Our common stock is listed both on the NASDAQ Stock Market and
the Prime Standard of the Frankfurt Stock Exchange and we
typically experience a significant volume of our trading on the
Prime Standard. Because of this, factors that would not
otherwise affect a stock traded solely on the NASDAQ Stock
Market may cause our stock price to fluctuate. For example,
European investors may react differently and more positively or
negatively than investors in the United States to events such as
acquisitions, dispositions, one-time charges and higher or lower
than expected revenue or earnings announcements. A positive or
negative reaction by investors in Europe to such events could
cause our stock price to increase or decrease significantly. The
European economy and market conditions in general, or downturns
on the Prime Standard specifically, regardless of the NASDAQ
Stock Market conditions, also could negatively impact our stock
price.
Our
stock price has been and is likely to remain
volatile.
Over the past few years, the NASDAQ Stock Market and the Prime
Standard of the Frankfurt Exchange have experienced significant
price and volume fluctuations that have particularly affected
the market prices of the stocks of technology companies.
Volatility in our stock price on either or both exchanges may
result from a number of factors, including, among others:
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low volumes of trading activity in our stock, particular in the
U.S.;
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variations in our or our competitors financial
and/or
operational results;
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the fluctuation in market value of comparable companies in any
of our markets;
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expected, perceived or announced relationships or transactions
with third parties;
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comments and forecasts by securities analysts;
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trading patterns of our stock on the NASDAQ Stock Market or
Prime Standard of the Frankfurt Stock Exchange;
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the inclusion or removal of our stock from market indices, such
as groups of technology stocks or other indices;
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loss of key personnel;
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announcements of technological innovations or new products by us
or our competitors;
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announcements of dispositions, organizational restructuring,
headcount reductions, litigation or write-off of investments;
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litigation developments; and
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general market downturns.
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In the past, companies that have experienced volatility in the
market price of their stock have been the object of securities
class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs
and a diversion of our managements attention and resources.
A
significant portion of our sales typically comes from a small
number of customers and the loss of one or more of these
customers or variability in the timing of orders could
negatively impact our operating results.
Our products are generally targeted at OEM customers in the
consumer electronics, digital photography and computer
industries, as well as the government sector and corporate
enterprises. Sales to a relatively small number of customers
historically have accounted for a significant percentage of our
revenues. For example, sales to our top ten customers accounted
for approximately 53% of revenue in 2006, 54% of revenue in 2005
and 54% of revenue in 2004. We expect that sales of our products
to a relatively small number of customers will continue to
account for a high percentage of our total sales for the
foreseeable future, particularly in our Flash Media Reader
business. The loss of a customer or reduction of orders from a
significant customer, including those due to product performance
issues, changes in customer buying patterns, or market, economic
or competitive conditions in our market segments, would increase
our dependence on a smaller group of our remaining customers.
Likewise, variations in the timing or patterns of customer
orders could also increase our dependence on other customers in
any particular period. Dependence on a small number of customers
and variations in order levels period to period could result in
decreased revenues, decreased margins,
and/or
inventory or receivables write-offs and otherwise harm our
business and operating results.
Sales
of our products depend on the development of emerging
applications in our target markets.
We sell our products primarily to address emerging applications
that have not yet reached a stage of mass adoption or
deployment. For example, we sell our smart card readers for use
in
e-passport
programs in Europe and for authentication of personnel within
various U.S. government agencies, both of which are new
applications that are not yet widely implemented. If demand for
products for applications such as these does not develop further
and grow sufficiently, our revenue and gross profit margins
could decline or fail to grow. We cannot predict the future
growth rate, if any, or size or composition of the market for
any of our products. Our target markets have not consistently
grown or developed as quickly as we had expected, and we have
experienced delays in the development of new products designed
to take advantage of new market opportunities. Since new target
markets are still evolving, it is difficult to assess the
competitive environment or the size of the market that may
develop. The demand and market acceptance for our products, as
is common for new technologies, is subject to high levels of
uncertainty and risk and may be influenced by various factors,
including, but not limited to, the following:
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general economic conditions;
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the ability of our competitors to develop and market competitive
solutions for emerging applications in our target markets and
our ability to win business in advance of and against such
competition;
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the adoption
and/or
continuation of industry or government regulations or policies
requiring the use of products such as our smart card readers;
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the timing of adoption of smart cards by the U.S. and other
governments, European banks and other enterprises for large
scale security programs beyond those in place today;
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the ability of financial institutions, corporate enterprises,
the U.S. government and other governments to agree on
industry specifications and to develop and deploy smart
card-based applications that will drive demand for smart card
readers such as ours; and
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the ability of high capacity flash memory cards to drive demand
for digital media readers, such as ours, that enable rapid
transfer of large amounts of data, for example digital
photographs.
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Our
products may have defects, which could damage our reputation,
decrease market acceptance of our products, cause us to lose
customers and revenue and result in costly litigation or
liability.
Products such as our smart card readers and digital media
readers may contain defects for many reasons, including
defective design or manufacture, defective material or software
interoperability issues. Often, these defects are not detected
until after the products have been shipped. If any of our
products contain defects or perceived defects or have
reliability, quality or compatibility problems or perceived
problems, our reputation might be damaged significantly, we
could lose or experience a delay in market acceptance of the
affected product or products and we might be unable to retain
existing customers or attract new customers. In addition, these
defects could interrupt or delay sales or our ability to
recognize revenue for products shipped. In the event of an
actual or perceived defect or other problem, we may need to
invest significant capital, technical, managerial and other
resources to investigate and correct the potential defect or
problem and potentially divert these resources from other
development efforts. If we are unable to provide a solution to
the potential defect or problem that is acceptable to our
customers, we may be required to incur substantial product
recall, repair and replacement and even litigation costs. These
costs could have a material adverse effect on our business and
operating results.
In addition, because our customers rely on our PC Security
products to prevent unauthorized access to PCs, networks or
facilities, a malfunction of or design defect in our products
(or even a perceived defect) could result in legal or warranty
claims against us for damages resulting from security breaches.
If such claims are adversely decided against us, the potential
liability could be substantial and have a material adverse
effect on our business and operating results. Furthermore, the
publicity associated with any such claim, whether or not decided
against us, could adversely affect our reputation. In addition,
a well-publicized security breach involving smart card-based and
other security systems could adversely affect the markets
perception of products like ours in general, or our products in
particular, regardless of whether the breach is actual or
attributable to our products. Any of the foregoing events could
cause demand for our products to decline, which would cause our
business and operating results to suffer.
If we
do not accurately anticipate the correct mix of products that
will be sold, we may be required to record charges related to
excess inventories.
Due to the unpredictable nature of the demand for our products,
we are required to place orders with our suppliers for
components, finished products and services in advance of actual
customer commitments to purchase these products. Significant
unanticipated fluctuations in demand could result in costly
excess production or inventories. In order to minimize the
negative financial impact of excess production, we may be
required to significantly reduce the sales price of the product
to increase demand, which in turn could result in a reduction in
the value of the original inventory purchase. If we were to
determine that we could not utilize or sell this inventory, we
may be required to write down its value, which we have done in
the past. Writing down inventory or reducing product prices
could adversely impact our cost of revenues and financial
condition.
Our
business could suffer if our third-party manufacturers cannot
meet production requirements.
Our products are manufactured outside the United States by
contract manufacturers. Our reliance on foreign manufacturing
poses a number of risks, including, but not limited to:
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difficulties in staffing;
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currency fluctuations;
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potentially adverse tax consequences;
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unexpected changes in regulatory requirements;
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tariffs and other trade barriers;
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political and economic instability;
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lack of control over the manufacturing process and ultimately
over the quality of our products;
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late delivery of our products, whether because of limited access
to our product components, transportation delays and
interruptions, difficulties in staffing, or disruptions such as
natural disasters;
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capacity limitations of our manufacturers, particularly in the
context of new large contracts for our products, whether because
our manufacturers lack the required capacity or are unwilling to
produce the quantities we desire; and
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obsolescence of our hardware products at the end of the
manufacturing cycle.
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In the second half of 2005 we shifted all product and component
manufacturing previously performed by our employees to contract
manufacturers, while continuing to manage demand planning,
procurement and other related activities within SCM. The
exclusive use of contract manufacturing reduces the flexibility
we have in our operations and requires us to exercise strong
planning and management in order to ensure that our products are
manufactured on schedule, to correct specifications and to a
high standard of quality. If any of our contract manufacturers
cannot meet our production requirements, we may be required to
rely on other contract manufacturing sources or identify and
qualify new contract manufacturers. We may be unable to identify
or qualify new contract manufacturers in a timely manner or at
all or with reasonable terms and these new manufacturers may not
allocate sufficient capacity to us in order to meet our
requirements. Any significant delay in our ability to obtain
adequate supplies of our products from our current or
alternative manufacturers would materially and adversely affect
our business and operating results. In addition, if we are not
successful at managing the contract manufacturing process, the
quality of our products could be jeopardized or inventories
could be too low or too high, which could result in damage to
our reputation with our customers and in the marketplace, as
well as possible write-offs of excess inventory.
We
have a limited number of suppliers of key components, and may
experience difficulties in obtaining components for which there
is significant demand.
We rely upon a limited number of suppliers of several key
components of our products. For example, we currently utilize
the foundry services of Atmel and Samsung to produce our ASICs
for smart cards readers; we use chips and antenna components
from Philips in our contactless smart card readers; and we use
various mechanical components in our smart card readers from
TaiSol Electronics. Our reliance on a limited number of
suppliers may expose us to various risks including, without
limitation, an inadequate supply of components, price increases,
late deliveries and poor component quality. This could result in
components not being available to us in a timely manner or at
all, particularly if larger companies have ordered more
significant volumes of those components, or in higher prices
being charged for components. Disruption or termination of the
supply of components or software used in our products could
delay shipments of these products. These delays could have a
material adverse effect on our business and operating results
and could also damage relationships with current and prospective
customers.
Our
future success will depend on our ability to keep pace with
technological change and meet the needs of our target markets
and customers.
The markets for our products are characterized by rapidly
changing technology and the need to meet market requirements and
to differentiate our products through technological
enhancements, and in some cases, price. Our customers
needs change, new technologies are introduced into the market,
and industry standards are still evolving. As a result, product
life cycles are often short and difficult to predict, and
frequently we must develop new products quickly in order to
remain competitive in light of new market requirements. Rapid
changes in technology, or the adoption of new industry
standards, could render our existing products obsolete and
unmarketable. If a product is deemed to be obsolete or
unmarketable, then we might have to reduce revenue expectations
or write down inventories for that product.
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Our future success will depend upon our ability to enhance our
current products and to develop and introduce new products with
clearly differentiated benefits that address the increasingly
sophisticated needs of our customers and that keep pace with
technological developments, new competitive product offerings
and emerging industry standards. We must be able to demonstrate
that our products have features or functions that are clearly
differentiated from existing or anticipated competitive
offerings, or we may be unsuccessful in selling these products.
In addition, in cases where we are selected to supply products
based on features or capabilities that are still under
development, we must be able to complete our product design and
delivery process on a timely basis, or risk losing current and
any future revenue from those products. In developing our
products, we must collaborate closely with our customers,
suppliers and other strategic partners to ensure that critical
development, marketing and distribution projects proceed in a
coordinated manner. Also, this collaboration is important
because these relationships increase our exposure to information
necessary to anticipate trends and plan product development. If
any of our current relationships terminate or otherwise
deteriorate, or if we are unable to enter into future alliances
that provide us with comparable insight into market trends, our
product development and marketing efforts may be adversely
affected, and we could lose sales. We expect that our product
development efforts will continue to require substantial
investments and we may not have sufficient resources to make the
necessary investments.
In some cases, we depend upon partners who provide one or more
components of the overall solution for a customer in conjunction
with our products. If our partners do not adapt their products
and technologies to new market or distribution requirements, or
if their products do not work well, then we may not be able to
sell our products into certain markets.
Because we operate in markets for which industry-wide standards
have not yet been fully set, it is possible that any standards
eventually adopted could prove disadvantageous to or
incompatible with our business model and product lines. If any
of the standards supported by us do not achieve or sustain
market acceptance, our business and operating results would be
materially and adversely affected.
Our
markets are highly competitive.
The markets for our products are competitive and characterized
by rapidly changing technology. We believe that the principal
competitive factors affecting the markets for our products
include:
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the extent to which products must support existing industry
standards and provide interoperability;
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the extent to which standards are widely adopted and product
interoperability is required within industry segments;
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the extent to which products are differentiated based on
technical features, quality and reliability, ease of use,
strength of distribution channels and price; and
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the ability of suppliers to develop new products quickly to
satisfy new market and customer requirements.
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We currently experience competition from a number of companies
in each of our target market segments and we believe that
competition in our markets is likely to intensify as a result of
anticipated increased demand for secure digital access products.
We may not be successful in competing against offerings from
other companies and could lose business as a result.
We also experience indirect competition from certain of our
customers who currently offer alternative products or are
expected to introduce competitive products in the future. For
example, we sell our products to many OEMs who incorporate our
products into their offerings or who resell our products in
order to provide a more complete solution to their customers. If
our OEM customers develop their own products to replace ours,
this would result in a loss of sales to those customers, as well
as increased competition for our products in the marketplace. In
addition, these OEM customers could cancel outstanding orders
for our products, which could cause us to write down inventory
already designated for those customers. We may in the future
face competition from these and other parties that develop
digital data security products based upon approaches similar to
or different from those employed by us. In addition, the market
for digital information security and access control products may
ultimately be dominated by approaches other than the approach
marketed by us.
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Many of our current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other
resources than we do. As a result, our competitors may be able
to respond more quickly to new or emerging technologies or
standards and to changes in customer requirements. Our
competitors may also be able to devote greater resources to the
development, promotion and sale of products and may be able to
deliver competitive products at a lower end user price. Current
and potential competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs
of our prospective customers. Therefore, new competitors, or
alliances among competitors, may emerge and rapidly acquire
significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss
of market share.
Sales
of our smart card readers to the U.S. government are
impacted by uncertainty of timelines and budgetary allocations,
as well as by the delay of standards for information technology
(IT) projects.
Historically, we have sold a significant proportion of our smart
card reader products to the U.S. government and we
anticipate that some portion of our future revenues will also
come from this sector. The timing of U.S. government smart
card projects is not always certain. For example, while the
U.S. government has announced plans for several new smart
card-based security projects, few have yet reached a stage of
sustained high volume card or reader deployment, in part due to
delays in reaching agreement on specifications for a new
federally mandated set of identity credentials. In addition,
government expenditures on IT projects have varied in the past
and we expect them to vary in the future. As a result of
shifting priorities in the federal budget and in the Department
of Homeland Security, U.S. government spending may be
reallocated away from IT projects, such as smart card
deployments. The slowing or delay of government projects for any
reason could negatively impact our sales.
We may
have to take back unsold inventory from our
customers.
If demand is less than anticipated, customers may ask that we
accept returned products that they do not believe they can sell.
We may determine that it is in our best interest to accept
returns in order to maintain good relations with our customers.
Returns may increase beyond present levels in the future. Once
these products have been returned, we may be required to take
additional inventory reserves to reflect the decreased market
value of slow-selling returned inventory, even if the products
are in good working order.
Large
stock holdings outside the U.S. make it difficult for us to
achieve quorum at stockholder meetings and this could restrict,
delay or prevent our ability to implement future corporate
actions, as well as have other effects, such as the delisting of
our stock from the NASDAQ Stock Market.
To achieve a quorum at a regular or special stockholder meeting,
at least one-third of all shares of our stock entitled to vote
must be present at such a meeting in person or by proxy. As of
August 7, 2006, the record date for our 2006 Annual Meeting
of Stockholders, more than two-thirds of our shares outstanding
were held by retail stockholders in Germany, through German
banks and brokers. Securities regulations and customs in Germany
result in very few German banks and brokers providing our proxy
materials to our stockholders in Germany and in very few German
stockholders voting their shares even when they do receive such
materials. In addition, the absence of a routine broker
non-vote in Germany typically requires the stockholder to
return the proxy card to us before the votes it represents can
be counted for purposes of establishing a quorum.
We expect that a significant percentage of our shares will
continue to be held by retail stockholders in Germany through
German banks and brokers. As a result, it is difficult and
costly for us, and requires considerable management resources,
to achieve a quorum at annual and special meetings of our
stockholders, if we are able to do so at all. For example,
because of the large pool of shares in Germany that were not
voted, we had to adjourn our 2006 Annual Meeting of Stockholders
from its original date of October 6, 2006, until
November 3, 2006, in order to solicit enough votes to
achieve quorum. This resulted in additional cost and diversion
of management resources from our operations. We may not be
successful in obtaining proxies from a sufficient number of our
stockholders to constitute a quorum in the future. If we are
unable to achieve a quorum at a future annual or special meeting
of our stockholders, corporate actions requiring stockholder
approval could be restricted, delayed or even prevented. These
include, but are not limited to, actions and transactions that
may be of benefit to our stockholders, part of our strategic
plan or necessary for our corporate governance, such as
corporate mergers, acquisitions, dispositions, sales
17
or reorganizations, financings, stock incentive plans or the
election of directors. Even if we are able to achieve a quorum
for a particular meeting, some of these actions or transactions
require the approval of a majority of the total number of our
shares then outstanding, and we may not be successful in
obtaining such approval.
The future failure to hold an annual meeting of stockholders may
result in our being out of compliance with Delaware law and the
qualitative listing requirements of the NASDAQ Stock Market,
each of which requires us to hold an annual meeting of our
stockholders. Our inability to obtain a quorum at any such
meeting may not be an adequate excuse for such failure. In
accordance with Section 211 of the Delaware General
Corporation Law, if there has been a failure to hold an annual
meeting, the Court of Chancery may order a meeting to be held
upon the application of any stockholder or director. Lack of
compliance with the qualitative listing requirements of the
NASDAQ Stock Market could result in the delisting of our common
stock on the NASDAQ Stock Market. Either of these events would
divert managements attention from our operations and would
likely be costly and could also have an adverse effect on the
trading price of our common stock.
We
have global operations, which require significant financial,
managerial and administrative resources.
Our business model includes the management of separate product
lines that address disparate market opportunities that are
geographically dispersed. While there is some shared technology
across our products, each product line requires significant
research and development effort to address the evolving needs of
our customers and markets. To support our development and sales
efforts, we maintain company offices and business operations in
several locations around the world, including Germany, India,
Japan and the United States. We also must manage contract
manufacturers in Singapore and China. Managing our various
development, sales, administrative and manufacturing operations
places a significant burden on our financial systems and has
resulted in a level of operational spending that is
disproportionately high compared to our current revenue levels.
Operating in diverse geographic locations also imposes
significant burdens on our managerial resources. In particular,
our management must:
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divert a significant amount of time and energy to manage
employees and contractors from diverse cultural backgrounds and
who speak different languages;
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travel between our different company offices;
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maintain sufficient internal financial controls in multiple
geographic locations that may have different control
environments;
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manage different product lines for different markets;
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manage our supply and distribution channels across different
countries and business practices; and
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coordinate these efforts to produce an integrated business
effort, focus and vision.
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Any failure to effectively manage our operations globally could
have a material adverse effect on our business and operating
results.
We
conduct a significant portion of our operations outside the
United States. Economic, political, regulatory and other risks
associated with international sales and operations could have an
adverse effect on our results of operation.
In addition to our corporate headquarters being located in
Germany, we conduct a substantial portion of our business in
Europe and Asia. Approximately 57% of our revenue for the year
ended December 31, 2006 and approximately 58% of our
revenue for the year ended December 31, 2005 were derived
from customers located outside the United States. Because a
significant number of our principal customers are located in
other countries, we anticipate that international sales will
continue to account for a substantial portion of our revenues.
As a result, a significant portion of our sales and operations
may continue to be subject to risks associated with foreign
operations, any of which could impact our sales
and/or our
operational performance. These risks include, but are not
limited to:
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changes in foreign currency exchange rates;
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changes in a specific countrys or regions political
or economic conditions and stability, particularly in emerging
markets;
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unexpected changes in foreign laws and regulatory requirements;
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potentially adverse tax consequences;
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longer accounts receivable collection cycles;
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difficulty in managing widespread sales and manufacturing
operations; and
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less effective protection of intellectual property.
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Fluctuations
in the valuation of foreign currencies could result in currency
exchange losses.
A significant portion of our business is conducted in foreign
currencies, principally the euro. Fluctuations in the value of
foreign currencies relative to the U.S. dollar will
continue to cause currency exchange gains and losses. We cannot
predict the effect of exchange rate fluctuations upon future
quarterly and annual operating results. We may experience
currency losses in the future. To date, we have not adopted a
hedging program to protect us from risks associated with foreign
currency fluctuations.
Our
key personnel are critical to our business, and such key
personnel may not remain with us in the future.
We depend on the continued employment of our senior executive
officers and other key management and technical personnel. If
any of our key personnel were to leave and not be replaced with
sufficiently qualified and experienced personnel, our business
could be adversely affected.
We also believe that our future success will depend in large
part on our ability to attract and retain highly qualified
technical and management personnel. However, competition for
such personnel is intense. We may not be able to retain our key
technical and management employees or to attract, assimilate or
retain other highly qualified technical and management personnel
in the future.
Likewise, as a small, dual-traded company, we are challenged to
identify, attract and retain experienced professionals with
diverse skills and backgrounds who are qualified and willing to
serve on our Board of Directors. The increased burden of
regulatory compliance under the Sarbanes-Oxley Act of 2002
creates additional liability and exposure for directors and
financial losses in our business and lack of growth in our stock
price make it difficult for us to offer attractive director
compensation packages. If we are not able to attract and retain
qualified board members, our ability to practice a high a level
of corporate governance could be impaired.
We are
subject to a lengthy sales cycle and additional delays could
result in significant fluctuations in our quarterly operating
results.
Our initial sales cycle for a new customer usually takes a
minimum of six to nine months. During this sales cycle, we may
expend substantial financial and managerial resources with no
assurance that a sale will ultimately result. The length of a
new customers sales cycle depends on a number of factors,
many of which we may not be able to control. These factors
include the customers product and technical requirements
and the level of competition we face for that customers
business. Any delays in the sales cycle for new customers could
delay or reduce our receipt of new revenue and could cause us to
expend more resources to obtain new customer wins. If we are
unsuccessful in managing sales cycles, our business could be
adversely affected.
We
face risks associated with strategic transactions.
A component of our ongoing business strategy is to seek to buy
businesses, products and technologies that complement or augment
our existing businesses, products and technologies. We have in
the past acquired or made, and from time to time in the future
may acquire or make, investments in companies, products and
technologies that we believe are complementary to our existing
businesses, products and technologies. Any future acquisition
could expose us to significant risks, including, without
limitation, the use of our limited cash balances or potentially
19
dilutive stock offerings to fund such acquisitions; costs of any
necessary financing, which may not be available on reasonable
terms or at all; accounting charges we might incur in connection
with such acquisitions; the difficulty and expense of
integrating personnel, technologies, customer, supplier and
distributor relationships, marketing efforts and facilities
acquired through acquisitions; diversion of our management
resources; failure to realize anticipated benefits; costly fees
for legal and transaction-related services and the unanticipated
assumption of liabilities. Any of the foregoing could have a
material adverse effect on our financial condition and results
of operations. We may not be successful with any such
acquisition.
Our business strategy also contemplates divesting portions of
our business from time to time, if and when we believe we would
be able to realize greater value for our stockholders in so
doing. We have in the past sold, and may from time to time in
the future sell, all or one or more portions of our business.
For example, in the second quarter of 2006, we completed the
sale of our DTV solutions business to Kudelski. Any divestiture
or disposition could expose us to significant risks, including,
without limitation, costly fees for legal and
transaction-related services; diversion of management resources;
loss of key personnel; and reduction in revenue. Further, we may
be required to retain or indemnify the buyer against certain
liabilities and obligations in connection with any such
divestiture or disposition and we may also become subject to
third party claims arising out of divestiture or disposition. In
addition, any such divestiture or disposition could result in
our recognition of an operating loss to the extent that the
proceeds received by us in the divestiture or disposition are
less than the book value of the assets sold. Regarding the sale
of our DTV solutions business in particular, risks include our
ability to collect the remaining $2 million in disputed
payments for the business, and our ability to improve
operational efficiencies or reduce operating costs through the
transfer of our DTV solutions business. Failure to overcome
these risks could have a material adverse effect on our
financial condition and results of operations.
We may
be exposed to risks of intellectual property infringement by
third parties.
Our success depends significantly upon our proprietary
technology. We currently rely on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect our proprietary
rights, which afford only limited protection. We may not be
successful in protecting our proprietary technology through
patents, it is possible that no new patents will be issued, that
our proprietary products or technologies are not patentable or
that any issued patent will fail to provide us with any
competitive advantages.
There has been a great deal of litigation in the technology
industry regarding intellectual property rights, and from time
to time we may be required to use litigation to protect our
proprietary technology. This may result in our incurring
substantial costs and we may not be successful in any such
litigation.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to use our proprietary information and software without
authorization. In addition, the laws of some foreign countries
do not protect proprietary and intellectual property rights to
the same extent as do the laws of the United States. Because
many of our products are sold and a significant portion of our
business is conducted outside the United States, our exposure to
intellectual property risks may be higher. Our means of
protecting our proprietary and intellectual property rights may
not be adequate. There is a risk that our competitors will
independently develop similar technology or duplicate our
products or design around patents or other intellectual property
rights. If we are unsuccessful in protecting our intellectual
property or our products or technologies are duplicated by
others, our business could be harmed.
Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.
We prepare our financial statements to conform with generally
accepted accounting principles, or GAAP, in the United States.
These accounting principles are subject to interpretation by the
Financial Standards Accounting Board, the American Institute of
Certified Public Accountants, the Securities and Exchange
Commission and various other bodies formed to interpret and
create appropriate accounting rules and policies. A change in
those rules or policies could have a significant effect on our
reported results and may affect our reporting of transactions
completed before a change is announced. For example, under the
recently issued Financial Accounting Standard Board Statement
No. 123(R), as of January 1, 2006 we were required to
apply certain expense recognition
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provisions to share-based payments to employees using the fair
value method. Adoption of SFAS 123R resulted in our
recording stock option compensation expense of $0.6 million
in fiscal year 2006. Any other changes in accounting policies in
the future may also result in significant accounting charges.
See Note 2 to our consolidated financial statements
attached to the Annual Report on
Form 10-K
for the expense disclosures under SFAS No. 123R.
We
face costs and risks associated with maintaining effective
internal controls over financial reporting.
Under Section 302 of the Sarbanes-Oxley Act of 2002, on a
quarterly basis our management is required to make certain
certifications regarding our disclosure controls and internal
controls over financial reporting. The process of maintaining
and evaluating the effectiveness of these controls is expensive,
time-consuming and requires significant attention from our
management and staff. We have found a material weakness in our
internal controls in the past and we cannot be certain in the
future that we will be able to report that our controls are
without material weakness or to complete our evaluation of those
controls in a timely fashion.
If we fail to maintain an effective system of disclosure
controls or internal control over financial reporting, we may
discover material weaknesses that we would then be required to
disclose. We may not be able to accurately or timely report on
our financial results, and we might be subject to investigation
by regulatory authorities. As a result, the financial position
of our business could be harmed; current and potential future
shareholders could lose confidence in us
and/or our
reported financial results, which may cause a negative effect on
the trading price of our common stock; and we could be exposed
to litigation or regulatory proceedings, which may be costly or
divert management attention.
In addition, all internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to the preparation and presentation of
financial statements. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
We
face risks from litigation.
From time to time, we may be subject to litigation, which could
include claims regarding infringement of the intellectual
property rights of third parties, product defects,
employment-related claims, and claims related to acquisitions,
dispositions or restructurings. For example, in December 2005, a
complaint was filed in France against SCM Microsystems GmbH, one
of our wholly-owned subsidiaries, by Aston France S.A. alleging
participation by SCM Microsystems GmbH in the counterfeiting of
Astons conditional access modules and claiming damages in
the amount of approximately $69 million. While this claim
was subsequently withdrawn, any such claims or litigation may be
time-consuming and costly, divert management resources, cause
product shipment delays, require us to redesign our products,
require us to accept returns of products and to write off
inventory, or have other adverse effects on our business. Any of
the foregoing could have a material adverse effect on our
results of operations and could require us to pay significant
monetary damages.
We expect the likelihood of intellectual property infringement
and misappropriation claims may increase as the number of
products and competitors in our markets grows and as we
increasingly incorporate third-party technology into our
products. As a result of infringement claims, we could be
required to license intellectual property from a third party or
redesign our products. Licenses may not be offered when we need
them or on acceptable terms. If we do obtain licenses from third
parties, we may be required to pay license fees or royalty
payments or we may be required to license some of our
intellectual property to others in return for such licenses. If
we are unable to obtain a license that is necessary for us or
our third party manufacturers to manufacture our allegedly
infringing products, we could be required to suspend the
manufacture of products or stop our suppliers from using
processes that may infringe the rights of third parties. We may
also be unsuccessful in redesigning our products. Our suppliers
and customers may be subject to infringement claims based on
intellectual property included in our products. We have
historically agreed to indemnify our suppliers and customers for
patent infringement claims relating to our products. The scope
of this indemnity varies, but may, in some instances, include
indemnification for damages and expenses, including
attorneys fees. We may periodically engage in litigation
as a
21
result of these indemnification obligations. Our insurance
policies exclude coverage for third-party claims for patent
infringement.
We are
exposed to credit risk on our accounts receivable. This risk is
heightened in times of economic weakness.
We distribute our products both through third-party resellers
and directly to certain customers. A substantial majority of our
outstanding trade receivables are not covered by collateral or
credit insurance. We may not be able to monitor and limit our
exposure to credit risk on our trade and non-trade receivables,
we may not be effective in limiting credit risk and avoiding
losses. Additionally, if the global economy and regional
economies deteriorate, one or more of our customers could
experience a weakened financial condition and we could incur a
material loss or losses as a result.
Provisions
in our agreements, charter documents, Delaware law and our
rights plan may delay or prevent our acquisition by another
company, which could decrease the value of your
shares.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that could make it more difficult for a third
party to acquire us or enter into a material transaction with us
without the consent of our Board of Directors. These provisions
include a classified Board of Directors and limitations on
actions by our stockholders by written consent. Delaware law
imposes some restrictions on mergers and other business
combinations between us and any holder of 15% or more of our
outstanding common stock. In addition, our Board of Directors
has the right to issue preferred stock without stockholder
approval, which could be used to dilute the stock ownership of a
potential hostile acquirer.
We have adopted a stockholder rights plan. The triggering and
exercise of the rights would cause substantial dilution to a
person or group that attempts to acquire us on terms or in a
manner not approved by our Board of Directors, except pursuant
to an offer conditioned upon redemption of the rights. While the
rights are not intended to prevent a takeover of our company,
they may have the effect of rendering more difficult or
discouraging an acquisition of us that was deemed to be
undesirable by our Board of Directors.
These provisions will apply even if the offer were to be
considered adequate by some of our stockholders. Also, because
these provisions may be deemed to discourage a change of
control, they could decrease the value of our common stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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SCM has no unresolved comments from the Securities and Exchange
Commission.
Our corporate headquarters are in Ismaning, Germany, where we
lease approximately 36,000 square feet pursuant to a lease
agreement that expires November 15, 2008. We also lease
small sales and marketing facilities in California and in Japan.
We own a research and development facility of approximately
17,600 square feet in Chennai, India. We consider these
properties as adequate for our business needs.
We also lease approximately 69,000 square feet at a
facility in Guilford, Connecticut, where the lease term expires
February 2011. During 2003, we discontinued operations at the
Guilford facility and we are currently attempting to sublease
the unused space. We lease premises of approximately
11,200 square feet in the U.K. where the lease term expires
September 2016. During 2003, we discontinued operations in the
U.K. Currently, we have subleased the premises for a part of the
remaining leasing period to an unrelated business.
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ITEM 3.
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LEGAL
PROCEEDINGS
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From time to time, we could be subject to claims arising in the
ordinary course of business or could be a defendant in lawsuits.
While the outcome of such claims or other proceedings cannot be
predicted with certainty, our management currently expects that
any such liabilities, to the extent not provided for by
insurance or otherwise, would not have a material adverse effect
on our financial condition, results of operations or cash flows.
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In December 2005, a complaint was filed in France against SCM
Microsystems GmbH (SCM GmbH), one of our
wholly-owned subsidiaries, by Aston France S.A.S., alleging
participation by SCM GmbH in the counterfeiting of Astons
conditional access modules. Aston was one of SCM GmbHs
Digital Television customers until November 2002, when SCM GmbH
entered into a settlement agreement (the 2002
Settlement) with Aston that included SCM GmbHs
agreement to cancel binding orders made by Aston and the return
by Aston of unsold inventory to SCM GmbH. In April 2005, SCM
GmbH entered into an agreement with Aston whereby Aston agreed
to (i) seek a refund from the French government for
approximately $4.7 million in value added taxes that
SCM GmbH had paid to the French government with respect to
products that Aston purchased from SCM GmbH prior to November
2002 and (ii) remit the refunded amount to SCM GmbH. On
October 13, 2005 the French government refunded
approximately $4.7 million (the VAT Refund) to
Aston, but Aston did not remit such amount to SCM GmbH.
In its complaint, Aston claimed damages in the amount of
EUR 57 million. Further, in November 2005 Aston
obtained a preliminary injunction in France to block a payment
obligation by Aston to SCM GmbH of the VAT Refund. On
February 2, 2006, SCM GmbH filed a counterclaim against
Aston in Germany alleging damages in the amount of approximately
EUR 11.5 million resulting from Astons
fraudulent misrepresentation and breach of contract in
connection with the 2002 Settlement.
On June 6, 2006, following a court decision in favor of SCM
GmbH, Aston paid to SCM GmbH the full amount of the VAT Refund,
including currency gains, in the amount of US$5 million.
Effective January 22, 2007, all disputes between and among
the parties were settled and withdrawn, with no further payment
between the parties, apart from reimbursement in a nominal
amount from SCM GmbH to Aston of court awarded legal fees
previously paid by Aston to SCM GmbH.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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For information related to matters submitted to a vote of our
security holders at our annual meeting held on November 3,
2006, please see Part II, Item 4 of our quarterly
report on
Form 10-Q
for the quarter ended September 30, 2006, filed with the
Securities and Exchange Commission on November 14, 2006.
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PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Price
Range of Common Stock; Number of Holders; Dividends
Our common stock is quoted on the Nasdaq Stock Markets
National Market under the symbol SCMM and on the
Prime Standard of the Frankfurt Stock Exchange under the symbol
SMY. According to data available at March 13,
2007, we estimate we had approximately 12,211 stockholders of
record and beneficial stockholders. The following table sets
forth the high and low closing prices of our common stock for
the periods indicated.
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Nasdaq
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Prime Standard
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National Market
|
|
|
(Quoted in Euros)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.92
|
|
|
$
|
3.05
|
|
|
|
3.75
|
|
|
|
2.35
|
|
Second Quarter
|
|
$
|
3.50
|
|
|
$
|
2.77
|
|
|
|
2.70
|
|
|
|
2.33
|
|
Third Quarter
|
|
$
|
3.32
|
|
|
$
|
2.66
|
|
|
|
2.68
|
|
|
|
2.21
|
|
Fourth Quarter
|
|
$
|
3.42
|
|
|
$
|
2.61
|
|
|
|
2.89
|
|
|
|
2.23
|
|
Fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.86
|
|
|
$
|
2.91
|
|
|
|
3.22
|
|
|
|
2.48
|
|
Second Quarter
|
|
$
|
3.90
|
|
|
$
|
2.91
|
|
|
|
3.10
|
|
|
|
2.26
|
|
Third Quarter
|
|
$
|
3.41
|
|
|
$
|
2.79
|
|
|
|
2.64
|
|
|
|
2.24
|
|
Fourth Quarter
|
|
$
|
3.71
|
|
|
$
|
2.98
|
|
|
|
2.80
|
|
|
|
2.27
|
|
We have never declared or paid cash dividends on our common
stock or other securities. We currently anticipate that we will
retain all of our future earnings for use in the expansion and
operation of our business and do not anticipate paying any cash
dividends in the foreseeable future.
The disclosure required by Item 201(d) of
Regulation S-K
is included in Item 12 and incorporated by reference to our
2007 Proxy Statement.
Recent
Sales of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
24
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The table below has been restated to account for the sale of our
DTV solutions business in fiscal 2006 and the sale of our retail
Digital Media and Video business in fiscal 2003, with both
businesses treated as discontinued operations.
SCM
MICROSYSTEMS, INC.
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
$
|
30,030
|
|
|
$
|
31,147
|
|
|
$
|
43,600
|
|
Cost of revenue
|
|
|
21,756
|
|
|
|
17,106
|
|
|
|
17,724
|
|
|
|
18,643
|
|
|
|
29,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
12,306
|
|
|
|
12,504
|
|
|
|
13,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,767
|
|
|
|
4,081
|
|
|
|
4,807
|
|
|
|
3,958
|
|
|
|
2,886
|
|
Selling and marketing
|
|
|
7,498
|
|
|
|
7,040
|
|
|
|
8,560
|
|
|
|
7,943
|
|
|
|
6,449
|
|
General and administrative
|
|
|
7,548
|
|
|
|
9,198
|
|
|
|
9,021
|
|
|
|
11,018
|
|
|
|
11,125
|
|
Amortization of intangibles
|
|
|
666
|
|
|
|
673
|
|
|
|
1,078
|
|
|
|
1,129
|
|
|
|
819
|
|
Impairment of goodwill and
intangibles
|
|
|
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
|
|
6,578
|
|
Restructuring and other charges
|
|
|
1,120
|
|
|
|
319
|
|
|
|
607
|
|
|
|
3,283
|
|
|
|
4,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,599
|
|
|
|
21,311
|
|
|
|
24,461
|
|
|
|
27,331
|
|
|
|
32,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,742
|
)
|
|
|
(10,481
|
)
|
|
|
(12,155
|
)
|
|
|
(14,827
|
)
|
|
|
(18,546
|
)
|
Loss from investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
(1,242
|
)
|
Interest income
|
|
|
1,350
|
|
|
|
745
|
|
|
|
806
|
|
|
|
813
|
|
|
|
823
|
|
Foreign currency gains (losses) and
other income (expense)
|
|
|
(225
|
)
|
|
|
1,731
|
|
|
|
(1,675
|
)
|
|
|
2,643
|
|
|
|
(1,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(7,617
|
)
|
|
|
(8,005
|
)
|
|
|
(13,024
|
)
|
|
|
(11,611
|
)
|
|
|
(20,730
|
)
|
Benefit (provision) for income taxes
|
|
|
(73
|
)
|
|
|
(150
|
)
|
|
|
173
|
|
|
|
2,013
|
|
|
|
(2,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,690
|
)
|
|
|
(8,155
|
)
|
|
|
(12,851
|
)
|
|
|
(9,598
|
)
|
|
|
(23,620
|
)
|
Gain (loss) from discontinued
operations, net of income taxes
|
|
|
3,508
|
|
|
|
(2,109
|
)
|
|
|
(6242
|
)
|
|
|
(13,476
|
)
|
|
|
(25,454
|
)
|
Gain (loss) on sale of discontinued
operations, net of income taxes
|
|
|
5,224
|
|
|
|
(2,171
|
)
|
|
|
430
|
|
|
|
(15,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
|
$
|
(38,176
|
)
|
|
$
|
(49,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
from continuing operations
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(1.52
|
)
|
Basic and diluted income (loss) per
share from discontinued operations
|
|
$
|
0.56
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(1.86
|
)
|
|
$
|
(1.63
|
)
|
Basic and diluted net income (loss)
per share
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
(3.15
|
)
|
Shares used to compute basic and
diluted income (loss) per share
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
15,402
|
|
|
|
15,317
|
|
|
|
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
36,902
|
|
|
$
|
32,440
|
|
|
$
|
46,153
|
|
|
$
|
55,038
|
|
|
$
|
55,517
|
|
Working capital(1)
|
|
|
31,967
|
|
|
|
27,371
|
|
|
|
39,161
|
|
|
|
50,700
|
|
|
|
83,997
|
|
Total assets
|
|
|
51,355
|
|
|
|
52,734
|
|
|
|
73,307
|
|
|
|
96,442
|
|
|
|
148,617
|
|
Total stockholders equity
|
|
|
35,318
|
|
|
|
32,617
|
|
|
|
46,829
|
|
|
|
63,424
|
|
|
|
100,100
|
|
|
|
|
(1)
|
|
Working capital is defined as
current assets less current liabilities
|
25
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following information should be read in conjunction with
the audited consolidated financial statements and notes thereto
attached to this Annual Report on
Form 10-K.
We also urge readers to review and consider our disclosures
describing various factors that could affect our business,
including the disclosures under the headings Risk
Factors in this Annual Report on
Form 10-K.
Overview
SCM Microsystems designs, develops and sells hardware, software
and silicon solutions that enable people to conveniently and
securely access digital content and services. We sell our secure
digital access products into two market segments: PC Security
and Flash Media Readers. Our products are sold primarily to
original equipment providers, or OEMs, who typically either
bundle our products with their own solutions, or repackage our
products for resale to their customers. Our OEM customers
include: government contractors, systems integrators, large
enterprises, computer manufacturers, as well as banks and other
financial institutions for our smart card readers; and computer
and photographic equipment manufacturers for our digital media
readers. We sell and license our products through a direct sales
and marketing organization, as well as through distributors,
value added resellers and systems integrators worldwide.
On May 22, 2006 we completed the sale of our DTV solutions
business to Kudelski S.A. As a result, we have accounted for the
DTV solutions business as discontinued operations, and the
statements of operations and cash flows for all periods
presented reflect the discontinuance of this business.
Previously, our operations also included a retail Digital Media
and Video business that we sold in the third quarter of 2003. As
a result of this sale and divestiture, beginning in the second
quarter of fiscal 2003, we have accounted for the retail Digital
Media and Video business as a discontinued operation, and
statements of operations for all periods presented have been
reclassified to reflect the discontinuance of this business. For
comparability, certain 2002 figures have been reclassified,
where appropriate, to conform to the financial statement
presentation used in 2003, 2004, 2005 and 2006. (See Note 3
to our consolidated financial statements attached to this Annual
Report on
Form 10-K.)
In our continuing operations, revenues have grown over the past
few quarters, but the rate and sustainability of this progress
is unpredictable due to significant variations in demand for our
products quarter to quarter. This is particularly true for our
PC Security products, many of which are targeted at new smart
card-based ID programs run by various U.S., European and Asian
governments. Sales of our smart card readers and chips for
government programs are impacted by testing and compliance
schedules of government bodies as well as roll-out schedules for
application deployments, both of which contribute to variability
in demand from quarter to quarter. Sales of our Flash Media
Reader products are less subject to this variability; however,
we are dependent on a small number of customers in both of our
primary product segments, which can result in fluctuations in
sales levels from one period to another.
We have adopted a strategy to grow revenue that is based on
introducing new PC Security and Flash Media Reader products to
address new market opportunities. During 2006, we experienced
increased demand for our smart card readers, primarily from the
government sector, where we began to provide readers for new and
emerging programs such as
e-passports
and
e-healthcare.
While we believe that
e-Passport
and other government authentication programs will continue to
grow in the future and that we will continue to play an active
role in providing smart card readers to these programs, it is
very difficult to estimate the level or timing of demand in any
given period.
In both our PC Security and Flash Media Reader businesses,
pricing pressure has increased over the last several quarters,
resulting in lower gross profits. To address an increasingly
competitive environment, we have put in place cost reduction
programs that resulted in margin improvement in the fourth
quarter of 2006 and that we believe should result in stable
margin levels going forward.
We have taken measures to reduce operating expenses over the
last several quarters, the bulk of which have been centered
around the outsourcing of our manufacturing operations and the
consolidation of facilities and functions. Beginning in October
2005, we began the closure of our Singapore manufacturing
facility and shifted the manufacturing of our products and
components to external contract manufacturers in Singapore and
China. During fiscal 2006, we completed the closure of our
Singapore office and moved all corporate finance and compliance
26
functions from California to Germany. In addition, during 2006
we reduced headcount and the use of outside contract personnel,
and further curtailed marketing expenses such as tradeshow
participation. The full effect of these cost cutting actions was
not experienced until the fourth quarter of 2006, when our GAAP
operating expenses decreased from an average of
$5.7 million for the first three quarters of fiscal 2006 to
$3.5 million in the fourth quarter.
Critical
Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition
and Results of Operations discusses our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including
those related to product returns, customer incentives, bad
debts, inventories, asset impairment, deferred tax assets,
accrued warranty reserves, restructuring costs, contingencies
and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies,
among others, affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements.
|
|
|
|
|
We recognize product revenue upon shipment provided that risk
and title have transferred, a purchase order has been received,
collection is determined to be reasonably assured and no
significant obligations remain. Maintenance revenue is deferred
and amortized over the period of the maintenance contract.
Provisions for estimated warranty repairs and returns and
allowances are provided for at the time products are shipped. We
maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances might be required, which could
have a material impact on our results of operations.
|
|
|
|
We typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly
unpredictable and can fluctuate substantially. We regularly
review inventory quantities on hand and record an estimated
provision for excess inventory, technical obsolescence and no
sale-ability based primarily on our historical sales and
expectations for future use. Actual demand and market conditions
may be different from those projected by our management. This
could have a material effect on our operating results and
financial position. If we were to make different judgments or
utilize different estimates, the amount and timing of our
write-down of inventories could be materially different. Excess
inventory frequently remains saleable. When excess inventory is
sold, it yields a gross profit margin of up to 100%. Sales of
excess inventory have the effect of increasing the gross profit
margin beyond that which would otherwise occur, because of
previous write-downs. Once we have written down inventory below
cost, we do not subsequently write it up.
|
|
|
|
The carrying value of our net deferred tax assets reflects that
we have been unable to generate sufficient taxable income in
certain tax jurisdictions. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items
will either expire before we are able to realize their benefit,
or that future deductibility is uncertain. Management evaluates
the realizability of the deferred tax assets quarterly. At
December 31, 2006 we have recorded valuation allowances
against substantially all of our deferred tax assets. The
deferred tax assets are still available for us to use in the
future to offset taxable income, which would result in the
recognition of a tax benefit and a reduction in our effective
tax rate. Actual operating results and the underlying amount and
category of income in future years could render our current
assumptions, judgments and estimates of the realizability of
deferred tax assets inaccurate, which could have a material
impact on our financial position or results of operations.
|
27
|
|
|
|
|
We accrue the estimated cost of product warranties during the
period of sale. While we engage in extensive product quality
programs and processes, including actively monitoring and
evaluating the quality of our component suppliers, our warranty
obligation is affected by actual warranty costs, including
material usage or service delivery costs incurred in correcting
a product failure. If actual material usage or service delivery
costs differ from our estimates, revisions to our estimated
warranty liability would be required, which could have a
material impact on our results of operations.
|
|
|
|
During previous years, we have recorded restructuring charges as
we rationalized operations in light of strategic decisions to
align our business focus on certain markets. These measures,
which included major changes in senior management, workforce
reduction, facilities consolidation and the transfer of our
production to contract manufacturers, were largely intended to
align our capacity and infrastructure to anticipate customer
demand and to transition our operations to better cost
efficiencies. In connection with plans we have adopted, we
recorded estimated expenses for severance and outplacement
costs, lease cancellations, asset write-offs and other
restructuring costs. Statement of Financial Accounting Standard
(SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, requires that a
liability for a cost associated with an exit or disposal
activity initiated after December 31, 2002 be recognized
when the liability is incurred and that the liability be
measured at fair value. Given the significance of, and the
timing of the execution of such activities, this process is
complex and involves periodic reassessments of original
estimates. We continually evaluate the adequacy of the remaining
liabilities under our restructuring initiatives. Although we
believe that these estimates accurately reflect the costs of our
restructuring and other plans, actual results may differ,
thereby requiring us to record additional provisions or reverse
a portion of such provisions.
|
Recent
Accounting Pronouncements
In April 2006, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FASB
Interpretation No. 46(R)-6 (FSP
FIN 46(R)-6), which addresses how a reporting
enterprise should determine the variability to be considered in
applying FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, as amended
(FIN 46(R)). The variability that is considered
in applying FIN 46(R) affects the determination of
(a) whether the entity is a variable interest entity,
(b) which interests are variable interests in the entity
and (c) which party, if any, is the primary beneficiary of
the variable interest entity. That variability will affect any
calculation of expected losses and expected residual returns, if
such a calculation is necessary. FSP FIN 46(R)-6 provides
additional guidance to consider for determining variability. FSP
FIN 46(R)-6 is effective beginning the first day of the
first reporting period beginning after June 15, 2006. After
evaluating FSP FIN 46(R)-6, we determined that there is no
impact to our consolidated financial position, results of
operations or cash flows from its adoption.
In June 2006, the FASB ratified Emerging Issues Task Force
(EITF) Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(Issue
No. 06-03).
Under Issue
No. 06-03,
a company must disclose its accounting policy regarding the
gross or net presentation of certain taxes. If taxes included in
gross revenues are significant, a company must disclose the
amount of such taxes for each period for which an income
statement is presented (i.e., both interim and annual periods).
Taxes within the scope of this Issue are those that are imposed
on and concurrent with a specific revenue-producing transaction.
Taxes assessed on an entitys activities over a period of
time, such as gross receipts taxes, are not within the scope of
the issue. Issue
No. 06-03
is effective for the first annual or interim reporting period
beginning after December 15, 2006. After evaluating Issue
No. 06-03,
we determined that there is no impact to our consolidated
financial position, results of operations or cash flows from its
adoption.
In July 2006, the FASB issued FASB Interpretation No. 48
Accounting For Uncertain Tax Positions
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. It
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the
amounts reported after adoption are to be accounted for as an
adjustment to the beginning balance of retained earnings.
28
We have completed our initial evaluation of the impact of the
January 1, 2007, adoption of FIN 48 and determined,
that such adoption will most likely result in a reduction of our
disclosed income taxes payable of $1.9 million as of
December 31, 2006. The expected reduction of income taxes
payable will be accounted for as an increase to the
January 1, 2007 beginning balance of retained earnings. Our
expectation of the impact from the adoption of FIN 48 is
subject to revision as management completes its analysis.
In September 2006, the Securities and Exchange Commission
(SEC) published Staff Accounting Bulletin (SAB) No
108. SAB 108 expresses the staff views regarding the
process of quantifying financial statement misstatements. The
bulletin prescribes the use of rollover and
iron curtain approaches in quantifying
misstatements. Rollover approach quantifies a
misstatement based on the amount of the error originating in the
current year income statement. Iron curtain approach
quantifies a misstatement based on the effects of correcting the
misstatement existing in the balance sheet at the end of the
year, irrespective of the misstatements year(s) of
origination. The statement is effective immediately. We did not
have any misstatements that were determined to be material on
the basis of either of the approaches mentioned above.
In September 2006, FASB issued SFAS No. 157, Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of
SFAS 157 are effective for the fiscal year beginning
January 1, 2008. We are currently evaluating the impact of
the provisions of SFAS 157 on our financial position,
results of operations and cash flows and do not believe the
impact of the adoption will be material.
Results
of Operations
The following table sets forth our statements of operations as a
percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
64.7
|
|
|
|
61.2
|
|
|
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35.3
|
|
|
|
38.8
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11.2
|
|
|
|
14.6
|
|
|
|
16.0
|
|
Selling and marketing
|
|
|
22.3
|
|
|
|
25.2
|
|
|
|
28.5
|
|
General and administrative
|
|
|
22.5
|
|
|
|
32.9
|
|
|
|
30.0
|
|
Amortization of intangibles
|
|
|
2.0
|
|
|
|
2.4
|
|
|
|
3.6
|
|
Impairment of goodwill and
intangibles
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Restructuring and other charges
(credits)
|
|
|
3.3
|
|
|
|
1.1
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61.3
|
|
|
|
76.3
|
|
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26.0
|
)
|
|
|
(37.5
|
)
|
|
|
(40.5
|
)
|
Interest income, net
|
|
|
4.0
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Foreign currency gains (losses)
and other income (expense)
|
|
|
(0.7
|
)
|
|
|
6.2
|
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(22.7
|
)
|
|
|
(28.7
|
)
|
|
|
(43.4
|
)
|
Benefit (provision) for income
taxes
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(22.9
|
)
|
|
|
(29.2
|
)
|
|
|
(42.8
|
)
|
Gain (loss) from discontinued
operations, net of income taxes
|
|
|
10.4
|
|
|
|
(7.5
|
)
|
|
|
(20.8
|
)
|
Gain (loss) on sale of
discontinued operations
|
|
|
15.5
|
|
|
|
(7.8
|
)
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3.1
|
%
|
|
|
(44.5
|
)%
|
|
|
(62.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
We sell our secure digital access products into two market
segments: PC Security and Flash Media Readers.
|
|
|
|
|
For the PC Security market, we offer smart card reader
technology that enables authentication of individuals for
applications such as electronic passports, electronic healthcare
cards, secure logical access to PCs and networks, and physical
access to facilities.
|
|
|
|
For the Flash Media Reader market, we offer digital media
readers that are used to transfer digital content to and from
various flash media. These readers are primarily used in digital
photo kiosks.
|
Revenue
The following table sets forth our annual revenues and
year-to-year
change in revenues by product segment for the fiscal years ended
December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
Fiscal
|
|
|
2005
|
|
|
Fiscal
|
|
|
2004
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
to 2006
|
|
|
2005
|
|
|
to 2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
PC Security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,745
|
|
|
|
36
|
%
|
|
$
|
17,415
|
|
|
|
(13
|
)%
|
|
$
|
20,017
|
|
Percentage of total revenues
|
|
|
71
|
%
|
|
|
|
|
|
|
62
|
%
|
|
|
|
|
|
|
67
|
%
|
Flash Media Readers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,868
|
|
|
|
(6
|
)%
|
|
$
|
10,521
|
|
|
|
5
|
%
|
|
$
|
10,013
|
|
Percentage of total revenues
|
|
|
29
|
%
|
|
|
|
|
|
|
38
|
%
|
|
|
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
33,613
|
|
|
|
20
|
%
|
|
$
|
27,936
|
|
|
|
(7
|
)%
|
|
$
|
30,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 Revenue Compared with Fiscal 2005 Revenue
Revenue for the year ended December 31, 2006 was
$33.6 million, an increase of 20% from $27.9 million
in 2005. This increase was driven by higher demand for our PC
Security products, offset by a slight decrease in sales of Flash
Media Reader products. Sales of our PC Security products
accounted for 71% and sales of our Flash Media Reader products
accounted for 29% of total revenue in 2006.
Sales of our PC Security products increased 36% to
$23.7 million in 2006, compared with $17.4 million in
2005. This product line consists of smart card readers and
related chip technology that are utilized principally in
security programs where smart cards are used to identify and
authenticate people in order to control access to computers and
computer networks, buildings or other facilities, and border
entry points. Revenue in this product line is subject to
significant variability based on the size and timing of product
orders. The majority of product orders are tied to government or
corporate security projects that typically deploy our smart card
readers in one or more stages, resulting in order volumes that
can range from small to very large over a series of months or
years. In 2006, higher revenue levels were primarily the result
of higher sales of smart card readers in the United States for
U.S. government security projects as well as growth in
demand for our products in Europe primarily related to
e-passport
projects. We believe that potential growth in sales of our PC
Security products has been curtailed by the slow pace at which
new smart card programs reach a stage requiring high volumes,
which directly drives demand for our readers.
Revenue from our Flash Media Reader product line decreased 6%
from $10.5 million in 2005 to $9.9 million in 2006.
Flash Media Reader revenue consists of sales of digital media
readers and related ASIC technology used to provide an interface
for flash memory cards in computer printers and digital
photography kiosks, which are used to download and print digital
photos, and in consumer electronics products such as televisions
to download and view digital photos. The revenue decrease in
2006 was primarily due to a reduction in the price we were able
to charge the primary customer for one of our digital media
reader products, as the customer had decided they did not need
the advanced functionality provided by components we previously
had used in the readers. We therefore began to use simpler and
less expensive components and thus the price of the product was
lowered.
30
Fiscal
2005 Revenue Compared with Fiscal 2004 Revenue
Revenue for the year ended December 31, 2005 was
$27.9 million, down 7% from $30.0 million in 2004.
Sales of our Security products accounted for 62% and sales of
our Flash Media Reader products accounted for 38% of total
revenue in 2005.
Sales of our PC Security products decreased 13% to
$17.4 million in 2005, compared with $20.0 million in
2004. Revenue in this product line is subject to significant
variability based on the size and timing primarily of product
orders. In 2005, lower revenue levels were primarily the result
of fluctuations in order levels, as well as some impact from
continued competition for business in Europe, based on price. In
particular, we experienced significantly lower sales in the
U.S. compared with the prior year period due to the timing
of orders for smart card readers for U.S. government
security projects.
Revenue from our Flash Media Reader product line increased 5%
from $10.0 million in 2004 to $10.5 million in 2005.
During the first half of 2005, we ceased to sell certain
products within this business, which reduced our revenue base
significantly. Beginning in the third quarter, we introduced a
new category of digital media reader products designed to be
embedded in televisions, which helped us to partially offset
this revenue loss and stabilize revenue levels.
Gross
Profit
The following table sets forth our gross profit and
year-to-year
change in gross profit by product segment for the fiscal years
ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
Fiscal
|
|
|
2005
|
|
|
Fiscal
|
|
|
2004
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
to 2006
|
|
|
2005
|
|
|
to 2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
PC Security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,745
|
|
|
|
|
|
|
$
|
17,415
|
|
|
|
|
|
|
$
|
20,017
|
|
Gross profit
|
|
|
9,725
|
|
|
|
59
|
%
|
|
|
6,120
|
|
|
|
(25
|
)%
|
|
|
8,190
|
|
Gross profit %
|
|
|
41
|
%
|
|
|
|
|
|
|
35
|
%
|
|
|
|
|
|
|
41
|
%
|
Flash Media Readers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,868
|
|
|
|
|
|
|
$
|
10,521
|
|
|
|
|
|
|
$
|
10,013
|
|
Gross profit
|
|
|
2,132
|
|
|
|
(55
|
)%
|
|
|
4,710
|
|
|
|
14
|
%
|
|
|
4,116
|
|
Gross profit %
|
|
|
22
|
%
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,613
|
|
|
|
|
|
|
$
|
27,936
|
|
|
|
|
|
|
$
|
30,030
|
|
Gross profit
|
|
|
11,857
|
|
|
|
9
|
%
|
|
|
10,830
|
|
|
|
(12
|
)%
|
|
|
12,306
|
|
Gross profit %
|
|
|
35
|
%
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
|
|
41
|
%
|
Gross profit for 2006 was $11.9 million, or 35% of revenue.
During 2006 gross profit for our PC Security products was
impacted by increased pricing pressure, offset by the effect of
a more favorable product mix as we increased the number of
contactless readers sold, particularly for
e-passport
applications During the fourth quarter of 2006, we experienced
an increase in gross profit in our PC Security business
primarily due to better inventory management and cost reduction
programs established earlier in the year. In our Flash Media
Reader business, gross profit was impacted by pricing pressure,
as well as by an increasing proportion of lower margin products
sold.
Gross profit for 2005 was $10.8 million, or 39% of revenue.
Our 2005 gross profit was negatively impacted by inventory
write-downs of approximately $1.3 million in our PC
security segment, severance costs for manufacturing personnel in
our Singapore facility of $0.5 million, as well as by
pricing pressure, mix of products sold and tooling costs.
Gross profit for 2004 was $12.3 million, or 41% of total
revenue. Our 2004 gross profit was adversely impacted by
inventory write-downs of $0.7 million related to PC
Security product inventory and $0.7 million related to
Flash Media Reader product inventory.
31
Our gross profit has been and will continue to be affected by a
variety of factors, including competition, the volume of sales
in any given quarter, product configuration and mix, the
availability of new products, product enhancements, software and
services, inventory write-downs and the cost and availability of
components. Accordingly, gross profit percentages are expected
to continue to fluctuate from period to period.
Operating
Expenses
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
% Change
|
|
|
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
2004
|
|
Fiscal
|
|
|
2006
|
|
to 2006
|
|
2005
|
|
to 2005
|
|
2004
|
|
|
(In thousands)
|
|
Expenses
|
|
$
|
3,767
|
|
|
|
(8
|
)%
|
|
$
|
4,081
|
|
|
|
(15
|
)%
|
|
$
|
4,807
|
|
Percentage of revenue
|
|
|
11
|
%
|
|
|
|
|
|
|
15
|
%
|
|
|
|
|
|
|
16
|
%
|
Research and development expenses consist primarily of employee
compensation and fees for the development of prototype products.
Research and development costs are primarily related to hardware
and chip development.
We focus the bulk of our research and development activities on
the development of products for new and emerging market
opportunities. In 2006, we focused primarily on the development
of smart card reader technology for the global
e-passport
market, electronic ID applications and the German
e-healthcard
program. Research and development expenses were
$3.8 million in 2006, or 11% of revenue, compared with
$4.1 million in 2005, or 15% of revenue, a decrease of 8%.
This decrease was primarily due to a lower level of external
resources used, as well as the offsetting effects of
approximately $0.2 million of contributions from customer
funded development.
In 2005, research and development expenses decreased 15% from
2004 levels of $4.8 million, which represented 16% of
revenue. This decrease was primarily due to lower headcount and
contract service costs and to the offsetting effect of customer
funded development contributions of $0.4 million.
We expect our research and development expenses to vary based on
future project demands.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
% Change
|
|
|
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
2004
|
|
Fiscal
|
|
|
2006
|
|
to 2006
|
|
2005
|
|
to 2005
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Expenses
|
|
$
|
7,498
|
|
|
|
7
|
%
|
|
$
|
7,040
|
|
|
|
(18
|
)%
|
|
$
|
8,560
|
|
Percentage of revenue
|
|
|
22
|
%
|
|
|
|
|
|
|
25
|
%
|
|
|
|
|
|
|
29
|
%
|
Selling and marketing expenses consist primarily of employee
compensation as well as tradeshow participation and other
marketing costs. We focus a significant proportion of our sales
and marketing activities on new and emerging market
opportunities. In 2006, these opportunities included
e-passport,
electronic ID applications and the early stages of the
e-healthcard
program in Germany. Selling and marketing expenses were
$7.5 million in 2006, or 22% of revenue, compared with
$7.0 million, or 25% of revenue in 2005, an increase of 7%.
The increase primarily consisted of $0.3 million in
severance costs related to the consolidation and closure of
facilities in the third quarter of 2006, as part of the
Companys efforts to lower expenses. We expect our sales
and marketing costs will vary as we continue to align our
resources to address existing and new market opportunities.
In 2005, sales and marketing expenses decreased 18% from
$8.6 million in 2004, which represented 29% of revenue.
This decrease was primarily the result of planned reductions in
headcount and tradeshow expenditures as part of the
Companys efforts to lower expenses.
During 2004, selling and marketing expenses decreased in the
second half of the year as we completed the launch of several
new products. While there was an overall decrease in spending,
this decrease was offset in part by increased costs associated
with the effect of foreign currency exchange related to the
payment of European employees in euros.
32
We expect our sales and marketing costs will vary as we continue
to align our resources to address existing and new market
opportunities.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
% Change
|
|
|
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
2004
|
|
Fiscal
|
|
|
2006
|
|
to 2006
|
|
2005
|
|
to 2005
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Expenses
|
|
$
|
7,548
|
|
|
|
(18
|
)%
|
|
$
|
9,198
|
|
|
|
2
|
%
|
|
$
|
9,021
|
|
Percentage of revenue
|
|
|
22
|
%
|
|
|
|
|
|
|
33
|
%
|
|
|
|
|
|
|
30
|
%
|
General and administrative expenses consist primarily of
compensation expenses for employees performing our
administrative functions, professional fees arising from legal,
auditing and other consulting services.
In 2006, general and administrative expenses were
$7.5 million, or 22% of revenue, compared with
$9.2 million, or 33% of revenue in 2005, a decrease of 18%.
The reduction in general and administrative expenses in 2006
primarily related to the consolidation and transfer of our
corporate finance and compliance functions from the U.S. to
Germany and the transfer of local finance functions from
Singapore and the U.S. to Germany. These actions have
resulted in a more streamlined and efficient audit process and a
decrease in the number of personnel required to prepare our
financial statements. The streamlining of general and
administrative functions was accompanied by a further reduction
in expenditures for third-party professional fees. The majority
of the decrease occurred in the fourth quarter of 2006, which
also resulted in a more favorable comparison for the year as a
whole.
General and administrative expenses in 2005 were relatively
unchanged from 2004 levels. While the Company initiated cost
reduction measures in the second half of 2004, including a small
reduction in headcount and a reduction in expenditures for
third-party professional fees, these measures were partially
offset by increased costs associated with the effect of foreign
currency exchange related to the payment of European employees
in euros and increased spending related to Sarbanes-Oxley
compliance.
Amortization
of Intangibles
Amortization of intangible assets was $0.7 million in 2006,
$0.7 million in 2005 and $1.1 million in 2004. Lower
amortization amounts in 2005 and 2006 reflect a lower level of
intangible assets on our balance sheet.
Impairment
of Goodwill and Intangibles
As required under SFAS No. 142, we evaluate the
carrying value of goodwill and indefinite-lived intangible
assets on our balance sheet from time to time and we will record
a charge for impairment whenever events or changes in
circumstances indicate that the carrying amount of long-lived
assets may not be recoverable.
In 2006 and 2005, no charge for impairment was recorded.
In 2004 we concluded that the carrying value of customer
relations and core technology relating to a past acquisition was
not supportable because the estimate of future cash flows
related to these intangible assets was not sufficient to recover
the carrying value of such intangibles. Accordingly, we took a
charge of $0.4 million under SFAS No. 144 for
intangible asset impairment.
Restructuring
and Other Charges (Credits)
During 2006, we recorded restructuring and other charges of
$1.4 million, primarily related to severance costs for
general and administrative personnel that were affected by our
decision to relocate corporate finance and compliance functions
from the U.S. to Germany and local finance functions from
the U.S. and Singapore to Germany, as well as the
outsourcing of our manufacturing operations from our Singapore
facility to contract manufacturers. Severance costs for
manufacturing personnel of approximately $0.3 million have
been recorded in cost of revenue (See Note 8 to our
consolidated financial statements attached to this Annual Report
on
Form 10-K).
During 2005, we incurred restructuring and other charges of
$0.8 million, which included $0.2 million of severance
costs related to a reduction in force of non-manufacturing
personnel at our Singapore facility, resulting
33
from our decision to outsource manufacturing operations to
contract manufacturers. Severance costs for manufacturing
personnel of $0.5 million were recorded in cost of revenue.
(See Note 8 to our consolidated financial statements
attached to this Annual Report on
Form 10-K.)
Restructuring and other charges in 2005 also included
$0.1 million primarily related to changes in estimates for
European tax related matters.
During 2004, we incurred restructuring and other credits related
to continuing operations of $0.6 million, which resulted
primarily from restructuring costs related to cost reduction
actions taken by management during the second half of the year
that included employee severance charges of $0.6 million.
Loss
from Investments
From time to time, we may make strategic investments in both
private and public companies. During each quarter, we evaluate
our investments for possible asset impairment. We examine a
number of factors, including the current economic conditions and
markets for each investment, as well as its cash position and
anticipated cash needs for the short and long term.
We had no strategic investments in 2006, 2005 or 2004 and
therefore did not record a loss or gain related to investments
during these periods.
Interest
Income, Net
Interest income, net consists of interest earned on invested
cash, offset by interest paid or accrued on outstanding debt.
Interest income resulting from cash balances was
$1.4 million in 2006, $0.7 million in 2005 and
$0.8 million in 2004. Higher interest income in 2006
resulted from higher interest rates and a greater amount of cash
invested. The 2005 period includes a cumulative adjustment to
interest income taken in the second quarter for the correction
of an error in accounting for the amortization of premiums and
discounts on investments. The correction of the error resulted
in a reduction of interest income in the second quarter and the
year of 2005 of approximately $0.3 million.
Reductions in invested cash balances in 2005 compared with 2004
were offset by higher rates of return on invested funds.
Foreign
Currency Gains and Losses and Other Income and
Expense
We recorded foreign currency exchange losses and other expense
of $0.2 million in 2006, foreign currency exchange gains
and other income of $1.7 million in 2005, and foreign
currency losses and other expenses of $1.7 million in 2004.
Changes in currency valuation in all periods presented were
primarily a result of exchange rate movements between the
U.S. dollar and the euro.
During 2006, foreign currency losses were $0.3 million, due
primarily to the devaluation of the U.S. dollar. Other
income was $0.1 million.
During 2005, foreign currency gains were $1.6 million, due
primarily to the revaluation of dollar holdings in an entity
where the euro is the functional currency. Other income was
$0.1 million, primarily attributable to the settlement of
transactional tax issues in Europe.
During 2004, net foreign currency losses resulted from foreign
currency losses of $1.6 million, due primarily to the
decrease in the value of the U.S. dollar as compared with
the euro.
Income
Taxes
In 2006 and 2005, we recorded provisions for income taxes of
$0.1 million and $0.2 million, respectively, primarily
resulting from taxes payable in foreign jurisdictions that are
not offset by operating loss carryforwards.
In 2004, we recorded a net benefit for income taxes of
$0.2 million, primarily due to changes in estimates for
taxes related to foreign tax jurisdictions.
34
Discontinued
Operations
On May 22, 2006, we completed the sale of substantially all
the assets and some of the liabilities associated with our DTV
solutions business to Kudelski S.A. Revenue for the DTV
solutions business was $13.5 million, $20.8 million
and $19.1 million in 2006, 2005 and 2004, respectively.
Operating loss for the DTV solutions business was
$1.3 million, $1.9 million and $6.6 million in
2006, 2005 and 2004, respectively. Net gain (loss) for the DTV
solutions business in 2006, 2005 and 2004 was $3.0 million,
$(1.6) million and $(6.1) million, respectively.
During 2003, we completed two transactions to sell our retail
Digital Media and Video business. On July 25, 2003, we
completed the sale of our digital video business to Pinnacle
Systems and on August 1, 2003, we completed the sale of our
retail digital media reader business to Zio Corporation.
Revenue for the retail Digital Media and Video business in 2006,
2005 and 2004 was $0, $0 and $16,000, respectively. Operating
loss for the retail Digital Media and Video business for the
same periods was $0.2 million, $0.3 million and
$0.3 million, respectively. Net gain (loss) for the retail
Digital Media and Video business for 2006, 2005 and 2004 was
$0.5 million, $(0.5) million and $(0.2) million,
respectively.
During 2006, we recorded a net gain on disposal of discontinued
operations of $5.2 million, primarily related to the sale
of the assets of the DTV solutions business.
During 2005, our net loss on disposal of discontinued operations
was $2.2 million, of which the majority related to the
settlement of litigation with DVD Cre8, Inc. and related legal
costs.
During 2004, our net gain on disposal of discontinued operations
was $0.4 million and included $1.6 million of
inventory and asset recoveries, offset in part by changes in
estimate of lease commitments of $0.4 million and legal
costs of $0.8 million.
Liquidity
and Capital Resources
As of December 31, 2006, our working capital, which we have
defined as current assets less current liabilities, was
$32.0 million, compared to $27.3 million as of
December 31, 2005. Working capital increased in 2006 by
approximately $4.7 million. While current assets increased
by $0.5 million resulting from an increase in cash, cash
equivalents and short-term investments of $4.5 million
which was mainly offset in part by a reduction in inventories of
$4.1 million, current liabilities decreased by
$4.1 million resulting primarily from lower accounts
payable by $1.1 million, reduced accruals by
$2.6 million and a decrease in income taxes payable by
$0.4 million.
In 2006, cash and cash equivalents increased by
$18.4 million, primarily due to the maturity of short-term
investments which have been invested short-term in cash.
Operating activities provided $0.2 million, investing
activities provided $17.5 million, financing activities
resulted in a positive cash flow of $0.3 million and the
effect of exchange rates on cash and cash equivalents was
$0.5 million.
Cash used in continuing operations of $10.3 million was
primarily due to a net loss before discontinued operations and
depreciation and amortization of $6.7 million. The
remaining $3.6 million cash used in continuing operations
resulted mainly from the net effect of changes in working
capital. Cash provided in operating activities from discontinued
operations was $10.5 million and consisted primarily of the
$9.0 million received in the sale of the DTV solutions
business offset in part by the value of the sold working capital
positions as well as the $5.0 million received from Aston
for a VAT refund.
Cash provided by investing activities from continuing operations
of $14.0 million resulted primarily from the maturity of
short-term investments of $16.9 million, partially offset
by purchases of $2.9 million.
Cash provided by investing activities from discontinued
operations resulted from the sale of the DTV solutions business.
The $3.5 million represented the net book value of sold
assets and liabilities in the transaction.
Cash provided by financing activities was from the issuance of
common stock of $0.3 million related to the Companys
employee stock purchase and stock option programs. At
December 31, 2006, our outstanding stock options as a
percentage of outstanding shares were 11%, compared to 18% at
December 31, 2005.
35
During 2006, we used $10.3 million in cash to fund
continuing operations. We currently expect that our current
capital resources and available borrowings should be sufficient
to meet our operating and capital requirements through at least
the end of 2007. We may, however, seek additional debt or equity
financing prior to that time. There can be no assurance that
additional capital will be available to us on favorable terms or
at all. The sale of additional debt or equity securities may
cause dilution to existing stockholders.
Off-Balance
Sheet Arrangements
We have not entered into off-balance sheet arrangements, or
issued guarantees to third parties.
Contractual
Obligations
The following summarizes expected cash requirements for
contractual obligations as of December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than 5
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Operating leases
|
|
$
|
6,284
|
|
|
$
|
1,795
|
|
|
$
|
2,368
|
|
|
$
|
1,038
|
|
|
$
|
1,083
|
|
Purchase commitments
|
|
|
8,635
|
|
|
|
8,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Obligations
|
|
$
|
14,919
|
|
|
$
|
10,430
|
|
|
$
|
2,368
|
|
|
$
|
1,038
|
|
|
$
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately $1.8 million of the purchase commitments
relate to the sold DTV solutions business.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
Currencies
We transact business in various foreign currencies and
accordingly, we are subject to exposure from adverse movements
in foreign currency exchange rates. This exposure is primarily
related to local currency denominated sales and operating
expenses in Europe, Singapore, India and Japan, where we conduct
business in both local currencies and U.S. dollars. We
assess the need to utilize financial instruments to hedge
foreign currency exposure on an ongoing basis.
Our foreign currency exchange gains and losses are primarily the
result of the revaluation of intercompany receivables/payables
(denominated in U.S. dollars) and trade receivables
(denominated in a currency other than the functional currency)
to the functional currency of the subsidiary. We have performed
a sensitivity analysis as of December 31, 2006 and 2005
using a modeling technique which evaluated the hypothetical
impact of a 10% movement in the value of the U.S. dollar
compared to the functional currency of the subsidiary, with all
other variables held constant, to determine the incremental
transaction gains or losses that would have been incurred. The
foreign exchange rates used were based on market rates in effect
at December 31, 2006 and 2005. The results of this
hypothetical sensitivity analysis indicated that a hypothetical
10% movement in foreign currency exchange rates would result in
increased foreign currency gains or losses of $1.1 million
and $1.0 million for 2006 and 2005, respectively.
Fixed
Income Investments
We do not use derivative financial instruments in our investment
portfolio. We do, however, limit our exposure to interest rate
and credit risk by establishing and strictly monitoring clear
policies and guidelines for our fixed income portfolios. At the
present time, the maximum duration of any investment in our
portfolio is limited to less than one year. The guidelines also
establish credit quality standards, limits on exposure to one
issue or issuer, as well as to the type of instrument. Due to
the limited duration and credit risk criteria we have
established, our exposure to market and credit risk is not
expected to be material.
At December 31, 2006, we had $32.1 million in cash and
cash equivalents and $4.8 million in short-term
investments. Based on our cash and cash equivalents and short
term investments as of December 31, 2006, a hypothetical
10% change in interest rates along the entire interest rate
yield curve would not be expected to materially affect the fair
value of our financial instruments that are exposed to changes
in interest rates.
36
At December 31, 2005, we had $13.7 million in cash and
cash equivalents and $18.8 million in short-term
investments. Based on our cash and cash equivalents and short
term investments as of December 31, 2005, a hypothetical
10% change in interest rates along the entire interest rate
yield curve would not materially affect the fair value of our
financial instruments that are exposed to changes in interest
rates.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by this Item is incorporated by
reference to pages F-1 through F-28 of this
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of
December 31, 2006. Based on this evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective, such that
the information relating to our business and operations,
including our consolidated subsidiaries, required to be
disclosed in our Securities and Exchange Commission
(SEC) reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Report on
Internal Control over Financial Reporting
As a result of the SECs extension of the deadline for
non-accelerated filers compliance with the internal
control requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, as a non-accelerated filer we are not subject to
these requirements in our annual report on
Form 10-K
for the fiscal year ending December 31, 2006. We will be
required to provide managements report on internal control
over financial reporting beginning with our annual report for
the fiscal year ending on December 31, 2007. Further, we
will be required to file the auditors attestation report
on internal control over financial reporting beginning with our
annual report for the fiscal year ending on December 31,
2008.
Changes
in Internal Control Over Financial Reporting
In connection with our continued monitoring and maintenance of
our controls procedures in relation to the provisions of the
Sarbanes-Oxley Act of 2002, we continue to review, revise and
improve the effectiveness of our internal controls. We made no
changes to our internal control over financial reporting during
the fourth quarter of 2006 that have materially affected, or
that are reasonably likely to materially affect, our internal
control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
37
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information required by Item 10 concerning our
directors and officers will be set forth under the captions
Election of Directors and Matters Relating to
the Board of Directors in our Proxy Statement relating to
our 2007 Annual Meeting of Stockholders, referred to in the
Annual Report on
Form 10-K
as the Proxy Statement, which we expect will be
filed within 120 days of the end of our fiscal year
pursuant to General Instruction G(3) of
Form 10-K.
Such information is incorporated herein by reference. The
information required by this item concerning compliance with
Section 16(a) of the Exchange Act is incorporated by
reference to the section captioned Section 16(a)
Beneficial Ownership Compliance that will be set forth in
the Proxy Statement. The information required by this item
concerning our code of ethics is incorporated by reference to
the section captioned Code of Conduct and Ethics
that will be set forth in the Proxy Statement. The information
required by this item concerning the Audit Committee of our
Board of Directors is incorporated by reference to the section
captioned Board Committees in our Proxy Statement.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 will be set forth under
the section captioned Executive Compensation
contained in the Proxy Statement, which information is
incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by Item 12 will be set forth under
the captions Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan
Information in the Proxy Statement, which information is
incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by Item 13 will be set forth under
the caption Certain Relationships and Related
Transactions in the Proxy Statement, which information is
incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by Item 14 will be set forth under
the caption Principal Accountant Fees and Services
in the Proxy Statement, which information is incorporated herein
by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents Filed with Report
1. Financial Statements
The following Consolidated Financial Statements and Independent
Auditors Reports are incorporated by reference to pages
F-1 through F-28 of this
Form 10-K.
a. The consolidated balance sheets as of December 31,
2006 and 2005, and the consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows
for each of the years in the three-year period ended
December 31, 2006, together with the notes thereto.
b. The report of our Independent Registered Public
Accounting Firm.
38
2. Financial Statement Schedule
The following financial statement schedule should be read in
conjunction with the consolidated financial statements and the
notes thereto.
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
|
|
|
|
|
|
End of
|
|
Classification
|
|
Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Accounts receivable allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
3,303
|
|
|
$
|
119
|
|
|
$
|
1,215
|
|
|
$
|
2,207
|
|
Year ended December 31, 2005
|
|
|
2,207
|
|
|
|
|
|
|
|
1,235
|
|
|
|
972
|
|
Year ended December 31, 2006
|
|
|
972
|
|
|
|
119
|
|
|
|
224
|
|
|
|
867
|
|
Warranty accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
326
|
|
|
$
|
423
|
|
|
$
|
505
|
|
|
$
|
244
|
|
Year ended December 31, 2005
|
|
|
244
|
|
|
|
409
|
|
|
|
500
|
|
|
|
153
|
|
Year ended December 31, 2006
|
|
|
153
|
|
|
|
227
|
|
|
|
346
|
|
|
|
34
|
|
3. Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Fourth Amended and Restated
Certificate of Incorporation
|
|
3
|
.2(5)
|
|
Amended and Restated Bylaws of
Registrant.
|
|
3
|
.3(6)
|
|
Certificate of Designation of
Rights, Preferences and Privileges of Series A
Participating Preferred Stock of SCM Microsystems, Inc.
|
|
4
|
.1(1)
|
|
Form of Registrants Common
Stock Certificate.
|
|
4
|
.2(6)
|
|
Preferred Stock Rights Agreement,
dated as of November 8, 2002, between SCM Microsystems,
Inc. and American Stock Transfer and Trust Company.
|
|
10
|
.1(1)*
|
|
Form of Director and Officer
Indemnification Agreement.
|
|
10
|
.2(8)*
|
|
Amended 1997 Stock Plan.
|
|
10
|
.3(1)*
|
|
1997 Employee Stock Purchase Plan.
|
|
10
|
.4(1)*
|
|
1997 Director Option Plan.
|
|
10
|
.5(1)*
|
|
1997 Stock Option Plan for French
Employees.
|
|
10
|
.6(1)*
|
|
1997 Employee Stock Purchase Plan
for
Non-U.S. Employees.
|
|
10
|
.7(2)*
|
|
2000 Non-statutory Stock Option
Plan.
|
|
10
|
.8(2)*
|
|
Dazzle Multimedia, Inc. 1998 Stock
Plan.
|
|
10
|
.9(2)*
|
|
Dazzle Multimedia, Inc. 2000 Stock
Option Plan.
|
|
10
|
.10(3)
|
|
Sublease Agreement, dated
December 14, 2000 between Microtech International and
Golden Goose LLC.
|
|
10
|
.11(1)*
|
|
Form of Employment Agreement
between SCM Microsystems GmbH and Robert Schneider.
|
|
10
|
.12(4)
|
|
Tenancy Agreement dated
August 31, 2001 between SCM Microsystems GmbH and Claus
Czaika.
|
|
10
|
.13(11)
|
|
Shuttle Technology Group
Unapproved Share Option Scheme.
|
|
10
|
.14(12)*
|
|
Form of Employment Agreement
between SCM Microsystems GmbH and Colas Overkott.
|
|
10
|
.15(13)*
|
|
Description of Executive
Compensation Arrangement.
|
|
10
|
.16(14)*
|
|
Management by Objective (MBO)
Bonus Program Guide.
|
|
10
|
.17(15)*
|
|
Bonus Agreement between SCM
Microsystems and Colas Overkott dated January 13, 2006.
|
39
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.18(15)*
|
|
Separation Agreement between SCM
Microsystems and Colas Overkott dated January 13, 2006.
|
|
10
|
.19(15)*
|
|
Employment Agreement between SCM
Microsystems and Steven L. Moore dated January 17, 2006.
|
|
10
|
.20(15)*
|
|
Separation Agreement between SCM
Microsystems and Ingo Zankel dated January 27, 2006.
|
|
10
|
.21(15)*
|
|
Employment Agreement between SCM
Microsystems and Stephan Rohaly dated March 14, 2006.
|
|
10
|
.22
|
|
Purchase Agreement between SCM
Microsystems and Kudelski S.A.
|
|
10
|
.23(16)*
|
|
Restrictive Covenant between
Kudelski S.A. and Robert Schneider dated May 22, 2006.
|
|
10
|
.24(16)*
|
|
Amended Employment Agreement
between SCM Microsystems GmbH and Robert Schneider dated
May 22, 2006.
|
|
10
|
.25(16)*
|
|
Amended Employment Agreement
between SCM Microsystems GmbH and Dr. Manfred Mueller dated
June 8, 2006.
|
|
10
|
.26
|
|
Lease dated July 15, 2006
between SCM Microsystems and Rreef America Reit II Corp.
|
|
10
|
.27(17)*
|
|
Supplementary Employment Agreement
between SCM Microsystems GmbH and Stephan Rohaly dated
December 12, 2006.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14
and
Rule 15D-14
of the Securities Exchange Act, as amended.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14
and
Rule 15D-14
of the Securities Exchange Act, as amended.
|
|
32
|
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Filed previously as an exhibit to SCMs Registration
Statement on
Form S-1
(See SEC File
No. 333-29073). |
|
(2) |
|
Filed previously as an exhibit to SCMs Registration
Statement on
Form S-8
(See SEC File
No. 333-51792). |
|
(3) |
|
Filed previously as an exhibit to SCMs Annual Report on
Form 10-K
for the year ended December 31, 2000 (See SEC File
No. 000-22689). |
|
(4) |
|
Filed previously as an exhibit to SCMs Annual Report on
Form 10-K
for the year ended December 31, 2001 (See SEC File
No. 000-22689). |
|
(5) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2002 (see SEC File
No. 000-22689). |
|
(6) |
|
Filed previously as an exhibit to SCMs Registration
Statement on
Form 8-A
(See SEC File
No. 000-29440). |
|
(7) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2003 (see SEC File
No. 000-29440). |
|
(8) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 (see SEC File
No. 000-29440). |
|
(9) |
|
Filed previously as exhibit 99.1 to SCMs Current
Report on
Form 8-K,
dated July 28, 2003 (see SEC File
No. 000-29440). |
|
(10) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2003 (see SEC File
No. 000-29440). |
|
(11) |
|
Filed previously as an exhibit to SCMs Registration
Statement on
Form S-8
(See SEC File
No. 333-73061). |
|
(12) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 (see SEC File
No. 000-29440). |
40
|
|
|
(13) |
|
Filed previously in the description of the Executive
Compensation Arrangement set forth in SCMs Current Report
on
Form 8-K,
dated September 21, 2004 (see SEC File
No. 000-29440). |
|
(14) |
|
Filed previously as an exhibit to SCMs Annual Report on
Form 10-K
for the year ended December 31, 2004 (See SEC File
No. 000-29440). |
|
(15) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006 (see SEC File
No. 000-29440). |
|
(16) |
|
Filed previously as an exhibit to SCMs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 (see SEC File
No. 000-29440). |
|
(17) |
|
Filed previously as an exhibit to SCMs Current Report on
Form 8-K,
dated December 18, 2006 (see SEC File
No. 000-29440). |
|
* |
|
Denotes management compensatory arrangement. |
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Registrant
SCM MICROSYSTEMS, INC.
Robert Schneider
Chief Executive Officer and Director
March 19, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Capacity in Which Signed
|
|
Date
|
|
/s/ Werner
Koepf
Werner
Koepf
|
|
Chairman of the Board
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Robert
Schneider
Robert
Schneider
|
|
Chief Executive Officer
(Principal Executive Officer) and Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Stephan
Rohaly
Stephan
Rohaly
|
|
Chief Financial Officer and
Secretary (Principal Financial and Accounting Officer)
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Manuel
Cubero
Manuel
Cubero
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Hagen
Hultzsch
Hagen
Hultzsch
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Steven
Humphreys
Steven
Humphreys
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Ng
Poh Chuan
Ng
Poh Chuan
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Simon
Turner
Simon
Turner
|
|
Director
|
|
March 19, 2007
|
42
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of SCM Microsystems, Inc.:
We have audited the accompanying consolidated balance sheets of
SCM Microsystems, Inc. and subsidiaries (the Company) as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2006. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a)(2). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
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, such consolidated financial statements present
fairly, in all material respects, the financial position of SCM
Microsystems, Inc. and subsidiaries as of December 31, 2006
and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. Also, 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.
|
|
|
|
|
/s/ DELOITTE &
TOUCHE GMBH
|
WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT
Munich, Germany
March 20, 2007
F-2
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,103
|
|
|
$
|
13,660
|
|
Short-term investments
|
|
|
4,799
|
|
|
|
18,780
|
|
Accounts receivable, net of
allowances of $867 and $972 as of December 31, 2006 and
2005, respectively
|
|
|
6,583
|
|
|
|
6,904
|
|
Inventories
|
|
|
1,927
|
|
|
|
6,005
|
|
Other current assets
|
|
|
2,489
|
|
|
|
2,038
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,901
|
|
|
|
47,387
|
|
Property and equipment, net
|
|
|
1,457
|
|
|
|
3,050
|
|
Intangible assets, net
|
|
|
272
|
|
|
|
879
|
|
Other assets
|
|
|
1,725
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,355
|
|
|
$
|
52,734
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,572
|
|
|
$
|
5,700
|
|
Accrued compensation and related
benefits
|
|
|
1,729
|
|
|
|
2,708
|
|
Accrued restructuring and other
charges
|
|
|
3,431
|
|
|
|
3,897
|
|
Accrued professional fees
|
|
|
1,063
|
|
|
|
1,644
|
|
Accrued royalties
|
|
|
971
|
|
|
|
1,244
|
|
Other accrued expenses
|
|
|
2,289
|
|
|
|
2,565
|
|
Income taxes payable
|
|
|
1,879
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,934
|
|
|
|
20,016
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
103
|
|
|
|
101
|
|
Commitments and contingencies (see
Notes 12 and 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value: 40,000 shares authorized; 16,316 and
16,211 shares issued and 15,698 and 15,593 shares
outstanding as of December 31, 2006 and 2005, respectively
|
|
|
16
|
|
|
|
16
|
|
Additional paid-in capital
|
|
|
228,580
|
|
|
|
227,676
|
|
Treasury stock, 618 shares
|
|
|
(2,777
|
)
|
|
|
(2,777
|
)
|
Accumulated deficit
|
|
|
(191,714
|
)
|
|
|
(192,756
|
)
|
Other cumulative comprehensive
income
|
|
|
1,213
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,318
|
|
|
|
32,617
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
51,355
|
|
|
$
|
52,734
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
$
|
30,030
|
|
Cost of revenue
|
|
|
21,756
|
|
|
|
17,106
|
|
|
|
17,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
12,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,767
|
|
|
|
4,081
|
|
|
|
4,807
|
|
Selling and marketing
|
|
|
7,498
|
|
|
|
7,040
|
|
|
|
8,560
|
|
General and administrative
|
|
|
7,548
|
|
|
|
9,198
|
|
|
|
9,021
|
|
Amortization of intangibles
|
|
|
666
|
|
|
|
673
|
|
|
|
1,078
|
|
Impairment of intangibles
|
|
|
|
|
|
|
|
|
|
|
388
|
|
Restructuring and other charges
|
|
|
1,120
|
|
|
|
319
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,599
|
|
|
|
21,311
|
|
|
|
24,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,742
|
)
|
|
|
(10,481
|
)
|
|
|
(12,155
|
)
|
Interest income
|
|
|
1,350
|
|
|
|
745
|
|
|
|
806
|
|
Foreign currency gains (losses)
and other income (expense), net
|
|
|
(225
|
)
|
|
|
1,731
|
|
|
|
(1,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
|
(7,617
|
)
|
|
|
(8,005
|
)
|
|
|
(13,024
|
)
|
Benefit (provision) for income
taxes
|
|
|
(73
|
)
|
|
|
(150
|
)
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,690
|
)
|
|
|
(8,155
|
)
|
|
|
(12,851
|
)
|
Gain (loss) from discontinued
operations, net of income taxes
|
|
|
3,508
|
|
|
|
(2,109
|
)
|
|
|
(6,242
|
)
|
Gain (loss) on sale of
discontinued operations, net of income taxes
|
|
|
5,224
|
|
|
|
(2,171
|
)
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
from continuing operations
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss)
per share from discontinued operations
|
|
$
|
0.56
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and
diluted income (loss) per share
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
15,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Income
|
|
|
Stockholders
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Equity
|
|
|
(Loss)
|
|
|
|
(In thousands)
|
|
|
Balances, January 1, 2004
|
|
|
15,300
|
|
|
|
15
|
|
|
|
226,582
|
|
|
|
(2,777
|
)
|
|
|
(161,658
|
)
|
|
|
1,262
|
|
|
|
63,424
|
|
|
|
|
|
Issuance of common stock upon
exercise of options
|
|
|
70
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
Issuance of common stock under
Employee Stock Purchase Plan
|
|
|
114
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
|
|
Non-employee stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202
|
)
|
|
|
(202
|
)
|
|
$
|
(202
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,454
|
|
|
|
1,454
|
|
|
|
1,454
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,663
|
)
|
|
|
|
|
|
|
(18,663
|
)
|
|
|
(18,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
15,484
|
|
|
|
15
|
|
|
|
227,398
|
|
|
|
(2,777
|
)
|
|
|
(180,321
|
)
|
|
|
2,514
|
|
|
|
46,829
|
|
|
|
|
|
Issuance of common stock upon
exercise of options
|
|
|
2
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Issuance of common stock under
Employee Stock Purchase Plan
|
|
|
107
|
|
|
|
1
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
Realized gain on investments
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
(49
|
)
|
|
$
|
(49
|
)
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
229
|
|
|
|
229
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,236
|
)
|
|
|
(2,236
|
)
|
|
|
(2,236
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,435
|
)
|
|
|
|
|
|
|
(12,435
|
)
|
|
|
(12,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
15,593
|
|
|
$
|
16
|
|
|
$
|
227,676
|
|
|
$
|
(2,777
|
)
|
|
$
|
(192,756
|
)
|
|
$
|
458
|
|
|
$
|
32,617
|
|
|
|
|
|
Issuance of common stock upon
exercise of options
|
|
|
26
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
Issuance of common stock under
Employee Stock Purchase Plan
|
|
|
79
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
71
|
|
|
$
|
71
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684
|
|
|
|
684
|
|
|
|
684
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,042
|
|
|
|
|
|
|
|
1,042
|
|
|
|
1,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
15,698
|
|
|
$
|
16
|
|
|
$
|
228,580
|
|
|
$
|
(2,777
|
)
|
|
$
|
(191,714
|
)
|
|
$
|
1,213
|
|
|
$
|
35,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by (used in) operating
activities from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) from discontinued
operations
|
|
|
(8,732
|
)
|
|
|
4,280
|
|
|
|
5,812
|
|
Deferred income taxes
|
|
|
2
|
|
|
|
(30
|
)
|
|
|
(224
|
)
|
Depreciation and amortization
|
|
|
1,036
|
|
|
|
1,703
|
|
|
|
2,933
|
|
Stock-based compensation expense
|
|
|
632
|
|
|
|
|
|
|
|
32
|
|
Loss (gain) on disposal of
property and equipment
|
|
|
46
|
|
|
|
(128
|
)
|
|
|
58
|
|
Impairment of intangibles
|
|
|
|
|
|
|
|
|
|
|
388
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,388
|
)
|
|
|
2,414
|
|
|
|
(1,366
|
)
|
Inventories
|
|
|
398
|
|
|
|
(1,021
|
)
|
|
|
2,005
|
|
Other assets
|
|
|
(574
|
)
|
|
|
367
|
|
|
|
6,060
|
|
Accounts payable
|
|
|
81
|
|
|
|
1,860
|
|
|
|
(1,936
|
)
|
Accrued expenses
|
|
|
(1,990
|
)
|
|
|
(5,402
|
)
|
|
|
(3,264
|
)
|
Income taxes payable
|
|
|
102
|
|
|
|
174
|
|
|
|
(652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities from continuing operations
|
|
|
(10,345
|
)
|
|
|
(8,218
|
)
|
|
|
(8,817
|
)
|
Net cash provided by (used in)
operating activities from discontinued operations
|
|
|
10,524
|
|
|
|
(4,595
|
)
|
|
|
(2,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
179
|
|
|
|
(12,813
|
)
|
|
|
(11,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(73
|
)
|
|
|
(57
|
)
|
|
|
(166
|
)
|
Proceeds from disposal of property
and equipment
|
|
|
11
|
|
|
|
381
|
|
|
|
32
|
|
Sales and maturities of short-term
investments
|
|
|
16,918
|
|
|
|
12,055
|
|
|
|
4,849
|
|
Purchases of short-term investments
|
|
|
(2,878
|
)
|
|
|
(15,851
|
)
|
|
|
(14,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities from continuing operations
|
|
|
13,978
|
|
|
|
(3,472
|
)
|
|
|
(9,670
|
)
|
Net cash provided by (used in)
investing activities from discontinued operations
|
|
|
3,484
|
|
|
|
(17
|
)
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
17,462
|
|
|
|
(3,489
|
)
|
|
|
(9,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of equity
securities, net
|
|
|
262
|
|
|
|
279
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
262
|
|
|
|
279
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
and cash equivalents
|
|
|
540
|
|
|
|
(1,498
|
)
|
|
|
2,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
18,443
|
|
|
|
(17,521
|
)
|
|
|
(18,201
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
13,660
|
|
|
|
31,181
|
|
|
|
49,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
32,103
|
|
|
$
|
13,660
|
|
|
$
|
31,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refunds received
|
|
$
|
|
|
|
$
|
96
|
|
|
$
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
133
|
|
|
$
|
40
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
SCM Microsystems (SCM or the Company)
was incorporated under the laws of the State of Delaware in
December 1996. SCMs principal business activity is the
design, development and sale of hardware, software and silicon
solutions that enable people to conveniently and securely access
digital content and services. The Company sells its products
primarily into two market segments: PC Security and Flash Media
Readers. In the PC Security market, the Company provides smart
card reader technology that enables secure access to PCs,
networks and physical facilities. In the Flash Media Reader
market, the Company provides digital media readers that are used
to transfer digital content to and from various flash media.
SCMs target customers are primarily original equipment
manufacturers, or OEMs, who typically either bundle the
Companys products with their own solutions, or repackage
the products for resale to their customers. OEM customers
include: government contractors, systems integrators, large
enterprises, computer manufacturers, as well as banks and other
financial institutions for SCMs smart card readers; and
computer and photographic equipment manufacturers for the
Companys digital medial readers. SCM sells and licenses
its products through a direct sales and marketing organization,
as well as through distributors, value-added resellers and
system integrators worldwide.
SCM maintains its corporate headquarters in Ismaning, Germany,
with additional facilities in India, the United States and Japan
for research and development and sales and marketing.
Principles of Consolidation and Basis of
Presentation The accompanying consolidated
financial statements include the accounts of SCM and its wholly
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Discontinued Operations The financial
information related to SCMs former Digital Television
solutions (DTV solutions) business and retail
Digital Media and Video business is reported as discontinued
operations for all periods presented as discussed in Note 3.
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires SCMs
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Such management estimates include
an allowance for doubtful accounts receivable, provision for
inventory, lower of cost or market adjustments, valuation
allowances against deferred income taxes, estimates related to
recovery of long-lived assets and accruals of product warranty,
restructuring reserves and accruals, and other liabilities.
Actual results could differ from these estimates.
Cash Equivalents SCM considers all highly
liquid debt investments with maturities of three months or less
at the date of acquisition to be cash equivalents.
Short-term Investments Short-term investments
consist of corporate notes and United States government agency
instruments, and are stated at fair value based on quoted market
prices. Short-term investments are classified as
available-for-sale.
The difference between amortized cost and fair value
representing unrealized holding gains or losses is recorded as a
component of stockholders equity as other cumulative
comprehensive gain or loss. Gains and losses on sales of
investments are determined on a specific identification basis.
Short-term investments are evaluated for impairment on a
quarterly basis and are written down to their fair value when
impairment indicators present are considered to be other than
temporary.
Fair Value of Financial Instruments
SCMs financial instruments include cash and cash
equivalents, short-term investments, trade receivables and
payables, and long-term investments. At December 31, 2006
and 2005, the fair value of cash and cash equivalents, trade
receivables and payables approximated their financial statement
carrying amounts because of the short-term maturities of these
instruments. (See Note 4 for fair value of investments.)
F-7
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories Inventories are stated at the
lower of standard cost, which approximates cost, or market
value. Cost is determined on the
first-in,
first-out method.
Property and Equipment Property and equipment
are stated at cost. Depreciation and amortization are computed
using the straight-line method over estimated useful lives of
three to five years except for buildings which are depreciated
over twenty-five to thirty years. Leasehold improvements are
amortized over the shorter of the lease term or their useful
life.
Intangible and Long-lived Assets The Company
evaluates long-lived assets under Statement of Financial
Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. SCM evaluates its long-lived assets and certain
identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by an asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
Intangible assets with definite lives are being amortized using
the straight-line method over the useful lives of the related
assets, from two to five years. During the fourth quarter of
2004, SCM recognized an impairment charge of $0.4 million
relating to the intangible assets from a past acquisition.
Revenue Recognition SCM recognizes revenue
pursuant to Staff Accounting Bulletin (SAB)
No. 104, Revenue
Recognition. Accordingly, revenue from product
sales is recognized upon product shipment, provided that risk
and title have transferred, a purchase order has been received,
the sales price is fixed and determinable and collection of the
resulting receivable is probable. Maintenance revenue is
deferred and amortized ratably over the period of the
maintenance contract. Provisions for estimated warranty repairs
and returns and allowances are provided for at the time products
are shipped.
Research and Development Research and
development expenses are expensed as incurred and consist
primarily of employee compensation and fees for the development
of prototype products. Cost contributions by customers are
accounted for as reductions in research and development expenses.
Freight Costs SCM reflects the cost of
shipping its products to customers as cost of revenue. Since
2005, reimbursements received from customers for freight costs
are recognized in revenue. Customer reimbursements for freight
are not significant.
Income Taxes SCM accounts for income taxes in
accordance with SFAS No. 109, Accounting for Income
Taxes, which requires the asset and liability approach for
financial accounting and reporting of income taxes. Deferred
income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. A valuation allowance is provided
to reduce the net deferred tax asset to an amount that is more
likely than not to be realized. At December 31, 2006 and
2005, a full valuation allowance was provided against the net
deferred tax assets.
Stock-based Compensation During the first
quarter of fiscal 2006, the Company adopted the provisions of,
and accounted for stock-based compensation in accordance with,
the Financial Accounting Standards Boards
(FASB) SFAS No. 123 revised
2004 (SFAS 123(R)), Share-Based Payment,
which replaced SFAS No. 123, Accounting for
Stock-Based Compensation and supersedes Accounting
Principles Board (APB) Opinion No. 25
(APB 25), Accounting for Stock Issued to
Employees. Under the fair value recognition provisions of
this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the
requisite service period, which is the vesting period. The
Company elected to use the modified-prospective method, under
which prior periods are not revised for comparative purposes.
The valuation provisions of SFAS 123(R) apply to new grants
and to grants that were outstanding as of the effective date and
are subsequently modified. Estimated compensation for grants
that were outstanding as of the effective date will be
recognized over the remaining service period using the
compensation cost estimated for the SFAS 123 pro forma
disclosures.
F-8
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The adoption of SFAS 123(R) did not have a material impact
on the Companys consolidated financial position, results
of operations and cash flows. See Note 2 for further
information regarding the Companys stock-based
compensation assumptions and expenses, including pro forma
disclosures for prior periods as if the Company had recorded
stock-based compensation expense in accordance with
SFAS 123.
Net Income or Loss Per Share Basic and
diluted net income or loss per share is based upon the weighted
average number of common shares outstanding during the period.
Diluted net income per share is based upon the weighted average
number of common shares and dilutive-potential common share
equivalents outstanding during the period. Dilutive-potential
common share equivalents are excluded from the computation in
loss periods as their effect would be antidilutive. If there is
a loss from continuing operations, diluted net income per share
would be computed in the same manner as basic net income per
share is computed, even if an entity has net income after
adjusting for a discontinued operation, an extraordinary item,
or the cumulative effect of an accounting change.
Foreign Currency Translation and Transactions
The functional currencies of SCMs foreign subsidiaries are
the local currencies, except for the Singapore subsidiary,
which, effective January 1, 2004, uses the U.S. dollar
as its functional currency. The change in the functional
currency of the Singapore subsidiary was in accordance with
SFAS 52, Foreign Currency Translation, and reflects
the changed economic facts and circumstances of the Singapore
subsidiary. The books of record of the Singapore subsidiary are
maintained in its functional currency, the U.S. dollar. For
those subsidiaries whose functional currency is the local
currency, SCM translates assets and liabilities to
U.S. dollars using period end exchange rates and translate
revenues and expenses using average exchange rates during the
period. Exchange gains and losses arising from translation of
foreign entity financial statements are included as a component
of other comprehensive income (loss). Gains and losses from
transactions denominated in currencies other than the functional
currencies of SCM or its subsidiaries are included in other
income and expense. SCM recorded a currency loss of
$0.3 million in fiscal year 2006, a currency gain of
$1.7 million in fiscal 2005 and a currency loss of
$1.6 million in fiscal 2004.
Concentration of Credit Risk Financial
instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable and short-term investments.
SCMs cash equivalents primarily consist of money market
accounts and commercial paper with maturities of less than three
months. SCM primarily sells its products to companies in the
United States, Asia and Europe. One U.S. based customer
represented 17% and one Asia based customer represented 19% of
accounts receivable at December 31, 2006. The Company does
not require collateral or other security to support accounts
receivable. To reduce risk, SCMs management performs
ongoing credit evaluations of its customers financial
condition. SCM maintains allowances for potential credit losses.
Comprehensive Gain (Loss)
SFAS No. 130, Reporting Comprehensive Income
requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from
non-owner sources. Comprehensive income (loss) for the years
ended December 31, 2006, 2005 and 2004 has been disclosed
within the consolidated statements of stockholders equity
and comprehensive income (loss).
Recently
Issued Accounting Standards
In April 2006, the FASB issued FASB Staff Position FASB
Interpretation No. 46(R)-6 (FSP
FIN 46(R)-6), which addresses how a reporting
enterprise should determine the variability to be considered in
applying FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, as amended
(FIN 46(R)). The variability that is considered
in applying FIN 46(R) affects the determination of
(a) whether the entity is a variable interest entity,
(b) which interests are variable interests in the entity
and (c) which party, if any, is the primary beneficiary of
the variable interest entity. That variability will affect any
calculation of expected losses and expected residual returns, if
such a calculation is necessary. FSP FIN 46(R)-6 provides
additional guidance to consider for determining variability. FSP
FIN 46(R)-6 is effective beginning the first day of the
first reporting period beginning after June 15, 2006. After
evaluating FSP FIN 46(R)-6, the Company determined that
there is no impact to its consolidated financial position,
results of operations or cash flows from its adoption.
F-9
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, the FASB ratified Emerging Issues Task Force
(EITF) Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(Issue
No. 06-03).
Under Issue
No. 06-03,
a company must disclose its accounting policy regarding the
gross or net presentation of certain taxes. If taxes included in
gross revenues are significant, a company must disclose the
amount of such taxes for each period for which an income
statement is presented (i.e., both interim and annual periods).
Taxes within the scope of this Issue are those that are imposed
on and concurrent with a specific revenue-producing transaction.
Taxes assessed on an entitys activities over a period of
time, such as gross receipts taxes, are not within the scope of
the issue. Issue
No. 06-03
is effective for the first annual or interim reporting period
beginning after December 15, 2006. After evaluating Issue
No. 06-03,
the Company determined that there is no impact to its
consolidated financial position, results of operations or cash
flows from its adoption.
In July 2006, the FASB issued FASB Interpretation No. 48
Accounting for Uncertain Tax Positions
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109 Accounting for Income Taxes. It
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the
amounts reported after adoption are to be accounted for as an
adjustment to the beginning balance of retained earnings.
The Company has completed its initial evaluation of the impact
of the January 1, 2007, adoption of FIN 48 and
determined, that such adoption will most likely result in a
reduction of its disclosed income taxes payable of
$1.9 million as of December 31, 2006. The expected
reduction of income taxes payable will be accounted for as an
increase to the January 1, 2007 beginning balance of
retained earnings. The Companys expectation of the impact
from the adoption of FIN 48 is subject to revision as
management completes its analysis.
In September 2006, the Securities and Exchange Commission
(SEC) published Staff Accounting Bulletin
(SAB) No 108. SAB 108 expresses the staff views
regarding the process of quantifying financial statement
misstatements. The bulletin prescribes the use of
rollover and iron curtain approaches in
quantifying misstatements. Rollover approach
quantifies a misstatement based on the amount of the error
originating in the current year income statement. Iron
curtain approach quantifies a misstatement based on the
effects of correcting the misstatement existing in the balance
sheet at the end of the year, irrespective of the
misstatements year(s) of origination. The statement is
effective immediately. The Company did not have any
misstatements that were determined to be material on the basis
of either of the approaches mentioned above.
In September 2006, FASB issued SFAS No. 157, Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of
SFAS 157 are effective for the fiscal year beginning
January 1, 2008. The Company is currently evaluating the
impact of the provisions of SFAS 157 on its financial
position, results of operations and cash flows and does not
believe the impact of the adoption will be material.
|
|
2.
|
Stockholders
Equity and Stock Based Compensation
|
Repurchase
Plan
In October 2002, SCMs Board of Directors approved a stock
repurchase program in which up to $5.0 million may be used
to purchase shares of the Companys common stock on the
open market in the United States or Germany from time to time
over two years, depending on market conditions, share prices and
other factors. During 2003 and 2002, SCM repurchased a total of
618,400 shares of its common stock under the program for an
aggregate of $2.8 million. The stock repurchase program
ended in the fourth quarter of 2004.
F-10
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stockholders
Rights Plan
On November 8, 2002, SCMs Board of Directors approved
a stockholders rights plan. Under the plan, the Company declared
a dividend of one preferred share purchase right for each share
of the Companys common stock held by SCM stockholders of
record as of the close of business on November 25, 2002.
Each preferred share purchase right entitles the holder to
purchase from SCM one one-thousandth of a share of Series A
participating preferred stock, par value $0.001 per share,
at a price of $30.00, subject to adjustment. The rights are not
immediately exercisable, however, and will become exercisable
only upon the occurrence of certain events. If a person or group
acquires, or announces a tender or exchange offer that would
result in the acquisition of 15% or more of SCMs common
stock while the stockholder rights plan remains in place, then,
unless the rights are redeemed by SCM for $0.001 per right,
the rights will become exercisable by all rights holders except
the acquiring person or group for shares of the Company or the
third party acquirer having a value of twice the rights
then-current exercise price. The stockholder rights plan may
have the effect of deterring or delaying a change in control of
the Company.
Stock
Based Compensation Plans
The Company has a stock-based compensation program that provides
its Board of Directors discretion in creating employee equity
incentives. This program includes incentive and non-statutory
stock options under various plans, the majority of which are
stockholder approved. Stock options are generally time-based,
vesting 25% each year over four years and expire ten years from
the grant date. Additionally, the Company has an Employee Stock
Purchase Plan (ESPP) that allows employees to
purchase shares of common stock at 85% of the fair market value
at the lower of either the date of enrollment or the date of
purchase. Shares issued as a result of stock option exercises
and the ESPP are newly issued shares. As of December 31,
2006, the Company had approximately 4.5 million shares of
common stock reserved for future issuance under the stock option
plans and ESPP. The Companys ESPP, its director option
plan and one of its employee stock option plans will expire in
March 2007.
On January 1, 2006, the Company adopted the provision of
SFAS 123(R) for its share-based compensation plans. Under
SFAS 123(R), the Company is required to recognize
stock-based compensation costs based on the estimated fair value
at the grant date for its share-based awards. In accordance to
this standard, the Company recognizes the compensation cost of
all share-based awards on a straight-line basis over the
requisite service period which is the vesting period of the
award.
The Company elected to use the modified prospective transition
method as permitted by SFAS 123(R) and therefore has not
restated its financial results for prior periods. Under this
transition method, in the year ended December 31, 2006, the
compensation cost recognized includes the cost for all
stock-based compensation awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS 123. Compensation cost for all share-based
compensation awards granted on or subsequent to January 1,
2006 was based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). In
conjunction with the adoption of SFAS 123(R), the Company
changed its method of attributing the value of stock-based
compensation to expense from the accelerated multiple-option
approach to the straight-line single option method. Compensation
expense for all share-based payment awards granted prior to
January 1, 2006 will continue to be recognized using the
accelerated multiple-option approach while compensation expense
for all share-based payment awards granted on or subsequent to
January 1, 2006 has been and will continue to be recognized
using the straight-line single-option approach.
Compensation expense recognized in the consolidated statement of
operations for the year ended December 31, 2006 is based on
awards ultimately expected to vest and reflects estimated
forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates. Prior to adoption of SFAS 123(R) the Company
accounted for forfeitures as they occurred.
F-11
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In calculating the compensation cost, the Company estimates the
fair value of each option grant on the date of grant using the
Black-Scholes-Merton options pricing model. The
Black-Scholes-Merton option pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
the Black-Scholes-Merton model requires the input of highly
subjective assumptions including the expected stock price
volatility.
As a result of adopting SFAS 123(R), the Companys
loss from continuing operations before the income tax provision
and net loss from discontinued operations for the year ended
December 31, 2006 was $0.6 million higher than it
would have been had the Company continued to account for
share-based compensation under APB 25. Basic and diluted
net loss per share from continuing operations for the year ended
December 31, 2006 would have been $0.04 lower, if the
Company had not adopted SFAS 123(R). There was no effect on
the condensed consolidated statements of cash flows for the year
ended December 31, 2006 from adopting SFAS 123(R).
On November 10, 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3 (SFAS 123(R)-3),
Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards. The Company has elected to adopt
the alternative transition method provided in the FASB Staff
Position for calculating the tax effects of stock-based
compensation pursuant to SFAS 123(R). The alternative
transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool
(APIC pool) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact
on the APIC pool and consolidated statements of cash flows of
the tax effects of employee stock-based compensation awards that
are outstanding upon adoption of SFAS 123(R).
The following table illustrates the stock-based compensation
expense resulting from stock options and shares issued under the
ESPP included in the audited condensed consolidated statement of
operations for the year ended December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
36
|
|
Research and development
|
|
|
110
|
|
Selling and marketing
|
|
|
163
|
|
General and administrative
|
|
|
323
|
|
|
|
|
|
|
Stock-based compensation expense
before income taxes
|
|
$
|
632
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
after income taxes
|
|
$
|
632
|
|
|
|
|
|
|
Stock
Option Plans
A total of 4,084,775 shares of common stock are currently
reserved for future grant under the Companys stock option
plans.
F-12
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the activity under the Companys stock option
plans for the three years ended December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
|
Available
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Intrinsic Value
|
|
|
Life (in years)
|
|
|
Balance at December 31, 2003
(1,756,560 exercisable at $29.54)
|
|
|
2,880,435
|
|
|
|
2,979,859
|
|
|
$
|
22.92
|
|
|
|
|
|
|
|
|
|
Options Authorized
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(512,897
|
)
|
|
|
512,897
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
495,693
|
|
|
|
(495,693
|
)
|
|
$
|
25.36
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(69,477
|
)
|
|
$
|
5.95
|
|
|
$
|
130,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
(1,936,445 exercisable at $27.03)
|
|
|
2,898,231
|
|
|
|
2,927,586
|
|
|
$
|
19.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Authorized
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(331,928
|
)
|
|
|
331,928
|
|
|
$
|
3.49
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
435,005
|
|
|
|
(435,005
|
)
|
|
$
|
28.93
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(1,748
|
)
|
|
$
|
3.31
|
|
|
$
|
1,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
(2,099,539 exercisable at $20.56)
|
|
|
3,036,308
|
|
|
|
2,822,761
|
|
|
$
|
16.26
|
|
|
|
|
|
|
|
6.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Authorized
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(376,794
|
)
|
|
|
376,794
|
|
|
$
|
3.26
|
|
|
|
|
|
|
|
|
|
Options cancelled or expired
|
|
|
1,390,261
|
|
|
|
(1,390,261
|
)
|
|
$
|
17.71
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(26,039
|
)
|
|
$
|
2.78
|
|
|
$
|
8,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
4,084,775
|
|
|
|
1,783,255
|
|
|
$
|
12.58
|
|
|
$
|
81,808
|
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2006
|
|
|
|
|
|
|
1,660,044
|
|
|
$
|
13.28
|
|
|
$
|
70,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable at December 31,
2006
|
|
|
|
|
|
|
1,208,481
|
|
|
$
|
17.02
|
|
|
$
|
43,299
|
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options
outstanding as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 2.65 - $ 3.08
|
|
|
368,690
|
|
|
|
8.34
|
|
|
$
|
2.89
|
|
|
|
150,041
|
|
|
$
|
2.82
|
|
$ 3.10 - $ 3.41
|
|
|
388,646
|
|
|
|
8.78
|
|
|
|
3.32
|
|
|
|
53,495
|
|
|
|
3.29
|
|
$ 3.44 - $ 8.08
|
|
|
513,988
|
|
|
|
5.23
|
|
|
|
7.02
|
|
|
|
493,563
|
|
|
|
7.10
|
|
$ 8.10 - $45.56
|
|
|
381,680
|
|
|
|
1.93
|
|
|
|
24.75
|
|
|
|
381,131
|
|
|
|
24.77
|
|
$47.88 - $83.00
|
|
|
130,251
|
|
|
|
3.19
|
|
|
|
53.89
|
|
|
|
130,251
|
|
|
|
53.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.65 - $83.00
|
|
|
1,783,255
|
|
|
|
5.79
|
|
|
$
|
12. 58
|
|
|
|
1,208,481
|
|
|
$
|
17.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value per option for
options granted during the years ended December 31, 2006,
2005 and 2004 was $1.71, $2.76, and $3.01, respectively. The
total intrinsic value of options exercised during the years
ended December 31, 2006, 2005 and 2004 was $8,716, $1,901,
and $130,700, respectively. Cash proceeds from the exercise of
stock options were $72,000, $5,800 and $414,000 for the three
years ended December 31, 2006,
F-13
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005 and 2004, respectively. No income tax benefit was realized
from the stock option exercises during the three year period
ended December 31, 2006. Stock-based compensation expense
related to stock options recognized under SFAS 123(R) for
the year ended December 31, 2006 was $0.6 million. At
December 31, 2006, there was $0.8 million of
unrecognized stock-based compensation expense, net of estimated
forfeitures related to non-vested options, that is expected to
be recognized over a weighted-average period of 1.59 years.
The fair value of option grants was estimated by using the
Black-Scholes-Merton model with the following weighted-average
assumptions for the three years ended December 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.81
|
%
|
|
|
3.84
|
%
|
|
|
3.43
|
%
|
Expected volatility
|
|
|
67
|
%
|
|
|
90
|
%
|
|
|
93
|
%
|
Expected term in years
|
|
|
3.92
|
|
|
|
4.00
|
|
|
|
4.00
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected Volatility: The Companys
computation of expected volatility for the year ended
December 31, 2006 is based on the historical volatility of
the Companys stock for a time period equivalent to the
expected life. Prior to the year ended December 31, 2006,
the Company had used its historical stock price volatility in
accordance with SFAS 123 for purposes of its pro forma
information.
Dividend Yield: The dividend yield assumption
is based on the Companys history and expectation of
dividend payouts.
Risk-Free Interest Rate: The risk-free
interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant for the expected term of the option.
Expected Term: The Companys expected
term represents the period that the Companys stock-based
awards are expected to be outstanding and was determined for the
year ended December 31, 2006 based on historical experience
of similar awards, giving consideration to the contractual terms
of the stock-based awards, vesting schedules and expectations of
future employee behavior. Stock options are generally granted
with vesting periods between one and four years.
Forfeiture Rates: Compensation expense
recognized in the consolidated statement of operations for the
fiscal year 2006 is based on awards ultimately expected to vest
and it reflects estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. Prior to adoption of SFAS 123(R), the
Company accounted for forfeitures as they occurred.
1997
Employee Stock Purchase Plan
Under the Companys ESPP, up to 1,021,887 shares of
the Companys common stock may be issued. The
Companys ESPP permits eligible employees to purchase
common stock through payroll deductions up to 10% of their base
wages 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. The Company has a two-year rolling plan with
four purchases every six months within the offering period. If
the fair market value per share is lower on the purchase date
than the beginning of the offering period, the current offering
period terminates and a new two-year offering period will
commence. The Companys ESPP restricts the maximum amount
of shares purchased by an individual to $25,000 worth of common
stock each year. During 2006, 2005 and 2004, a total of 78,679,
107,526 and 114,151 shares, respectively, were issued under
the plan. As of December 31, 2006, 354,899 shares were
available for future issuance under the Companys ESPP. The
ESPP will expire in March 2007.
The fair value of issuances under the Companys ESPP is
estimated on the issuance date by applying the principles of
FASB Technical
Bulletin 97-1
(FTB
97-1),
Accounting under Statement 123 for Certain Employee
F-14
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock Purchase Plan with a Look Back Option, and using
the Black-Scholes-Merton options pricing model. Stock-based
compensation expense related to the Companys ESPP
recognized under SFAS 123(R) for the year ended
December 31, 2006 was $111,000. At December 31, 2006,
there was $61,000 of unrecognized stock-based compensation
expense related to outstanding ESPP shares that is expected to
be recognized over a twenty two month period.
The following weighted average assumptions are included in the
estimated grant date fair value calculations for rights to
purchase stock under the Purchase Plan:
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Expected life
|
|
15 months
|
|
6 months
|
|
6 months
|
Risk-free interest
|
|
4.90%
|
|
2.56%
|
|
2.00%
|
Volatility
|
|
49%
|
|
76%
|
|
73%
|
Dividend yield
|
|
None
|
|
None
|
|
None
|
The weighted-average fair value of purchase rights granted under
the Purchase Plan in 2006, 2005 and 2004 was $1.36, $1.08 and
$1.89 per share, respectively.
Prior to 2006, the Company accounted for its employee stock
option and employee stock purchase plans under the intrinsic
value recognition and measurement principles of APB No. 25
and related Interpretations, and had adopted the disclosure-only
provisions of SFAS 123, as amended by SFAS 148,
Accounting for Stock-Based Compensation
Transition and Disclosures. As the exercise price of the
Companys employee stock options equals the market price of
the underlying stock on the date of the grant, no compensation
expense was recognized in the Companys financial
statements.
In calculating pro forma compensation, the fair value of each
option grant is estimated on the date of grant using the
Black-Scholes-Merton options pricing model. The
Black-Scholes-Merton option pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
the Black-Scholes-Merton model requires the input of highly
subjective assumptions including the expected stock price
volatility. As the Companys stock-based awards to
employees have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not
necessarily provide a reliable single measure of its stock-based
awards to its employees.
Had the Company determined stock-based compensation costs based
on the estimated fair value at the grant date for its stock
options and the estimated fair value at the issuance date for
its ESPP, the Companys net loss and net loss per share for
the fiscal years ended December 31, 2005 and 2004 would
have been as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss as reported
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
Add: Stock-based compensation
expense included in reported net loss, net of related tax effects
|
|
|
|
|
|
|
|
|
Less: Stock-based compensation
expense determined under fair value method for all awards
|
|
|
(1,363
|
)
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(13,798
|
)
|
|
$
|
(21,157
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, as
reported basic and diluted
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
Pro forma loss per
share basic and diluted
|
|
$
|
(0.89
|
)
|
|
$
|
(1.37
|
)
|
F-15
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Discontinued
Operations
|
On May 22, 2006, the Company completed the sale of
substantially all the assets and some of the liabilities
associated with its DTV solutions business to Kudelski for total
expected consideration of $11 million in cash, of which
$9 million has been received as of December 31, 2006.
As part of the purchase contract, the remaining $2 million
was to be paid to the Company upon fulfillment of certain
conditions. Based on recent actions by Kudelski and the terms of
the purchase agreement, the Company has made demand for payment
of the remaining $2 million. The obligation to make the
additional $2 million payment is disputed by Kudelski.
Accordingly, the Company has not recorded the $2 million as
a receivable. In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long Lived
Assets, for the fiscal years ended December 31, 2006,
2005 and 2004, the DTV solutions business has been presented as
discontinued operations in the consolidated statements of
operations and cash flows and all prior periods have been
reclassified to conform to this presentation.
Based on the carrying value of the assets and the liabilities
attributed to the DTV solutions business on May 22, 2006,
and the estimated costs and expenses incurred in connection with
the sale, the Company recorded a net pretax gain of
approximately $5.5 million, excluding the $2 million
noted above.
Based on a Transition Services and Side Agreement
between the Company and Kudelski, revenues relating to the
discontinued operations of the DTV solutions business will be
generated for a limited time. Based on this agreement, a service
fee is earned by the Company for its services to order products
with a supplier of DTV solutions business products and to
sell these products to Kudelski. It is expected that these
revenues will be generated until approximately the second
quarter of 2007.
The operating results for the discontinued operations of the DTV
solutions business for the fiscal years ended December 31,
2006, 2005 and 2004 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenue
|
|
$
|
13,513
|
|
|
$
|
20,785
|
|
|
$
|
19,054
|
|
Operating loss
|
|
$
|
(1,287
|
)
|
|
$
|
(1,868
|
)
|
|
$
|
(6,571
|
)
|
Income (loss) before income taxes
|
|
$
|
2,953
|
|
|
$
|
(1,791
|
)
|
|
$
|
(6,096
|
)
|
Income tax benefit
|
|
$
|
67
|
|
|
$
|
183
|
|
|
$
|
5
|
|
Gain (loss) from discontinued
operations
|
|
$
|
3,020
|
|
|
$
|
(1,608
|
)
|
|
$
|
(6,091
|
)
|
During 2003, the Company completed two transactions to sell its
retail Digital Media and Video business. On July 25, 2003,
the Company completed the sale of its digital video business to
Pinnacle Systems and on August 1, 2003, the Company
completed the sale of its retail digital media reader business
to Zio Corporation. As a result of these sales, the Company has
accounted for the retail Digital Media and Video business as
discontinued operations.
The operating results for the discontinued operations of the
retail Digital Media and Video business for the years ended
December 31, 2006, 2005 and 2004 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16
|
|
Operating loss
|
|
$
|
(168
|
)
|
|
$
|
(287
|
)
|
|
$
|
(257
|
)
|
Loss before income taxes
|
|
$
|
(76
|
)
|
|
$
|
(430
|
)
|
|
$
|
(151
|
)
|
Income tax benefit (provision)
|
|
$
|
564
|
|
|
$
|
(71
|
)
|
|
$
|
|
|
Gain (loss) from discontinued
operations
|
|
$
|
488
|
|
|
$
|
(501
|
)
|
|
$
|
(151
|
)
|
The operating loss for the Digital Media and Video business
resulted from general and administrative expenses for the
discontinued entities in the U.S. and UK, mainly in
connection with the remaining long-term lease agreements from
the discontinued operations.
F-16
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, net loss on disposal of the retail Digital Media
and Video business was $0.1 million, which was related to
changes in estimates for lease commitments.
During 2005, net loss on disposal of the retail Digital Media
and Video business was $2.2 million, of which the majority
was related to the settlement of litigation with DVD Cre8, Inc.
and related legal costs (see Note 8).
During 2004, net gain on disposal of the retail Digital Media
and Video business was $0.4 million and included
$1.6 million of inventory and asset recoveries, offset by
changes in estimates for lease commitments of $0.4 million
and legal costs of $0.8 million.
|
|
4.
|
Short-Term
Investments
|
At December 31, 2006, all of the short-term investment
portfolio matures in 2007. The fair value of short-term
investments at December 31, 2006 and 2005 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gain on
|
|
|
Loss on
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Investments
|
|
|
Investments
|
|
|
Value
|
|
|
Corporate notes
|
|
$
|
1,021
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
1,019
|
|
U.S. government agencies
|
|
|
3,792
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
3,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,813
|
|
|
$
|
|
|
|
$
|
(14
|
)
|
|
$
|
4,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gain on
|
|
|
Loss on
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Investments
|
|
|
Investments
|
|
|
Value
|
|
|
Corporate notes
|
|
$
|
9,369
|
|
|
$
|
6
|
|
|
$
|
(34
|
)
|
|
$
|
9,341
|
|
U.S. government agencies
|
|
|
9,490
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
9,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,859
|
|
|
$
|
6
|
|
|
$
|
(85
|
)
|
|
$
|
18,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Adjustment to Interest Income and Other Cumulative Comprehensive
Gain
In July 2005, during a review of the Companys investment
holdings and the calculation of interest income and unrealized
gains and losses on investments, the Company discovered an error
in the recording of the amortization of investment premiums and
discounts and the related interest income and unrealized gain
(loss) on investments. As a result, interest income and
unrealized loss on investments and the balance of unrealized
loss included in other cumulative comprehensive gain for the
years ended December 31, 2004 and 2003 were overstated. The
cumulative overstatement of interest income and unrealized loss
on investments for periods prior to the three months ended
June 30, 2005 was approximately $0.3 million. The
effect of the error was not material to any relevant prior
period and had the amounts been recorded correctly in the prior
periods, there would have been no effect on reported
comprehensive loss or total stockholders equity. To
correct this error, the Company recorded the cumulative
$0.3 million as a reduction in interest income and a
decrease in unrealized loss on investments during the
three-month period ended June 2005.
During each quarter, SCM evaluates investments for possible
asset impairment by examining a number of factors, including the
current economic conditions and markets for each investment, as
well as its cash position and anticipated cash needs for the
short and long term. In addition, the Company evaluates severity
and duration in each reporting period. At December 31,
2006, approximately $4.8 million of the short-term
investment portfolio has an unrealized loss and approximately
$2.7 million of those investments have been in an
unrealized loss position for more than one year. Of the $14,000
unrealized loss at December 31, 2006, approximately $4,000
relates to investments that have been in an unrealized loss
position for more than one year. The Company believes these fair
F-17
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value declines are the result of rising short-term interest
rates. For the years ended December 31, 2006, 2005 and
2004, no impairment of the investments was identified based on
the evaluations performed.
Inventories consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Raw materials
|
|
$
|
754
|
|
|
$
|
2,430
|
|
Work-in-process
|
|
|
|
|
|
|
2,435
|
|
Finished goods
|
|
|
1,173
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,927
|
|
|
$
|
6,005
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment, net consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
127
|
|
|
$
|
260
|
|
Building and leasehold improvements
|
|
|
1,789
|
|
|
|
3,187
|
|
Furniture, fixtures and office
equipment
|
|
|
2,851
|
|
|
|
5,333
|
|
Automobiles
|
|
|
1
|
|
|
|
58
|
|
Purchased software
|
|
|
3,209
|
|
|
|
4,018
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,977
|
|
|
|
12,856
|
|
Accumulated depreciation
|
|
|
(6,520
|
)
|
|
|
(9,806
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,457
|
|
|
$
|
3,050
|
|
|
|
|
|
|
|
|
|
|
SCM recorded depreciation expenses in the amount of
$0.3 million, $1.0 million and $1.8 million for
the years ended December 31, 2006, 2005 and 2004,
respectively.
Intangible assets are associated with the Companys
European operations and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relations
|
|
|
60 months
|
|
|
$
|
1,639
|
|
|
$
|
(1,520
|
)
|
|
$
|
119
|
|
|
$
|
1,476
|
|
|
$
|
(1,071
|
)
|
|
$
|
405
|
|
Core technology
|
|
|
60 months
|
|
|
|
1,858
|
|
|
|
(1,705
|
)
|
|
|
153
|
|
|
|
1,673
|
|
|
|
(1,199
|
)
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
3,497
|
|
|
$
|
(3,225
|
)
|
|
$
|
272
|
|
|
$
|
3,149
|
|
|
$
|
(2,270
|
)
|
|
$
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, SCMs intangible assets relating to
core technology and customer relations are subject to
amortization.
Amortization expense related to intangible assets for continuing
operations was $0.7 million, $0.7 million and
$1.1 million, for the years ended December 31, 2006,
2005 and 2004, respectively.
F-18
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated future amortization of intangible assets is as follows
(in thousands):
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
2007
|
|
$
|
272
|
|
|
|
|
|
|
SCM evaluates long-lived assets under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In the fourth quarter of 2004, the Company
determined that the intangible assets from a past acquisition
were impaired and recorded a charge of $0.4 million.
|
|
8.
|
Restructuring
and Other Charges
|
Continuing
Operations
During 2006, 2005 and 2004, SCM incurred net restructuring and
other charges (credits) related to continuing operations of
approximately $1.4 million, $0.8 million and
$0.6 million, respectively.
Accrued liabilities related to restructuring actions and other
activities during 2006, 2005 and 2004 consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease/Contract
|
|
|
Write
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Commitments
|
|
|
Downs
|
|
|
Severance
|
|
|
Costs
|
|
|
Total
|
|
|
Balances as of January 1, 2004
|
|
|
124
|
|
|
|
49
|
|
|
|
114
|
|
|
|
33
|
|
|
|
320
|
|
Provision for 2004
|
|
|
9
|
|
|
|
17
|
|
|
|
567
|
|
|
|
23
|
|
|
|
616
|
|
Changes in estimates
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
(3
|
)
|
|
|
561
|
|
|
|
22
|
|
|
|
609
|
|
Payments or write offs in 2004
|
|
|
(101
|
)
|
|
|
(46
|
)
|
|
|
(521
|
)
|
|
|
(34
|
)
|
|
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2004
|
|
|
52
|
|
|
|
|
|
|
|
154
|
|
|
|
21
|
|
|
|
227
|
|
Provision for 2005
|
|
|
|
|
|
|
|
|
|
|
699
|
|
|
|
6
|
|
|
|
705
|
|
Changes in estimates
|
|
|
7
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
129
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
691
|
|
|
|
135
|
|
|
|
833
|
|
Payments or write offs in 2005
|
|
|
(27
|
)
|
|
|
|
|
|
|
(693
|
)
|
|
|
(147
|
)
|
|
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2005
|
|
|
32
|
|
|
|
|
|
|
|
152
|
|
|
|
9
|
|
|
|
193
|
|
Provision for 2006
|
|
|
33
|
|
|
|
|
|
|
|
1,320
|
|
|
|
|
|
|
|
1,353
|
|
Changes in estimates
|
|
|
(2
|
)
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
1,324
|
|
|
|
|
|
|
|
1,355
|
|
Payments or write offs in 2006
|
|
|
(48
|
)
|
|
|
|
|
|
|
(1,370
|
)
|
|
|
|
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2006
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
106
|
|
|
$
|
9
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended December 31, 2006, restructuring
and other charges primarily related to severance costs in
connection with a reduction in force resulting from the
Companys decision to transfer all manufacturing operations
from its Singapore facility to contract manufacturers as well as
the decision to transfer the corporate headquarter functions
from California to Germany and local finance functions from the
U.S. and Singapore to Germany. Approximately $0.3 million
of the restructuring amount relates to severance for
manufacturing personnel and is therefore recorded in cost of
revenue. The remaining $1.1 million is recorded in
operating expenses and is primarily made up of severance for
non-manufacturing personnel. The Company believes the
restructuring activity is substantially completed and that any
future costs incurred will be insignificant.
F-19
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2005, SCM incurred net restructuring and other charges of
approximately $0.8 million, which was primarily related to
severance costs in connection with a reduction in force
resulting from the Companys decision to transfer all
manufacturing operations from its Singapore facility to contract
manufacturers. Approximately $0.5 million of the
restructuring amount relates to severance for manufacturing
personnel and is therefore recorded in cost of revenue. The
remaining $0.3 million is recorded in operating expenses
and is primarily made up of $0.2 million of severance for
non-manufacturing personnel and $0.1 million of changes in
estimates related to European tax matters.
During 2004, SCM incurred restructuring and other credits
related to continuing operations of $0.6 million, which
resulted primarily from restructuring costs related to cost
reduction actions taken by management during the second half of
the year that included employee severance charges of
$0.6 million.
Discontinued
Operations
During 2006, 2005, and 2004, SCM incurred restructuring and
other charges related to discontinued operations of
approximately $0.1 million, $2.3 million and
$0.5 million, respectively.
Accrued liabilities related to restructuring actions and other
activities during 2006, 2005 and 2004 consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
|
|
|
Lease/Contract
|
|
|
Write
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Settlements
|
|
|
Commitments
|
|
|
Downs
|
|
|
Severance
|
|
|
Costs
|
|
|
Total
|
|
|
Balances as of January 1, 2004
|
|
|
|
|
|
|
3,912
|
|
|
|
9
|
|
|
|
275
|
|
|
|
7,119
|
|
|
|
11,315
|
|
Provision for 2004
|
|
|
620
|
|
|
|
43
|
|
|
|
22
|
|
|
|
271
|
|
|
|
909
|
|
|
|
1,865
|
|
Changes in estimates
|
|
|
(19
|
)
|
|
|
450
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
(1,740
|
)
|
|
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
493
|
|
|
|
22
|
|
|
|
206
|
|
|
|
(831
|
)
|
|
|
491
|
|
Payments or write offs in 2004
|
|
|
(601
|
)
|
|
|
(445
|
)
|
|
|
(31
|
)
|
|
|
(204
|
)
|
|
|
(873
|
)
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2004
|
|
|
|
|
|
|
3,960
|
|
|
|
|
|
|
|
277
|
|
|
|
5,415
|
|
|
|
9,652
|
|
Provision for 2005
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
|
2,367
|
|
Changes in estimates
|
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
665
|
|
|
|
2,250
|
|
Payments or write offs in 2005
|
|
|
(1,700
|
)
|
|
|
(651
|
)
|
|
|
|
|
|
|
(273
|
)
|
|
|
(5,574
|
)
|
|
|
(8,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2005
|
|
|
|
|
|
|
3,198
|
|
|
|
|
|
|
|
|
|
|
|
506
|
|
|
|
3,704
|
|
Provision for 2006
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
7
|
|
Changes in estimates
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
94
|
|
Payments or write offs in 2006
|
|
|
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
(159
|
)
|
|
|
(497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2006
|
|
$
|
|
|
|
$
|
2,949
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
352
|
|
|
$
|
3,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operation costs for the fiscal year ended
December 31, 2006 primarily related to changes in estimates
for lease obligations.
Exit costs for the year ended December 31, 2005 primarily
related to the settlement of litigation with DVD Cre8, Inc.
and legal costs, as well as changes in estimates for lease
obligations.
As shown in the table above in Payments or write offs in
2005 Other Costs, in April 2005, SCM made a
payment to the French government of approximately
$4.7 million as then calculated, related to Value Added Tax
(VAT) in respect of sales transactions with a former
customer. In connection with this payment, SCM entered into
F-20
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an agreement with the customer whereby the customer agreed to
seek a refund from the French government for the VAT paid with
respect to the products it purchased from the Company, and then
remit the refunded amount to SCM. On June 9, 2006, the
customer remitted to the Company the full amount including
currency gains totaling $5.0 million, of which
$4.2 million was recognized as other income from
discontinued operations. The difference between the
$5.0 million remittance and the $4.2 million other
income were receivables which were realizable independently from
the outcome of the aforementioned agreement. See Note 14
for further discussion.
During 2004, restructuring expenses related to discontinued
operations were $0.5 million. Expenses consisted of
approximately $0.6 million for legal settlements for claims
asserted by a European customer, as well as other legal
settlements and related legal costs, $0.5 million of lease
and contract commitments, $0.2 million severance expenses
and $0.9 million of legal and professional fees. These
expenses were offset by $1.7 million resulting from changes
in estimates to European tax related matters.
Loss before income taxes for domestic and
non-U.S. continuing
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income (loss) from continuing
operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(2,709
|
)
|
|
$
|
24,017
|
|
|
$
|
(3,074
|
)
|
Foreign
|
|
|
(4,908
|
)
|
|
|
(32,022
|
)
|
|
|
(9,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes
|
|
$
|
(7,617
|
)
|
|
$
|
(8,005
|
)
|
|
$
|
(13,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit (provision) for income taxes consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(2
|
)
|
|
|
33
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
33
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
(4
|
)
|
|
|
(162
|
)
|
|
|
(2
|
)
|
Foreign
|
|
|
(67
|
)
|
|
|
(21
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
(183
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit (provision) for
income taxes
|
|
$
|
(73
|
)
|
|
$
|
(150
|
)
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant items making up deferred tax assets and liabilities
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowances not currently
deductible for tax purposes
|
|
$
|
1,370
|
|
|
$
|
1,420
|
|
Net operating loss carryforwards
|
|
|
44,814
|
|
|
|
43,602
|
|
Accrued and other
|
|
|
1,286
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,470
|
|
|
|
46,427
|
|
Less valuation allowance
|
|
|
(47,366
|
)
|
|
|
(46,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
337
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(207
|
)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(103
|
)
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
SCM has $5.2 million of foreign net operating loss
carryforwards related to an acquisition in Germany. When
realized, the benefits will be credited first to reduce to zero
any non-current intangible assets related to the acquisition and
second to reduce income tax expense.
During the years ended December 31, 2006 and 2005, SCM
recognized a benefit of $0.8 million and $0.2 million,
respectively, from the utilization of foreign net operating loss
carryforwards for which the Company had previously established a
full valuation allowance. Because of the full valuation
allowance against the deferred tax assets, the benefit from the
utilization of this tax attribute had not been previously
recognized.
The benefit (provision) for taxes reconciles to the amount
computed by applying the statutory federal rate to loss before
income taxes from continuing operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Computed expected tax benefit
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
State taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
Foreign taxes benefits provided
for at rates other than U.S. statutory rate
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
(8
|
)%
|
Impairment of nondeductible
goodwill and intangibles
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
Change in valuation allowance
|
|
|
(44
|
)%
|
|
|
(41
|
)%
|
|
|
(29
|
)%
|
Other
|
|
|
(1
|
)%
|
|
|
(3
|
)%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income
taxes
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, SCM has net operating loss
carryforwards of approximately $78.9 million for federal,
$32.4 million for state and $50.2 million for foreign
income tax purposes. If not utilized, these carryforwards will
begin to expire beginning in 2019 for federal purposes and have
already begun to expire for state and foreign purposes.
SCM has research credit carryforwards of approximately
$0.7 million and $0.5 million for federal and state
income tax purposes, respectively. If not utilized, the federal
credit carryforwards will expire in various amounts beginning in
2019. The California credits can be carried forward indefinitely.
The Tax Reform Act of 1986 limits the use of net operating loss
and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. In the event SCM has
a change in ownership, utilization of the carryforwards could be
restricted.
F-22
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SCM has no present intention of remitting undistributed earnings
of foreign subsidiaries, and accordingly, no deferred tax
liability has been established relative to these undistributed
earnings.
|
|
10.
|
Earnings
/ Net Loss Per Share
|
The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net loss per
share from continuing operations (in thousands, except per share
amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Loss from continuing operations
|
|
$
|
(7,690
|
)
|
|
$
|
(8,155
|
)
|
|
$
|
(12,851
|
)
|
Discontinued operations
|
|
|
8,732
|
|
|
|
(4,280
|
)
|
|
|
(5,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding used in computation of basic and diluted income
(loss) per share
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
15,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per
share Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.83
|
)
|
Discontinued operations
|
|
|
0.56
|
|
|
|
(0.27
|
)
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As SCM has incurred losses from continuing operations during
each of the last three fiscal years, shares issuable under stock
options are excluded from the computation of diluted earnings
per share as their effect is anti-dilutive. Common equivalent
shares issuable under stock options and their weighted average
exercise price for the three years ended December 31, 2006
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Common equivalent shares issuable
|
|
|
24,094
|
|
|
|
48,533
|
|
|
|
205,773
|
|
Weighted average exercise price of
shares issuable
|
|
$
|
2.78
|
|
|
$
|
2.84
|
|
|
$
|
3.64
|
|
|
|
11.
|
Segment
Reporting, Geographic Information and Major Customers
|
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for the reporting by public business enterprises of information
about operating segments, products and services, geographic
areas, and major customers. The method for determining what
information to report is based on the way that management
organizes the operating segments within the Company for making
operating decisions and assessing financial performance. The
Companys chief operating decision maker is considered to
be its executive staff, consisting of the Chief Executive
Officer, Chief Financial Officer and Vice President Marketing.
On May 22, 2006, the Company completed the sale of
substantially all the assets and some of the liabilities
associated with its DTV solutions business to Kudelski. In
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, for the fiscal
years ended December 31, 2006, 2005 and 2004, this business
has been presented as discontinued operations in the condensed
consolidated statements of operations and cash flows and all
prior periods have been reclassified to conform to this
presentation.
The Companys continuing operations provide secure digital
access solutions to OEM customers in two markets segments: PC
Security and Flash Media Readers. The executive staff reviews
financial information and business performance along these two
business segments. The Company evaluates the performance of its
segments at the revenue and gross margin level. The
Companys reporting systems do not track or allocate
operating expenses
F-23
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
or assets by segment. The Company does not include intercompany
transfers between segments for management purposes.
Summary information by segment for the years ended
December 31, 2006, 2005 and 2004 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
PC Security:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,745
|
|
|
$
|
17,415
|
|
|
$
|
20,017
|
|
Gross profit
|
|
|
9,725
|
|
|
|
6,120
|
|
|
|
8,190
|
|
Gross profit %
|
|
|
41
|
%
|
|
|
35
|
%
|
|
|
41
|
%
|
Flash Media Readers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,868
|
|
|
$
|
10,521
|
|
|
$
|
10,013
|
|
Gross profit
|
|
|
2,132
|
|
|
|
4,710
|
|
|
|
4,116
|
|
Gross profit %
|
|
|
22
|
%
|
|
|
45
|
%
|
|
|
41
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
$
|
30,030
|
|
Gross profit
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
12,306
|
|
Gross profit %
|
|
|
35
|
%
|
|
|
39
|
%
|
|
|
41
|
%
|
Geographic revenue is based on selling location. Information
regarding revenue by geographic region is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
13,294
|
|
|
$
|
9,749
|
|
|
$
|
8,540
|
|
|