e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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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, 2007
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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
(Zip Code)
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(Address of Principal Executive
Offices)
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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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company þ
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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,
2007, 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 $37,531,932.
At March 6, 2008, the registrant had outstanding
15,743,515 shares of Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Designated portions of the Companys Proxy Statement and
Notice of Annual Meeting to be filed within 120 days after
the Registrants fiscal year end of December 31, 2007
are 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, 2007
TABLE OF
CONTENTS
SCM, CHIPDRIVE, EasyTAN and SmartOS are registered trademarks of
SCM Microsystems 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,
including the documents incorporated by reference in this Annual
Report, contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended,
and Section 21E on
Form 10-K
of the Securities Exchange Act of 1934, as amended. 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 in two market segments: PC Security and Digital 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 identification and drivers
licenses, electronic healthcare cards, secure logical access to
PCs and networks, and physical access to facilities. Within the
PC Security segment, we also offer a line of smart card
solutions under the
CHIPDRIVE®
brand that include productivity applications such as time
recording and attendance, physical access and password
management for small and medium sized enterprises.
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For the Digital Media Reader market, we offer digital media
readers that are used to transfer digital content to and from
various digital 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
photoprocessing 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. We sell
our CHIPDRIVE products primarily through retail channels and the
Internet.
In May 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
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for all periods presented reflect the discontinuance of this
business. (See Note 3 to our consolidated financial
statements that are included in this Annual Report on
Form 10-K.)
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, citizen ID and electronic 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-based or other electronic transactions
without jeopardizing sensitive personal account information. In
all of these areas, we believe standards-based devices that
easily interface to a PC or network to provide secure,
controlled access to digital content or services are an easily
deployed and effective solution.
PC and
Network 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
safeguard the data of individuals and protect the network from
manipulation or abuse, both from within and without the system.
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
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into a reader attached to a PC or other device, or can include
wireless capabilities for contactless interface. Worldwide
shipments of smart cards topped 3.3 billion in 2007 and are
estimated to grow to nearly 3.9 billion in 2008 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 is also expected to grow. In a
March 2006 report, 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 more than
10 million smart cards to military personnel and
contractors. These cards are being used as the standard
identification credential for military personnel, and are also
being used for secure authentication and network access. In
compliance with Homeland Security Presidential Directive
(HSPD)-12, since late 2006, the CAC card also has served as a
standard identity credential that is both secure and
interoperable across all federal agencies, regardless of which
agency issued the card. To satisfy the technical requirements of
HSPD-12, the National Institute for Standards and Technology
(NIST) developed Federal Information Processing Standards
Publication 201 (FIPS 201) a U.S. federal
government standard specifying Personal Identity Verification
(PIV) requirements for federal employees and contractors. Under
FIPS 201 specifications, PIV cards must also include
capabilities for contactless interface with security terminals
at doorways and other entrances to provide secure physical
access at government facilities.
In order to comply with HSPD-12, government facilities are
replacing their existing access control credentials with PIV
cards and are replacing their CAC card readers with FIPS 201
compliant smart card readers. 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 Group. A July 2007 market study from
IMS Research forecasts that the American market for
electronic physical access control equipment will reach
$925 million in 2011, with a forecast compound annual
growth rate (CAGR) of 8.3%. One of the key trends driving this
growth is the replacement of 125 kHz proximity readers with
13.56MHz smart card readers. This trend is set to accelerate
over the next two years following the introduction of the
government mandate HSPD-12.
The U.S. government is actively driving the use of smart
cards outside the boundaries of the U.S. 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), several 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 the 27 visa waiver countries now issue electronic
passports and many 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. Mexico, China, Taiwan and Russia, as well as
several European countries, including Austria, Belgium, France,
Germany, Italy, Poland and Turkey, 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, one of the largest programs actively underway is in
Germany, where pilot tests were set up in 2007. The German
government plans to distribute 82 million new eHealth
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cards to citizens beginning in late 2008 and to have in place a
corresponding network and card reader infrastructure for
doctors, hospitals, pharmacies and other healthcare providers by
2009.
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,
NTT Corporation, Pfizer, Royal Dutch/Shell Group and Sun
Microsystems.
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. Over the last two years, electronic payment programs
featuring cards equipped with contactless technology, such as
such as
Visa®
payWavetm
and
MasterCard®
PayPasstm,
have become widespread in Europe and Asia and are expected to
generate significant demand worldwide for smart cards and
related technology going forward. Integration of contactless
payment technology into mobile phones is expected to further
spur demand for contactless technology over the next several
years.
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 U.S. government PIVs program; as well as to OEMs
that incorporate our products into their devices, such as PCs or
keyboards. We sell our CHIPDRIVE small office productivity
packages primarily to end users via retail channels and the
Internet.
Smart Card Readers. We are one of the
worlds leading 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;
readers for contactless interface; 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
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
biometric interface with existing control systems as well as CAC
and newer PIV credential 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 smart card readers are developed in compliance with relevant
industry standards related to the applications for which they
will be used, including PC/SC, EMV, FINREAD and Common Criteria.
For example, many of our readers, including the SCRx31 Secure
Card Reader line, conform to 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.
Digital
Media Reader Market
Digital cameras have rapidly saturated the consumer market over
the last few years, with 80% of U.S. households predicted
to own a digital camera by 2010, according to Gartner Group.
Camera phones have also gained rapid popularity, with the result
that 15% of consumers declare their phones to be their primary
picture taking device, according to an October 2007 survey from
InfoTrends. InfoTrends estimates that U.S. output of
digital photo prints will grow from 13.2 billion
prints in 2005 to 16 billion by 2009. Digital flash media
cards, which store digital images on the majority of digital
cameras and some camera phones, 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 digital 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
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to a December 2007 survey conducted by InfoTrends, 49% of
digital camera owners who print photos had obtained prints at a
retail location in 2007, 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.
Our
Digital 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 digital
flash media interface capabilities into their products and
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) or Modular (gMOD and PCD-zMOD)
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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Single Board Drives our single board drives
provide flexible interface solutions for print kiosks, photo
labs and other applications requiring digital 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 included in this Annual Report on
Form 10-K
for financial information regarding revenue and gross margin for
our reported business segments through 2007. See
Managements Discussion and Analysis of Financial
Conditions 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.
Silicon Strategy. We have implemented a number
of our core interface and processing technologies into our own
silicon chips. We have also selected what we believe are the
best available silicon from outside suppliers based on desired
functionality and have embedded our core interface and
processing technologies in order to meet time-to-market
requirements. We expect to continue to maintain a balance
between our own silicon and using third party devices.
Firmware and Drivers. For our PC Security
products, including contact and contactless readers, we have
developed interface technology that provides interoperability
between PCs and smart cards from many different smart card
manufacturers and with many different operating systems. 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 Digital Media Reader products, we have
developed interface technology that provides interoperability
and compatibility between various digital appliances, computer
platforms and flash memory cards. For complex
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terminals for electronic healthcare and other markets, we have
chosen to use
Linux®-based
embedded firmware, which helps to provide us the base layers for
writing higher levels of application software. All SCMs
products are offered with the necessary device drivers for major
operating systems, including Microsoft Windows, Windows
Vistatm,
Linux and MAC
OS®.
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 photo processing equipment.
Sales to a relatively small number of customers historically
have accounted for a significant percentage of our total sales.
Sales to our top ten customers accounted for approximately 61%
of revenue in 2007, 53% of revenue in 2006 and 54% of revenue in
2005. In 2007, Envoy Data Corporation accounted for more than
10% of our revenue. In 2006, Solectron accounted for more than
10% of our revenue. In 2005, IBM and Shin Shin Co. Ltd. each
accounted for more than 10% of our 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, resellers and Internet sales. As of
December 31, 2007, we had 28 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.
NETC@RDS. We are a member of the NETC@RDS
initiative, which is devoted to establishing improved health
care access and administration procedures for mobile citizens
across the European Union (EU), using the electronic European
Health Insurance Card. We are a technology provider to the
NETC@RDS project and have participated in market validation
tests which included 85 pilot sites in 10 EU member states.
7
NFC Forum. We are a principal member of the
NFC Forum, a non-profit industry association whose mission is to
advance the use of Near Field Communication (NFC) technology by
developing specifications, ensuring interoperability among
devices and services, and educating the market about NFC
technology. NFC is a type of radio frequency technology that
allows for secure transference of data between a card and reader
over distances of not more than a few inches, and is an
important technology for contactless payment applications. The
NFC Forum consists of 135+ global member companies, including
leading mobile communications, semiconductor and consumer
electronics firms. NFC Forum members are currently developing
specifications for a modular NFC device architecture, protocols
for interoperable data exchange and device-independent service
delivery, device discovery, and device capability.
PCMCIA. We are a member of the 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 a member of Smart Card
Alliances Leadership Council.
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 also a
member of the smart card terminal committee of Teletrust, 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 digital 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
$3.1 million, $3.8 million and $4.1 million for
the three years ended December 31, 2007, respectively. As
of December 31, 2007, 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 expect our research
and development expenses to vary based on future project demands
and on the markets we target. We expect to add research and
development resources in 2008 to enhance our product offerings.
8
Manufacturing
and Sources of Supply
We utilize the services of contract manufacturers primarily in
Singapore to manufacture our products and components. We have
implemented a global sourcing strategy that we believe enables
us to achieve economies of scale and uniform quality standards
for our products, and to support gross margins. 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, 2007, we had nine
full-time employees engaged in manufacturing and logistics
activities, focused on coordinating product management and
supply chain activities between SCM and our contract
manufacturers.
Over the past several months, we have added alternative sources
for both our products and components. Even so, we rely upon a
limited number of suppliers for some key components of our
products. For example, we currently utilize the foundry services
of two suppliers to produce our ASICs for smart cards readers,
and we use chips and antenna components from one supplier in our
contactless smart card readers. Wherever possible, we have added
additional sources of supply for mechanical components such as
printed circuit boards or casing. However, a 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 digital 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 Digital 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, 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.
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 grow,
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, 2007, we had 153 full-time
employees, of which 83 were engaged in engineering, research and
development; 28 were engaged in sales and marketing; nine were
engaged in manufacturing and logistics; and 33 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.
10
Please see Note 11 to our consolidated financial statements
included in 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 reports 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 (SEC). Our
Internet address is www.scmmicro.com. The content on our website
is not, nor should be deemed to be, incorporated by reference
into this Annual Report on
Form 10-K.
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 in the following risk
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 risks,
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
$192.1 million as of December 31, 2007. In the future,
we may not be able to achieve expected results, we may continue
to incur losses and we 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, seasonal demand, 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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the absence of significant backlog in our business;
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our 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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the rate of adoption of industry-wide standards;
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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. 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 or
decreases in demand for our products resulting from fluctuations
in our customers budgets, purchasing patterns or
deployment schedules. 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 photo processing 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. Sales to our top ten customers accounted for
approximately 61% of revenue in 2007, 53% of revenue in 2006 and
54% of revenue in 2005. 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 Digital Media Reader business, where
approximately two thirds of our business has typically been
generated by two or three customers. 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, could significantly lower our revenues in any
period and would increase our dependence on a smaller group of
our remaining customers. For example, in the first half of 2007,
we experienced a significant reduction in sales of our Digital
Media Reader products due to the loss of a major customer in
this business. 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 various smart card-based security programs in Europe, such as
electronic drivers licenses, citizen ID and
e-passport,
which are applications that are not yet widely implemented.
Because the markets for our products are still emerging, demand
for our products is subject to variability from period to
period. For example, in the second quarter of 2007, we
experienced lower sales of our PC Security products in Europe in
part as a result of delays in the timing of orders for several
smart card programs. There is no assurance that demand will
become more predictable as additional smart card programs
demonstrate success. If demand for products to enable smart
card-based security applications does not develop further and
grow sufficiently, our revenue and gross profit margins could
decline or fail to grow. We cannot predict
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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.
We provide warranties on certain product sales, which range from
twelve to twenty-four months, and allowances for estimated
warranty costs are recorded during the period of sale. The
determination of such allowances requires us to make estimates
of product return rates and expected costs to repair or to
replace the products under warranty. We currently establish
warranty reserves based on historical warranty costs for each
product line combined with liability estimates based on the
prior twelve months sales activities. If actual return
rates and/or
repair and replacement costs differ significantly from our
estimates, adjustments to recognize additional cost of sales may
be required in future periods.
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 or
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
14
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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The use of contract manufacturing 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 for some key
components of our products. For example, we currently utilize
the foundry services of two suppliers to produce our ASICs for
smart cards readers, and we use
15
chips and antenna components from one supplier in our
contactless smart card readers. 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. In addition, some of
the basic components we use in our products, such as digital
flash media, may at any time be in great demand. 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. We may also lose
market share.
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.
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.
A
significant portion of our PC Security business is dependent
upon sales for government programs, which are impacted by
uncertainty of timelines and budgetary allocations, as well as
by delays in developing standards for information technology
(IT) projects and in coordinating all aspects of
large smart card-based security programs.
Historically, we have sold a significant proportion of our PC
Security products to the U.S. government and we anticipate
that a significant portion of our future revenues will continue
to come from the government sector, both in the U.S. and
internationally. In addition, we have spent significant
resources developing eHealth100 smart card terminals for the
German governments electronic healthcard program. The
timing of government smart card programs is not always certain
and delays in program implementation are common. For example,
budget freezes by the U.S. government during the second
quarter of 2007 contributed to delayed orders for our smart card
reader products. There have also been delays in implementing the
German eHealth program. 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, for example, due to shifting priorities in the
U.S. federal budget and in the Department of Homeland
Security. In Germany, the government has stated that it plans to
distribute new electronic health cards to its citizens beginning
in late 2008 and to have in place a corresponding network and
card reader infrastructure by 2009; however, the actual timing
of equipment and card deployments in the German eHealth program
remain uncertain. The continued delay of government projects for
any reason could negatively impact our sales.
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We may
choose to take back unsold inventory from our
customers.
While we believe this situation is unlikely, if demand is less
than anticipated, customers may ask that we accept returned
products that they do not believe they can sell. We do not have
a policy relating to product returns; however, we may determine
that it is in our best interest to accept returns in order to
maintain good relations with our customers. If we were to accept
product returns, 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.
Changes
in tax laws or the interpretation thereof, adverse tax audits
and other tax matters may adversely affect our future
results.
A number of factors may impact our tax position, including:
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the jurisdictions in which profits are determined to be earned
and taxed;
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the resolution of issues arising from tax audits with various
tax authorities;
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changes in the valuation of our deferred tax assets and
liabilities;
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adjustments to estimated taxes upon finalization of various tax
returns;
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increases in expenses not deductible for tax purposes; and
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the repatriation of
non-U.S. earnings
for which we have not previously provided for U.S. taxes.
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Any of these factors could make it more difficult for us to
project or achieve expected tax results. An increase or decrease
in our tax liabilities due to these or other factors could
adversely affect our financial results in future periods.
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
September 11, 2007, the record date for our 2007 Annual
Meeting of Stockholders, approximately two-thirds of our shares
outstanding were held by retail stockholders in Germany, through
German banks and brokers. Securities regulations and business
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.
As a result, it is often difficult and costly for us, and
requires considerable management resources, to achieve a quorum
at annual and special meetings of our stockholders, and 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 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 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.
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.
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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 elsewhere. 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 49% of our revenue for the year
ended December 31, 2007 and approximately 57% of our
revenue for the year ended December 31, 2006 was 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 impact costs and/or
revenues we disclose in U.S. dollars, and could result in
foreign currency 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. For
example, when a significant portion of operating expenses are
incurred in a foreign currency such as the euro, and revenues
are generated in U.S. dollars, exchange rate fluctuations
might have a positive or negative net financial impact on these
transactions, depending on whether the U.S. dollar devalues
or revalues compared to the euro. We cannot predict the effect
of exchange rate fluctuations upon future quarterly and annual
operating results. The effect of currency exchange rate changes
may increase or decrease our costs
and/or
revenues in any given quarter, and 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 and directors 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. If we are not able to attract and retain
qualified board members, our ability to practice a high level of
corporate governance could be impaired
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.
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
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; integrating internal controls
over financial reporting; discovering and correcting
deficiencies in internal controls and other regulatory
compliance, data adequacy and integrity, product quality and
product liabilities; diversion of our management resources;
failure to realize anticipated
20
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.
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 such divestiture or
disposition. In addition, we may not achieve the expected price
in a divestiture transaction. 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.
We
face costs and risks associated with maintaining effective
internal controls over financial reporting, and if we fail to
achieve and maintain adequate internal controls over financial
reporting, our business, results of operations and financial
condition, and investors confidence in us could be
materially affected.
Under Sections 302 and 404 of the Sarbanes-Oxley Act of
2002, our management is required to make certain assessments and
certifications regarding our disclosure controls and internal
controls over financial reporting. We have dedicated, and expect
to continue to dedicate, significant management, financial and
other resources in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act during and after
2007. The process of maintaining and evaluating the
effectiveness of these controls is expensive, time-consuming and
requires significant attention from our management and staff.
During the course of our evaluation, we may identify areas
requiring improvement and may be required to design enhanced
processes and controls to address issues identified through this
review. This could result in significant delays and costs to us
and require us to divert substantial resources, including
management time from other activities. 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
not be able to rely on the integrity of our financial results,
which could result in inaccurate or late reporting of our
financial results and investigation by regulatory authorities.
If we fail to achieve and maintain adequate internal controls
the financial position of our business could be harmed; current
and potential future shareholders could lose
21
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 and operated, can only provide reasonable assurance
that the objectives of the control system are met. Because there
are inherent limitations in all control systems, no evaluation
of control can provide absolute assurance, that all control
issues and instances of fraud, if any, within the Company have
been or will be detected. 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. 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 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 the acquisition of SCM 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
22
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. Because these
provisions may be deemed to discourage a change of control, they
may delay or prevent the acquisition of our company, which could
decrease the value of our common stock.
You
may experience dilution of your ownership interests due to the
future issuance of additional shares of our stock, and future
sales of shares of our common stock could have an adverse effect
on our stock price.
From time to time, in the future we may issue previously
authorized and unissued securities, resulting in the dilution of
the ownership interests of our current stockholders. We are
currently authorized to issue up to 40,000,000 shares of
common stock. As of March 6, 2008, 15,743,515 shares
of common stock were outstanding.
In 2007, our Board of Directors and our stockholders approved
our 2007 stock option plan, under which options to purchase
1.5 million shares of our common stock may be granted. As
of December 31, 2007, an aggregate of approximately
3.4 million shares of common stock was reserved for future
issuance under our stock option plans, of which 1.9 million
shares were subject to outstanding options. We may issue
additional shares of our common stock or other securities that
are convertible into or exercisable for shares of common stock
in connection with the hiring of personnel, future acquisitions,
future private placements, or future public offerings of our
securities for capital raising or for other business purposes.
If we issue additional securities, the aggregate percentage
ownership of our existing stockholders will be reduced. In
addition, any new securities that we issue may have rights
senior to those of our common stock.
In addition, the potential issuance of additional shares of
common stock or preferred stock, or the perception that such
issuances could occur, may create downward pressure on the
trading price of our common stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
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 are currently
in negotiation to extend the lease agreement. We also lease
small sales and marketing facilities in California and in Japan.
In California, we lease approximately 6,200 square feet
pursuant to a lease agreement that expires September 30,
2008 and in Japan, we lease approximately 1,400 square feet
pursuant to a lease agreement that expires October 31,
2008. 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 leased 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. We had subleased the premises for a part of the remaining
leasing period to an unrelated business.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We have no current items under legal proceedings.
23
In December 2005, a complaint was filed in France against SCM
Microsystems GmbH (SCM GmbH), one of the
Companys 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 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 filed in France, 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, which after
conversion into U.S. Dollars amounted to $5.0 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.
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 expects that any such
liabilities, to the extent not provided for by insurance or
otherwise, will not have a material adverse effect on our
financial condition, results of operations or cash flows.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
For information related to matters submitted to a vote of our
security holders at our annual meeting held on November 9,
2007, please see Part II, Item 4 of our quarterly
report on
Form 10-Q
for the quarter ended September 30, 2007, filed with the
Securities and Exchange Commission on November 13, 2007.
24
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Price
Range of Common Stock; Number of Holders; Dividends
Our common stock is traded 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 4,
2008, we estimate we had approximately 10,670 stockholders of
record and beneficial stockholders. Not represented in this
figure are individual stockholders in Germany whose custodian
banks do not release stockholder information to us. The
following table sets forth the high and low closing prices of
our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq
|
|
|
|
|
|
|
National Market
|
|
|
Prime Standard (Quoted in Euros)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.34
|
|
|
$
|
2.97
|
|
|
|
3.35
|
|
|
|
2.30
|
|
Second Quarter
|
|
$
|
4.42
|
|
|
$
|
2.90
|
|
|
|
3.25
|
|
|
|
2.23
|
|
Third Quarter
|
|
$
|
3.32
|
|
|
$
|
2.63
|
|
|
|
2.28
|
|
|
|
1.95
|
|
Fourth Quarter
|
|
$
|
3.74
|
|
|
$
|
2.85
|
|
|
|
2.56
|
|
|
|
2.05
|
|
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
2008 Proxy Statement.
25
Stock
Performance Graph
The following performance graph compares the cumulative total
return to holders of our common stock since December 31,
2002, to the cumulative total return over such period of the
NASDAQ Composite index and the RDG Technology Index.
The performance graph assumes that $100 was invested on
December 31, 2002 in our common stock and in each of the
comparative indices. The performance graph further assumes that
such amount was initially invested in our common stock at a
price of $4.25 per share, the closing price on December 31,
2002.
Our historic stock price performance is not necessarily
indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among SCM Microsystems, Inc., The NASDAQ Composite Index
and The RDG Technology Composite Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement Period
|
|
|
|
|
|
|
|
|
|
(Fiscal Year Covered)
|
|
|
SCM Microsystems
|
|
|
NASDAQ Composite
|
|
|
RDG Technology
|
Dec-02
|
|
|
|
100
|
|
|
|
|
100
|
|
|
|
|
100
|
|
Dec-03
|
|
|
|
182
|
|
|
|
|
150
|
|
|
|
|
150
|
|
Dec-04
|
|
|
|
115
|
|
|
|
|
165
|
|
|
|
|
154
|
|
Dec-05
|
|
|
|
80
|
|
|
|
|
168
|
|
|
|
|
159
|
|
Dec-06
|
|
|
|
73
|
|
|
|
|
188
|
|
|
|
|
174
|
|
Dec-07
|
|
|
|
79
|
|
|
|
|
205
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
None.
26
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
30,435
|
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
$
|
30,030
|
|
|
$
|
31,147
|
|
Cost of revenue
|
|
|
17,781
|
|
|
|
21,756
|
|
|
|
17,106
|
|
|
|
17,724
|
|
|
|
18,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,654
|
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
12,306
|
|
|
|
12,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,123
|
|
|
|
3,767
|
|
|
|
4,081
|
|
|
|
4,807
|
|
|
|
3,958
|
|
Selling and marketing
|
|
|
6,603
|
|
|
|
7,498
|
|
|
|
7,040
|
|
|
|
8,560
|
|
|
|
7,943
|
|
General and administrative
|
|
|
7,132
|
|
|
|
7,548
|
|
|
|
9,198
|
|
|
|
9,021
|
|
|
|
11,018
|
|
Amortization of intangibles
|
|
|
272
|
|
|
|
666
|
|
|
|
673
|
|
|
|
1,078
|
|
|
|
1,129
|
|
Impairment of goodwill and intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
Restructuring and other charges (credits)
|
|
|
(4
|
)
|
|
|
1,120
|
|
|
|
319
|
|
|
|
607
|
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,126
|
|
|
|
20,599
|
|
|
|
21,311
|
|
|
|
24,461
|
|
|
|
27,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,472
|
)
|
|
|
(8,742
|
)
|
|
|
(10,481
|
)
|
|
|
(12,155
|
)
|
|
|
(14,827
|
)
|
Loss from investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
Interest income
|
|
|
1,639
|
|
|
|
1,350
|
|
|
|
745
|
|
|
|
806
|
|
|
|
813
|
|
Foreign currency gains (losses) and other income (expense)
|
|
|
(346
|
)
|
|
|
(225
|
)
|
|
|
1,731
|
|
|
|
(1,675
|
)
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(3,179
|
)
|
|
|
(7,617
|
)
|
|
|
(8,005
|
)
|
|
|
(13,024
|
)
|
|
|
(11,611
|
)
|
Benefit (provision) for income taxes
|
|
|
(113
|
)
|
|
|
(73
|
)
|
|
|
(150
|
)
|
|
|
173
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,292
|
)
|
|
|
(7,690
|
)
|
|
|
(8,155
|
)
|
|
|
(12,851
|
)
|
|
|
(9,598
|
)
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
(215
|
)
|
|
|
3,508
|
|
|
|
(2,109
|
)
|
|
|
(6242
|
)
|
|
|
(13,476
|
)
|
Gain (loss) on sale of discontinued operations, net of income
taxes
|
|
|
1,586
|
|
|
|
5,224
|
|
|
|
(2,171
|
)
|
|
|
430
|
|
|
|
(15,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,921
|
)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
|
$
|
(38,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations
|
|
$
|
(0.21
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(0.63
|
)
|
Basic and diluted income (loss) per share from discontinued
operations
|
|
$
|
0.09
|
|
|
$
|
0.56
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(1.86
|
)
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(2.49
|
)
|
Shares used to compute basic and diluted income (loss) per share
|
|
|
15,725
|
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
15,402
|
|
|
|
15,317
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
32,444
|
|
|
$
|
36,902
|
|
|
$
|
32,440
|
|
|
$
|
46,153
|
|
|
$
|
55,038
|
|
Working capital(1)
|
|
|
34,027
|
|
|
|
31,967
|
|
|
|
27,371
|
|
|
|
39,161
|
|
|
|
50,700
|
|
Total assets
|
|
|
48,564
|
|
|
|
51,355
|
|
|
|
52,734
|
|
|
|
73,307
|
|
|
|
96,442
|
|
Total stockholders equity
|
|
|
37,039
|
|
|
|
35,318
|
|
|
|
32,617
|
|
|
|
46,829
|
|
|
|
63,424
|
|
|
|
|
(1) |
|
Working capital is defined as current assets less current
liabilities |
|
|
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
included in Item 8 of 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 Digital 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 photo processing 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.
During 2007 and in early 2008, we restructured and strengthened
our management team with key executive hires and promotions.
Felix Marx joined as Chief Executive Officer in October 2007;
Sour Chhor joined as Executive Vice President, Strategy,
Marketing and Engineering in February 2008; and Manfred Mueller
was promoted to Executive Vice President, Strategic Sales and
Business Development in March 2008. We believe our new
executives and the new structure of our executive team
strengthens our ability to anticipate and respond to market
trends in our industry.
During 2007, we continued to operate our business based on the
reduced expense levels we achieved in the fourth quarter of
2006. We had taken several actions during 2006 to lower
operating expenses, including outsourcing our manufacturing,
moving our corporate financial and compliance functions from the
U.S. to Germany, consolidating offices and reducing
headcount. During 2006, we also put in place product cost
reduction programs that have resulted in ongoing product margin
improvements from the fourth quarter of 2006 through 2007. As a
result of our lower cost and expense structure, we narrowed
operating and net losses during 2007, and realized an operating
and net profit in the fourth quarter of 2007.
We have adopted a strategy to grow revenue that is based on
introducing new PC Security and Digital 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 national ID cards. During 2007, demand remained stable at
these higher levels in three of our four quarters, but order
delays across our business caused our revenue to be below such
levels in the second quarter of 2007. In both our PC Security
and Digital Media Reader businesses, pricing pressure has
continued over the last several quarters. In the third and
fourth quarters of 2007, we added sales resources in Europe,
Japan, the U.S. and Latin America to increase our ability
to capture available business.
28
In our continuing operations, we may experience significant
variations in demand for our products from 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 Digital Media Reader products are less subject to
this variability based on market or project demands; 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.
In May 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. (See
Note 3 to our consolidated financial statements included in
this Annual Report on
Form 10-K.)
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 (U.S. GAAP). 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.
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|
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.
|
|
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|
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.
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|
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|
We adopted the Financial Accounting Standards Boards
(FASB) Interpretation No. 48, Accounting For
Uncertain Tax Positions (FIN 48) in the
first quarter of 2007. We are required to make certain judgments
and estimates in determining income tax expense for financial
statement purposes. Significant changes to
|
29
|
|
|
|
|
these estimates may result in an increase or decrease to our tax
provision in a subsequent period. The calculation of our tax
liabilities requires dealing with uncertainties in the
application of complex tax regulations. FIN 48 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. It is
inherently difficult and subjective to estimate such amounts. We
reevaluate such uncertain tax positions on a quarterly basis
based on factors such as, but not limited to, changes in tax
laws, issues settled under audit and changes in facts or
circumstances. Such changes in recognition or measurement might
result in the recognition of a tax benefit or an additional
charge to the tax provision in the period. For further
discussion, see Note 9 to our Consolidated Financial
Statements included in this Annual Report on Form
10-K.
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|
|
|
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, 2007, we have recorded valuation allowances
against 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.
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|
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.
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|
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 September 2006, the 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. After evaluating the impact of
the provisions of SFAS 157 on our financial position,
results of operations and cash flows, we do not expect a
material impact from its adoption.
In February 2007, FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits companies to
choose to measure certain financial instruments and other items
at fair value. The standard requires that unrealized gains and
losses are reported in earnings for items measured using
30
the fair value option. SFAS No. 159 is effective for
us beginning in the first quarter of fiscal year 2008. After
evaluating the impact of the provisions of SFAS 159 on our
financial position, results of operations and cash flows, we do
not expect a material impact from its adoption.
In December 2007, FASB issued SFAS No. 141 (revised
2007), Business Combinations. Under
SFAS No. 141(R), an entity is required to recognize
the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value
on the acquisition date. It further requires that
acquisition-related costs be recognized separately from the
acquisition and expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition
date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition,
acquired in-process research and development (IPR&D) is
capitalized as an intangible asset and amortized over its
estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations
on a prospective basis beginning in the first quarter of fiscal
year 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 changes the accounting and reporting for
minority interests, which will be recharacterized as
non-controlling interests and classified as a component of
equity. SFAS No. 160 is effective for us on a
prospective basis for business combinations with an acquisition
date beginning in the first quarter of fiscal year 2009. As of
December 31, 2007, we did not have any minority interests.
Results
of Operations
The following table sets forth our statements of operations as a
percentage of net revenue for the periods indicated:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
58.4
|
|
|
|
64.7
|
|
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41.6
|
|
|
|
35.3
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10.3
|
|
|
|
11.2
|
|
|
|
14.6
|
|
Selling and marketing
|
|
|
21.7
|
|
|
|
22.3
|
|
|
|
25.2
|
|
General and administrative
|
|
|
23.4
|
|
|
|
22.5
|
|
|
|
32.9
|
|
Amortization of intangibles
|
|
|
0.9
|
|
|
|
2.0
|
|
|
|
2.4
|
|
Impairment of goodwill and intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges (credits)
|
|
|
(0.0
|
)
|
|
|
3.3
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
56.3
|
|
|
|
61.3
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(14.7
|
)
|
|
|
(26.0
|
)
|
|
|
(37.5
|
)
|
Interest income
|
|
|
5.4
|
|
|
|
4.0
|
|
|
|
2.7
|
|
Foreign currency gains (losses) and other income (expense)
|
|
|
(1.1
|
)
|
|
|
(0.7
|
)
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(10.4
|
)
|
|
|
(22.7
|
)
|
|
|
(28.7
|
)
|
Provision for income taxes
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(10.8
|
)
|
|
|
(22.9
|
)
|
|
|
(29.2
|
)
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
(0.7
|
)
|
|
|
10.4
|
|
|
|
(7.5
|
)
|
Gain (loss) on sale of discontinued operations, net of income
taxes
|
|
|
5.2
|
|
|
|
15.5
|
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(6.3
|
)%
|
|
|
3.1
|
%
|
|
|
(44.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our secure digital access products into two market
segments: PC Security and Digital Media Readers.
31
|
|
|
|
|
For the PC Security market, we offer smart card reader
technology that enables authentication of individuals for
applications such as electronic identification and drivers
license, electronic healthcare cards, secure logical access to
PCs and networks, and physical access to facilities. Within the
PC Security segment, we also offer a line of smart card
solutions under the
CHIPDRIVE®
brand that include productivity applications such as time
recording and attendance, physical access and password
management for small and medium sized enterprises.
|
|
|
|
For the Digital Media Reader market, we offer digital media
readers that are used to transfer digital content to and from
various digital 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, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
Fiscal
|
|
|
2006
|
|
|
Fiscal
|
|
|
2005
|
|
|
Fiscal
|
|
|
|
2007
|
|
|
to 2007
|
|
|
2006
|
|
|
to 2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
PC Security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,427
|
|
|
|
3
|
%
|
|
$
|
23,745
|
|
|
|
36
|
%
|
|
$
|
17,415
|
|
Percentage of total revenues
|
|
|
80
|
%
|
|
|
|
|
|
|
71
|
%
|
|
|
|
|
|
|
62
|
%
|
Digital Media Readers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,008
|
|
|
|
(39
|
)%
|
|
$
|
9,868
|
|
|
|
(6
|
)%
|
|
$
|
10,521
|
|
Percentage of total revenues
|
|
|
20
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
30,435
|
|
|
|
(9
|
)%
|
|
$
|
33,613
|
|
|
|
20
|
%
|
|
$
|
27,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007 Revenue Compared with Fiscal 2006 Revenue
Revenue for the year ended December 31, 2007 was
$30.4 million, a decrease of 9% from $33.6 million in
2006. This decrease was due primarily to a 39% decline in sales
of our Digital Media Reader products, primarily due to the loss
of a major customer at the beginning of 2007, offset in part by
a 3% increase in sales of our PC Security products. Sales of our
PCS Security products accounted for 80% of total revenue in 2007
and sales of Digital Media Reader products accounted for 20% of
revenue.
PC Security product revenue was $24.4 million in 2007, an
increase of 3% from $23.7 million in 2006. Our PC Security
product line principally consists of smart card readers and
related chip technology that are primarily used in large
security programs where smart cards are employed to authenticate
the identity of people in order to control access to computers
or computer networks; borders; buildings and other facilities;
and services, such as health care. Also included in this
business segment are our CHIPDRIVE software and reader
solutions, which provide electronic timecard and other
productivity applications for small and medium enterprises. The
majority of revenue in our PC Security business segment is tied
to government, financial or enterprise programs and is subject
to significant variability based on the size and timing of
customer orders. In 2007, the composition of sales of our PC
Security products remained very similar to the prior year,
except that within Europe, we had less revenue from the various
government and other security programs that comprise the
majority of our European sales, while our CHIPDRIVE products
contributed a more significant amount of revenue. Sales of
readers for U.S. government projects to comply with
Homeland Security Presidential Directive-12 and other federal
mandates comprised the largest percentage of total PC Security
sales; followed by sales of readers for electronic
identification and other programs in Europe; sales of readers
for enterprise security programs in Asia; and sales of our
CHIPDRIVE software and readers.
Revenue from our Digital Media Reader product line was
$6.0 million in 2007, a decrease of 39% from
$9.9 million in 2006. Our Digital Media Reader product line
consists of digital media readers and related ASIC technology
used to provide an interface for flash memory cards, primarily
embedded in digital photography kiosks, where the readers are
used to download and print digital photos. Two to three
customers historically have accounted
32
for approximately two-thirds of sales in this business segment.
As a result, revenue in our Digital Media Reader product line
can fluctuate significantly quarter to quarter due to
variability in the size and timing of customer orders. The
revenue decrease in 2007 was primarily due to the loss of a
major customer at the beginning of the year. Sales to another
major customer increased significantly in the second half of the
year, however, this was not sufficient to offset the decrease in
sales in the first half of the year.
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
Digital Media Reader products. Sales of our PC Security products
accounted for 71% and sales of our Digital 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. 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.
Revenue from our Digital Media Reader product line decreased 6%
from $10.5 million in 2005 to $9.9 million in 2006.
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.
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, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
Fiscal
|
|
|
2006
|
|
|
Fiscal
|
|
|
2005
|
|
|
Fiscal
|
|
|
|
2007
|
|
|
to 2007
|
|
|
2006
|
|
|
to 2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
PC Security
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,427
|
|
|
|
|
|
|
$
|
23,745
|
|
|
|
|
|
|
$
|
17,415
|
|
Gross profit
|
|
|
10,472
|
|
|
|
8
|
%
|
|
|
9,725
|
|
|
|
59
|
%
|
|
|
6,120
|
|
Gross profit%
|
|
|
43
|
%
|
|
|
|
|
|
|
41
|
%
|
|
|
|
|
|
|
35
|
%
|
Digital Media Readers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,008
|
|
|
|
|
|
|
$
|
9,868
|
|
|
|
|
|
|
$
|
10,521
|
|
Gross profit
|
|
|
2,182
|
|
|
|
2
|
%
|
|
|
2,132
|
|
|
|
(55
|
)%
|
|
|
4,710
|
|
Gross profit%
|
|
|
36
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
30,435
|
|
|
|
|
|
|
$
|
33,613
|
|
|
|
|
|
|
$
|
27,936
|
|
Gross profit
|
|
|
12,654
|
|
|
|
7
|
%
|
|
|
11,857
|
|
|
|
9
|
%
|
|
|
10,830
|
|
Gross profit%
|
|
|
42
|
%
|
|
|
|
|
|
|
35
|
%
|
|
|
|
|
|
|
39
|
%
|
Gross profit for 2007 was $12.7 million, or 42% of revenue.
During 2007, gross profit was impacted by a favorable mix of
products sold, better inventory management and product cost
reductions, particularly in our PC Security business. Offsetting
these positive factors were low sales levels of Digital Media
Reader products in the first half of the year and low sales
levels of PC Security products in the second quarter of 2007 as
well as continued pricing pressure over the last several
quarters. By product segment, gross profit for our PC Security
products was 43% and gross profit for our Digital Media Reader
products was 36% in 2007.
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
33
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 Digital 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.
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
|
|
2006
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
|
2007
|
|
to 2007
|
|
2006
|
|
to 2006
|
|
2005
|
|
|
(In thousands)
|
|
Expenses
|
|
$
|
3,123
|
|
|
|
(17
|
)%
|
|
$
|
3,767
|
|
|
|
(8
|
)%
|
|
$
|
4,081
|
|
Percentage of revenue
|
|
|
10
|
%
|
|
|
|
|
|
|
11
|
%
|
|
|
|
|
|
|
15
|
%
|
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 firmware development.
We focus the bulk of our research and development activities on
the development of products for new and emerging market
opportunities. In 2007 and 2006, we focused primarily on the
development of smart card reader technology for the German
e-healthcard
program, electronic ID applications and the global
e-passport
market. Research and development expenses were $3.1 million
in 2007, or 10% of revenue, compared with $3.8 million in
2006, or 11% of revenue, a decrease of 17%. This decrease was
primarily due to a lower level of external resources used.
Research and development expenses in 2006 decreased 8% from
$4.1 million in 2005, or 15% of revenue, primarily as a
result of lower level of external resources used.
We expect our research and development expenses to vary based on
future project demands and on the markets we target. We expect
to add research and development resources in 2008 to enhance our
product offerings.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
% Change
|
|
|
|
|
Fiscal
|
|
2006
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
|
2007
|
|
to 2007
|
|
2006
|
|
to 2006
|
|
2005
|
|
|
(In thousands)
|
|
Expenses
|
|
$
|
6,603
|
|
|
|
(12
|
)%
|
|
$
|
7,498
|
|
|
|
7
|
%
|
|
$
|
7,040
|
|
Percentage of revenue
|
|
|
22
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
25
|
%
|
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 2007 and 2006, these opportunities included
electronic ID applications, the early stages of the
e-healthcard
program in Germany and
e-passport.
Selling and marketing expenses were $6.6 million in 2007,
or 22% of revenue, compared with $7.5 million in 2006, or
22% of revenue, a decrease of 12%. The decrease was primarily
due to a reduction in sales personnel and activities as a result
of restructuring activities at the end of 2006.
34
In 2006, sales and marketing expenses increased 7% from
$7.0 million in 2005, which represented 25% of revenue. 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 increase as we
continue to align our resources to address existing and new
market opportunities. For example, in the third and fourth
quarters of 2007, we added sales resources in each geographic
region, and we expect to add additional sales resources during
2008 to enhance our ability to capture available business.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
% Change
|
|
|
|
|
Fiscal
|
|
2006
|
|
Fiscal
|
|
2005
|
|
Fiscal
|
|
|
2007
|
|
to 2007
|
|
2006
|
|
to 2006
|
|
2005
|
|
|
(In thousands)
|
|
Expenses
|
|
$
|
7,132
|
|
|
|
(6
|
)%
|
|
$
|
7,548
|
|
|
|
(18
|
)%
|
|
$
|
9,198
|
|
Percentage of revenue
|
|
|
23
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
|
|
|
|
33
|
%
|
General and administrative expenses consist primarily of
compensation expenses for employees performing our
administrative functions, and professional fees arising from
legal, auditing and other consulting services.
In 2007, general and administrative expenses were
$7.1 million, or 23% of revenue, compared with
$7.5 million, or 22% of revenue in 2006, a decrease of 6%.
The decrease primarily was due to the consolidation and transfer
of our corporate finance and compliance functions from the
U.S. to Germany and the completion of the transfer of local
finance functions from Singapore and the U.S. to Germany at
the end of 2006, offset in part by the payment of
$1.4 million in severance and other costs related to our
former CEO in the second quarter of 2007.
General and administrative expenses in 2006 decreased 18% from
$9.2 million in 2005, which represented 33% of revenue.
This reduction 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, which
resulted in a more streamlined and efficient audit process, a
decrease in the number of personnel required to prepare our
financial statements and a 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.
Amortization
of Intangibles
Amortization of intangible assets was $0.3 million in 2007,
$0.7 million in 2006 and $0.7 million in 2005. The
decrease in amortization amounts in 2007 compared with previous
periods reflects the completion of amortization of intangible
assets in the second quarter of 2007. No further amounts remain
to be amortized in future periods as the intangible assets have
been fully amortized.
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 included in 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 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 included in 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.
35
Interest
Income
Interest income consists of interest earned on invested cash.
Interest income resulting from cash balances was
$1.6 million in 2007, $1.4 million in 2006 and
$0.7 million in 2005. Higher interest income in 2007
compared with 2006 resulted primarily from higher interest rates
in 2007. Higher interest income in 2006 compared with 2005
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.
Foreign
Currency Gains and Losses and Other Income and
Expense
We recorded foreign currency exchange losses and other expense
of $0.3 million in 2007 and $0.2 million in 2006, and
we recorded foreign currency exchange gains and other income of
$1.7 million in 2005. 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 2007, foreign currency losses were $0.3 million, due
primarily to the devaluation of the U.S. dollar. No other
income was recorded.
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.
Income
Taxes
In 2007, 2006 and 2005, we recorded provisions for income taxes
of $0.1 million, $0.1 million and $0.2 million,
respectively, primarily resulting from minimum taxation and
taxes payable in foreign jurisdictions that are not offset by
operating loss carryforwards.
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 $0.5 million, $13.5 million and
$20.8 million in 2007, 2006 and 2005, respectively.
Operating gain (loss) for the DTV solutions business was
$0.1 million, $(1.3) million and $(1.9) million
in 2007, 2006 and 2005, respectively. Net gain (loss) for the
DTV solutions business in 2007, 2006 and 2005 was
$0.1 million, $3.0 million, and $(1.6) 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.
We recorded no revenue for the retail Digital Media and Video
business in 2007, 2006 or 2005. Operating loss for the retail
Digital Media and Video business for the same periods was
$0.3 million, $0.2 million and $0.3 million,
respectively. Net gain (loss) for the retail Digital Media and
Video business for 2007, 2006 and 2005 was $(0.3) million,
$0.5 million and $(0.5) million, respectively.
During 2007, we recorded a net gain on disposal of discontinued
operations of $1.6 million, primarily related to the final
payment received for the sale of the assets of the DTV solutions
business.
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.
36
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.
Liquidity
and Capital Resources
As of December 31, 2007, our working capital, which we have
defined as current assets less current liabilities, was
$34.0 million, compared to $32.0 million as of
December 31, 2006. Working capital increased in 2007 by
approximately $2.0 million. Current assets decreased by
$2.6 million, resulting from a reduction in cash, cash
equivalents and short-term investments of $4.5 million and
a reduction of other current assets of $1.0 million, which
was only partly offset by increases in accounts receivable of
$2.1 million and in inventories of $0.8 million.
Current liabilities decreased by $4.7 million, resulting
from a reduction in accounts payable of $1.5 million, a
reduction in accruals of $1.6 million and a decrease in
income taxes payable by $1.6 million.
In 2007, cash and cash equivalents decreased by
$13.5 million, primarily due to cash used for additional
purchases of short-term investments. While operating activities
used $5.4 million and investing activities used
$9.3 million, financing activities resulted in a positive
cash flow of $0.1 million and the effect of exchange rates
on cash and cash equivalents was $1.1 million.
Cash used in continuing operations of $6.0 million was
primarily due to a net loss before discontinued operations,
depreciation and amortization and stock-based compensation
expenses of $2.0 million. The remaining $4.0 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 $0.5 million
and consisted primarily of the final payment received for the
sale of the assets of the DTV solutions business of
$1.6 million, partly offset by payments for accounts
payables and accruals related to discontinued operations.
Cash used in investing activities from continuing operations of
$9.3 million resulted primarily from the purchases of
short-term investments of $28.7 million, partially offset
by maturities of $19.6 million. The remaining
$0.2 million was used for capital expenditures.
Cash provided by financing activities resulted from the issuance
of common stock of $0.1 million related to the
Companys employee stock purchase and stock option
programs. At December 31, 2007, our outstanding stock
options as a percentage of outstanding shares was 12%, compared
to 11% at December 31, 2006.
During 2007, we used $6.0 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 2008.
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, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
More than 5
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Operating leases
|
|
$
|
5,187
|
|
|
$
|
1,870
|
|
|
$
|
1,820
|
|
|
$
|
633
|
|
|
$
|
864
|
|
Purchase commitments
|
|
|
3,802
|
|
|
|
3,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Obligations
|
|
$
|
8,989
|
|
|
$
|
5,672
|
|
|
$
|
1,820
|
|
|
$
|
633
|
|
|
$
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The long-term income taxes payable of $0.2 million
accounted for under FIN 48 are not included in the table
above. We are unable to reliably estimate the timing of future
payments related to uncertain tax positions.
37
|
|
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, 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, 2007 and 2006
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, 2007 and 2006. 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 $0.9 million
and $1.1 million for 2007 and 2006, 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, 2007, we had $18.6 million in cash and
cash equivalents and $13.8 million in short-term
investments. Based on our cash and cash equivalents and
short-term investments as of December 31, 2007, 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.
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 materially affect the fair
value of our financial instruments that are exposed to changes
in interest rates.
38
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Consolidated Financial Statements
39
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, 2007 and 2006, 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, 2007. 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, 2007
and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2007, 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 18, 2008
40
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,600
|
|
|
$
|
32,103
|
|
Short-term investments
|
|
|
13,844
|
|
|
|
4,799
|
|
Accounts receivable, net of allowances of $341 and $867 as of
December 31, 2007 and 2006, respectively
|
|
|
8,638
|
|
|
|
6,583
|
|
Inventories
|
|
|
2,738
|
|
|
|
1,927
|
|
Other current assets
|
|
|
1,455
|
|
|
|
2,489
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
45,275
|
|
|
|
47,901
|
|
Property and equipment, net
|
|
|
1,522
|
|
|
|
1,457
|
|
Intangible assets, net
|
|
|
|
|
|
|
272
|
|
Other assets
|
|
|
1,767
|
|
|
|
1,725
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,564
|
|
|
$
|
51,355
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,063
|
|
|
$
|
4,572
|
|
Accrued compensation and related benefits
|
|
|
1,213
|
|
|
|
1,729
|
|
Accrued restructuring and other charges
|
|
|
2,960
|
|
|
|
3,431
|
|
Accrued professional fees
|
|
|
993
|
|
|
|
1,063
|
|
Accrued royalties
|
|
|
417
|
|
|
|
971
|
|
Other accrued expenses
|
|
|
2,325
|
|
|
|
2,289
|
|
Income taxes payable
|
|
|
277
|
|
|
|
1,879
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,248
|
|
|
|
15,934
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
77
|
|
|
|
103
|
|
Long-term income taxes payable
|
|
|
200
|
|
|
|
|
|
Commitments and contingencies (see Notes 12 and 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 40,000 shares
authorized; 16,356 and 16,316 shares issued and 15,737 and
15,698 shares outstanding as of December 31, 2007 and
2006, respectively
|
|
|
16
|
|
|
|
16
|
|
Additional paid-in capital
|
|
|
229,414
|
|
|
|
228,580
|
|
Treasury stock, 618 shares
|
|
|
(2,777
|
)
|
|
|
(2,777
|
)
|
Accumulated deficit
|
|
|
(192,089
|
)
|
|
|
(191,714
|
)
|
Accumulated other comprehensive income
|
|
|
2,475
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
37,039
|
|
|
|
35,318
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
48,564
|
|
|
$
|
51,355
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
41
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
30,435
|
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
Cost of revenue
|
|
|
17,781
|
|
|
|
21,756
|
|
|
|
17,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,654
|
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,123
|
|
|
|
3,767
|
|
|
|
4,081
|
|
Selling and marketing
|
|
|
6,603
|
|
|
|
7,498
|
|
|
|
7,040
|
|
General and administrative
|
|
|
7,132
|
|
|
|
7,548
|
|
|
|
9,198
|
|
Amortization of intangibles
|
|
|
272
|
|
|
|
666
|
|
|
|
673
|
|
Restructuring and other charges (credits)
|
|
|
(4
|
)
|
|
|
1,120
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,126
|
|
|
|
20,599
|
|
|
|
21,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,472
|
)
|
|
|
(8,742
|
)
|
|
|
(10,481
|
)
|
Interest income
|
|
|
1,639
|
|
|
|
1,350
|
|
|
|
745
|
|
Foreign currency gains (losses) and other income (expense), net
|
|
|
(346
|
)
|
|
|
(225
|
)
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(3,179
|
)
|
|
|
(7,617
|
)
|
|
|
(8,005
|
)
|
Provision for income taxes
|
|
|
(113
|
)
|
|
|
(73
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,292
|
)
|
|
|
(7,690
|
)
|
|
|
(8,155
|
)
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
(215
|
)
|
|
|
3,508
|
|
|
|
(2,109
|
)
|
Gain (loss) on sale of discontinued operations, net of income
taxes
|
|
|
1,586
|
|
|
|
5,224
|
|
|
|
(2,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,921
|
)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations
|
|
$
|
(0.21
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share from discontinued
operations
|
|
$
|
0.09
|
|
|
$
|
0.56
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted income (loss) per share
|
|
|
15,725
|
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
42
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
|
(In thousands)
|
|
|
Balances, January 1, 2005
|
|
|
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
|
|
|
|
|
|
Adjustment to Accumulated Deficit resulting from the adoption of
FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,546
|
|
|
|
|
|
|
|
1,546
|
|
|
|
|
|
Issuance of common stock upon exercise of options
|
|
|
12
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
27
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
|
$
|
(14
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,276
|
|
|
|
1,276
|
|
|
|
1,276
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
(1,921
|
)
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
15,737
|
|
|
$
|
16
|
|
|
$
|
229,414
|
|
|
$
|
(2,777
|
)
|
|
$
|
(192,089
|
)
|
|
$
|
2,475
|
|
|
$
|
37,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
43
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,921
|
)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) from discontinued operations
|
|
|
(1,371
|
)
|
|
|
(8,732
|
)
|
|
|
4,280
|
|
Deferred income taxes
|
|
|
(26
|
)
|
|
|
2
|
|
|
|
(30
|
)
|
Depreciation and amortization
|
|
|
580
|
|
|
|
1,036
|
|
|
|
1,703
|
|
Stock-based compensation expense
|
|
|
725
|
|
|
|
632
|
|
|
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
(5
|
)
|
|
|
46
|
|
|
|
(128
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,937
|
)
|
|
|
(2,388
|
)
|
|
|
2,414
|
|
Inventories
|
|
|
(731
|
)
|
|
|
398
|
|
|
|
(1,021
|
)
|
Other assets
|
|
|
1,079
|
|
|
|
(574
|
)
|
|
|
367
|
|
Accounts payable
|
|
|
(1,043
|
)
|
|
|
81
|
|
|
|
1,860
|
|
Accrued expenses
|
|
|
(1,453
|
)
|
|
|
(1,990
|
)
|
|
|
(5,402
|
)
|
Income taxes payable
|
|
|
113
|
|
|
|
102
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities from continuing operations
|
|
|
(5,990
|
)
|
|
|
(10,345
|
)
|
|
|
(8,218
|
)
|
Net cash provided by (used in) operating activities from
discontinued operations
|
|
|
546
|
|
|
|
10,524
|
|
|
|
(4,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(5,444
|
)
|
|
|
179
|
|
|
|
(12,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(222
|
)
|
|
|
(73
|
)
|
|
|
(57
|
)
|
Proceeds from disposal of property and equipment
|
|
|
22
|
|
|
|
11
|
|
|
|
381
|
|
Sales and maturities of short-term investments
|
|
|
19,587
|
|
|
|
16,918
|
|
|
|
12,055
|
|
Purchases of short-term investments
|
|
|
(28,647
|
)
|
|
|
(2,878
|
)
|
|
|
(15,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities from
continuing operations
|
|
|
(9,260
|
)
|
|
|
13,978
|
|
|
|
(3,472
|
)
|
Net cash provided by (used in) investing activities from
discontinued operations
|
|
|
|
|
|
|
3,484
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(9,260
|
)
|
|
|
17,462
|
|
|
|
(3,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of equity securities, net
|
|
|
109
|
|
|
|
262
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
109
|
|
|
|
262
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
1,092
|
|
|
|
540
|
|
|
|
(1,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(13,503
|
)
|
|
|
18,443
|
|
|
|
(17,521
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
32,103
|
|
|
|
13,660
|
|
|
|
31,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
18,600
|
|
|
$
|
32,103
|
|
|
$
|
13,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax refunds received
|
|
$
|
|
|
|
$
|
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
118
|
|
|
$
|
133
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
44
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
|
|
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 in two market segments: PC Security and Digital Media
Readers. In the PC Security market, the Company provides smart
card reader technology that enables secure access to PCs,
networks and physical facilities, as well as smart card-based
productivity packages for small- and medium-sized businesses
under the CHIPDRIVE brand. In the Digital Media Reader market,
the Company provides digital media readers that are used to
transfer digital content to and from various digital 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 photo processing equipment manufacturers for
the Companys digital media readers. The Company sells its
CHIPDRIVE solutions through resellers and the Internet. 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 for research and development
and in the United States and Japan for 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, 2007
and 2006, the fair value of cash and cash equivalents, trade
receivables and payables approximated their financial statement
45
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
carrying amounts because of the short-term maturities of these
instruments. (See Note 4 for fair value of investments.)
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. An estimated provision is recorded for excess
inventory, technical obsolescence and unsellability based
primarily on historical sales and expectations for future use.
Once inventory has been written down below cost, it is not
subsequently written up.
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.
Product warranties The Company accrues the
estimated cost of product warranties during the period of sale.
The Companys 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 estimates,
revisions to the estimated warranty liability would be required.
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.
Freight Costs SCM reflects the cost of
shipping its products to customers as cost of revenue.
Reimbursements received from customers for freight costs are not
significant, but when received are recognized in revenue.
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, 2007, a
full valuation allowance was provided against the net deferred
tax assets.
During the first quarter of fiscal 2007, the Company adopted the
provisions of, and accounted for uncertain tax positions in
accordance with the Financial Accounting Standards Boards
(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 SFAS 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
46
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
FIN 48 requires the Company to make certain judgments and
estimates in determining income tax expense for financial
statement purposes. Significant changes to these estimates may
result in an increase or decrease to SCMs tax provision in
a subsequent period. The calculation of SCMs tax
liabilities requires dealing with uncertainties in the
application of complex tax regulations. FIN 48 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. It is
inherently difficult and subjective to estimate such amounts.
SCM reevaluates such uncertain tax positions on a quarterly
basis based on factors such as, but not limited to, changes in
tax laws, issues settled under audit and changes in facts or
circumstances. Such changes in recognition or measurement might
result in the recognition of a tax benefit or an additional
charge to the tax provision in the period. As a result of the
implementation, the Company recognized a $1.5 million
decrease to income taxes payable for uncertain tax positions.
This decrease was accounted for as an adjustment to the
beginning balance of accumulated deficit on the balance sheet.
Including this decrease, at the beginning of 2007, the Company
had $0.1 million of unrecognized tax benefits included in
income taxes payable on the consolidated balance sheet. See
Note 9 for further information regarding the Companys
tax disclosures.
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,
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.
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
uses the U.S. dollar as its functional currency. 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
47
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2007, a currency loss of
$0.3 million in 2006 and a currency gain of
$1.6 million in 2005.
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. Two U.S. based customer
represented 30% and 15%, respectively of the accounts receivable
balance at December 31, 2007. 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, 2007, 2006 and 2005 has been disclosed
within the consolidated statements of stockholders equity
and comprehensive income (loss).
Recently
Issued Accounting Standards
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. After evaluating the impact of the
provisions of SFAS 157 on our financial position, results
of operations and cash flows, we do not expect a material impact
from its adoption.
In February 2007, FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits companies to
choose to measure certain financial instruments and other items
at fair value. The standard requires that unrealized gains and
losses are reported in earnings for items measured using the
fair value option. SFAS No. 159 is effective for us
beginning in the first quarter of fiscal year 2008. After
evaluating the impact of the provisions of SFAS 159 on our
financial position, results of operations and cash flows, we do
not expect a material impact from its adoption.
In December 2007, FASB issued SFAS No. 141 (revised
2007), Business Combinations. Under
SFAS No. 141(R), an entity is required to recognize
the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value
on the acquisition date. It further requires that
acquisition-related costs be recognized separately from the
acquisition and expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition
date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition,
acquired in-process research and development (IPR&D) is
capitalized as an intangible asset and amortized over its
estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations
on a prospective basis beginning in the first quarter of fiscal
year 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 changes the accounting and reporting for
minority interests, which will be recharacterized as
non-controlling interests and classified as a component of
equity. SFAS No. 160 is effective for us on a
prospective basis for business combinations with an acquisition
date beginning in the first quarter of fiscal year 2009. As of
December 31, 2007, we did not have any minority interests.
48
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Stockholders
Equity and Stock-Based Compensation
|
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 and
expire seven to ten years from the date of grant. Vesting
varies, with some options vesting 25% each year over four years;
some vesting
1/12th per
month over one year; some vesting 100% after one year; and some
vesting
1/12th per
month, commencing four years from the date of grant.
Additionally, the Company previously had an Employee Stock
Purchase Plan (ESPP) that allowed employees to
purchase shares of common stock at 85% of the fair market value
at the lower of either the date of enrolment or the date of
purchase. Shares issued as a result of stock option exercises
and the ESPP are newly issued shares. The Companys ESPP,
director option plan and 1997 stock option plan all expired in
March 2007. In 2007, our Board of Directors and our stockholders
approved our 2007 stock option plan, under which options to
purchase 1.5 million shares of our common stock may be
granted. As of December 31, 2007, an aggregate of
approximately 3.4 million shares of common stock was
reserved for future issuance under our stock option plans, of
which 1.9 million shares were subject to outstanding
options.
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 two years ended December 31,
2007, 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.
49
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Compensation expense recognized in the consolidated statement of
operations in the two years ended December 31, 2007 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.
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 years ended
December 31, 2007 and 2006 was $0.7 million and
$0.6 million greater, respectively, 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 years ended December 31,
2007 and 2006 would have been $0.05 and $0.04 lower,
respectively, if the Company had not adopted SFAS 123(R).
There was no effect on the condensed consolidated statements of
cash flows for the years ended December 31, 2007 and 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 years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
63
|
|
|
$
|
36
|
|
Research and development
|
|
|
73
|
|
|
|
110
|
|
Selling and marketing
|
|
|
233
|
|
|
|
163
|
|
General and administrative
|
|
|
356
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes
|
|
$
|
725
|
|
|
$
|
632
|
|
Income tax benefit
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense after income taxes
|
|
$
|
725
|
|
|
$
|
632
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Plans
The Companys director option plan and 1997 stock option
plan expired in March 2007, and options can no longer be granted
under these plans. In November 2007, stockholders approved the
2007 Stock Option Plan, which authorizes 1.5 million stock
option grants.
50
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A total of 1,493,493 shares of common stock are reserved
for future option grants under the remaining 2000 stock plan and
the new 2007 stock option plan as of December 31, 2007.
A summary of the activity under the Companys stock option
plans for the three years ended December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Number of
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Available
|
|
|
Options
|
|
|
Price
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per share
|
|
|
Value
|
|
|
Life (in years)
|
|
|
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
(1,208,481 exercisable at $17.02)
|
|
$
|
4,084,775
|
|
|
|
1,783,255
|
|
|
$
|
12.58
|
|
|
$
|
81,808
|
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Authorized
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
(506,181
|
)
|
|
|
506,181
|
|
|
$
|
3.83
|
|
|
|
|
|
|
|
|
|
Options Cancelled or Expired
|
|
|
(3,585,101
|
)
|
|
|
(414,726
|
)
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
Options Exercised
|
|
|
|
|
|
|
(12,438
|
)
|
|
$
|
3.05
|
|
|
$
|
9,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,493,493
|
|
|
|
1,862,272
|
|
|
$
|
10.97
|
|
|
$
|
191,809
|
|
|
|
5.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
|
|
|
|
1,750,662
|
|
|
$
|
11.44
|
|
|
$
|
172,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
|
|
|
|
1,260,320
|
|
|
$
|
14.51
|
|
|
$
|
91,528
|
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options
outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - $ 3.03
|
|
|
388,014
|
|
|
|
7.82
|
|
|
$
|
2.89
|
|
|
|
155,590
|
|
|
$
|
2.83
|
|
$ 3.05 - $ 3.41
|
|
|
389,047
|
|
|
|
6.64
|
|
|
|
3.31
|
|
|
|
309,467
|
|
|
|
3.33
|
|
$ 3.44 - $ 5.15
|
|
|
394,807
|
|
|
|
7.92
|
|
|
|
4.28
|
|
|
|
109,146
|
|
|
|
4.69
|
|
$ 5.86 - $ 12
|
|
|
377,596
|
|
|
|
3.96
|
|
|
|
8.01
|
|
|
|
373,309
|
|
|
|
8.04
|
|
$14.60 - $83.00
|
|
|
312,808
|
|
|
|
1.58
|
|
|
|
42.51
|
|
|
|
312,808
|
|
|
|
42.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.65 - $83.00
|
|
|
1,862,272
|
|
|
|
5.77
|
|
|
$
|
10.97
|
|
|
|
1,260,320
|
|
|
$
|
14.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average grant date fair value per option for
options granted during the years ended December 31, 2007,
2006 and 2005 was $1.80, $1.71 and $2.76, respectively. The
total intrinsic value of options exercised during the years
ended December 31, 2007, 2006 and 2005 was $9,085, $8,716
and $1,901, respectively. Cash proceeds from the exercise of
stock options were $38,000, $72,000 and $5,800 for the three
years ended December 31, 2007, 2006 and 2005, respectively.
For the year ended December 31, 2007, an income tax benefit
from the stock option exercises of below $1,000 was realized. No
income tax benefit was realized from the stock option exercises
for the years ended December 31, 2006 and 2005. Stock-based
compensation expense related to stock options recognized under
SFAS 123(R) for the two years ended December 31, 2007
and 2006 was $0.7 million and $0.6 million,
respectively. At December 31, 2007, there was
$0.7 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 1.72 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, 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.23
|
%
|
|
|
4.81
|
%
|
|
|
3.84
|
%
|
Expected volatility
|
|
|
56
|
%
|
|
|
67
|
%
|
|
|
90
|
%
|
Expected term in years
|
|
|
4.00
|
|
|
|
3.92
|
|
|
|
4.00
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected Volatility: The Companys
computation of expected volatility for the year ended
December 31, 2007 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, 2007,
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, 2007 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 five years.
Forfeiture Rates: Compensation expense
recognized in the consolidated statement of operations for the
two years ended December 31, 2007 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.
1997
Employee Stock Purchase Plan
Until its expiration in March 2007, the Companys ESPP
permitted 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 had a two-year rolling plan with four purchases every
six months within the offering period. If the fair market value
per share was lower on the purchase date than the beginning of
the offering period, the current offering period terminated and
a new two year offering period would have commenced. The
Companys ESPP restricted the maximum amount of shares
purchased by an individual to $25,000 worth of common stock each
year. During 2007, 2006 and 2005, a
52
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
total of 27,145, 78,679 and 107,526 shares, respectively,
were issued under the plan. As of December 31, 2007, no
shares were available for future issuance under the
Companys ESPP, due to the plans expiration in March
2007.
The fair value of issuances under the Companys ESPP was
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 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, 2007 was a benefit of $40,000. The benefit
stemmed from the expiration of the plan before the expected
offering periods had terminated. At December 31, 2007,
there was no further unrecognized stock-based compensation
expense related to outstanding ESPP shares as the plan expired
in March 2007.
The following weighted average assumptions are included in the
estimated grant date fair value calculations for rights to
purchase stock under the Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected life
|
|
|
|
|
|
|
15 months
|
|
|
|
6 months
|
|
Risk-free interest
|
|
|
|
|
|
|
4.90%
|
|
|
|
2.56%
|
|
Volatility
|
|
|
|
|
|
|
49%
|
|
|
|
76%
|
|
Dividend yield
|
|
|
|
|
|
|
None
|
|
|
|
None
|
|
The weighted-average fair value of purchase rights granted under
the Purchase Plan in 2006 and 2005 was $1.36 and $1.08 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.
53
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 year ended December 31, 2005 would have been as
follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except per
|
|
|
|
share data)
|
|
|
Net loss as reported
|
|
$
|
(12,435
|
)
|
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
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(13,798
|
)
|
|
|
|
|
|
Net loss per share, as reported basic and diluted
|
|
$
|
(0.80
|
)
|
Pro forma loss per share basic and diluted
|
|
$
|
(0.89
|
)
|
|
|
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 a
total consideration of $10.6 million in cash, of which
$9 million was paid at the time of sale and
$1.6 million, which was originally payable subject to the
completion of certain product development milestones by Kudelski
subsequent to the close of the transaction, was paid in
May 2007.
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets, for the fiscal
years ended December 31, 2007, 2006 and 2005, 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. An additional $1.5 million
gain on sale of discontinued operations was realized in May 2007
primarily resulting from the final payment by Kudelski as
described 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 were
generated for a limited time after the sale of the DTV solutions
business. Under this agreement, a service fee was earned by the
Company for its services related to ordering products from a
supplier and selling these products to Kudelski. The agreement
was terminated at the end of the first quarter of 2007 and
related revenues ceased after this period.
54
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The operating results for the discontinued operations of the DTV
solutions business for the fiscal years ended December 31,
2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
496
|
|
|
$
|
13,513
|
|
|
$
|
20,785
|
|
Operating gain (loss)
|
|
$
|
61
|
|
|
$
|
(1,287
|
)
|
|
$
|
(1,868
|
)
|
Income (loss) before income taxes
|
|
$
|
84
|
|
|
$
|
2,953
|
|
|
$
|
(1,791
|
)
|
Income tax benefit
|
|
$
|
|
|
|
$
|
67
|
|
|
$
|
183
|
|
Gain (loss) from discontinued operations
|
|
$
|
84
|
|
|
$
|
3,020
|
|
|
$
|
(1,608
|
)
|
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, 2007, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating loss
|
|
$
|
(304
|
)
|
|
$
|
(168
|
)
|
|
$
|
(287
|
)
|
Loss before income taxes
|
|
$
|
(207
|
)
|
|
$
|
(76
|
)
|
|
$
|
(430
|
)
|
Income tax benefit (provision)
|
|
$
|
(92
|
)
|
|
$
|
564
|
|
|
$
|
(71
|
)
|
Gain (loss) from discontinued operations
|
|
$
|
(299
|
)
|
|
$
|
488
|
|
|
$
|
(501
|
)
|
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.
During 2007, net gain 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 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).
|
|
4.
|
Short-Term
Investments
|
At December 31, 2007, the entire short-term investment
portfolio matures in 2008. The fair value of short-term
investments at December 31, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gain on
|
|
|
Loss on
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Investments
|
|
|
Investments
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Corporate notes
|
|
$
|
13,872
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
13,844
|
|
55
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Gain on
|
|
|
Loss on
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Investments
|
|
|
Investment
|
|
|
Value
|
|
|
Corporate notes
|
|
$
|
1,021
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
1,019
|
|
U.S. government agencies
|
|
|
3,792
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
3,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,813
|
|
|
$
|
|
|
|
$
|
(14
|
)
|
|
$
|
4,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2007, all of the short-term investment portfolio has an
unrealized loss. No investments have been in an unrealized loss
position for more than one year. The Company believes these fair
value declines are the result of rising short-term interest
rates for the underlying investments. For the years ended
December 31, 2007, 2006 and 2005, no impairment of the
investments was identified based on the evaluations performed.
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
1,202
|
|
|
$
|
754
|
|
Work-in-process
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
1,536
|
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,738
|
|
|
$
|
1,927
|
|
|
|
|
|
|
|
|
|
|
56
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Property
and Equipment
|
Property and equipment, net consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
142
|
|
|
$
|
127
|
|
Building and leasehold improvements
|
|
|
1,972
|
|
|
|
1,789
|
|
Furniture, fixtures and office equipment
|
|
|
3,223
|
|
|
|
2,851
|
|
Automobiles
|
|
|
35
|
|
|
|
1
|
|
Purchased software
|
|
|
3,526
|
|
|
|
3,209
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,898
|
|
|
|
7,977
|
|
Accumulated depreciation
|
|
|
(7,376
|
)
|
|
|
(6,520
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,522
|
|
|
$
|
1,457
|
|
|
|
|
|
|
|
|
|
|
SCM recorded depreciation expenses in the amount of
$0.3 million, $0.3 million and $1.0 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
Intangible assets are associated with the Companys
European operations and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Customer relations
|
|
|
60 months
|
|
|
$
|
1,834
|
|
|
$
|
(1,834
|
)
|
|
$
|
|
|
|
$
|
1,639
|
|
|
$
|
(1,520
|
)
|
|
$
|
119
|
|
Core technology
|
|
|
60 months
|
|
|
|
2,078
|
|
|
|
(2,078
|
)
|
|
|
|
|
|
|
1,858
|
|
|
|
(1,705
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
3,912
|
|
|
$
|
(3,912
|
)
|
|
$
|
|
|
|
$
|
3,497
|
|
|
$
|
(3,225
|
)
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.3 million, $0.7 million and
$0.7 million for the years ended December 31, 2007,
2006 and 2005, respectively.
No further amounts remain to be amortized in future periods.
|
|
8.
|
Restructuring
and Other Charges
|
Continuing
Operations
During 2007, the Company realized income from the release of a
severance accrual related to continuing operations of $4,000.
During 2006 and 2005, SCM incurred net restructuring and other
charges related to continuing operations of approximately
$1.4 million and $0.8 million, respectively.
57
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities related to restructuring actions and other
activities during 2007, 2006 and 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease/Contract
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Commitments
|
|
|
Severance
|
|
|
Costs
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balances as of January 1, 2005
|
|
|
52
|
|
|
|
154
|
|
|
|
21
|
|
|
|
227
|
|
Provision for 2005
|
|
|
|
|
|
|
699
|
|
|
|
6
|
|
|
|
705
|
|
Changes in estimates
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
129
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
691
|
|
|
|
135
|
|
|
|
833
|
|
Payments and other changes 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 and other changes in 2006
|
|
|
(48
|
)
|
|
|
(1,370
|
)
|
|
|
|
|
|
|
(1,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006
|
|
|
15
|
|
|
|
106
|
|
|
|
9
|
|
|
|
130
|
|
Provision for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in estimates
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Payments and other changes in 2007
|
|
|
(3
|
)
|
|
|
(102
|
)
|
|
|
1
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2007
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, the Company did not incur expenses for
restructuring, as past restructuring activities had been
completed in earlier periods.
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 related to
severance for manufacturing personnel and was therefore recorded
in cost of revenue. The remaining $1.1 million was recorded
in operating expenses and was primarily made up of severance for
non-manufacturing personnel.
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.
Discontinued
Operations
During 2007, income from restructuring and other items related
to discontinued operations was approximately $0.1 million.
During 2006, and 2005, SCM incurred restructuring and other
charges related to discontinued operations of approximately
$0.1 million and $2.3 million, respectively.
58
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities related to restructuring actions and other
activities during 2007, 2006 and 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
|
|
|
Lease/Contract
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Settlements
|
|
|
Commitments
|
|
|
Severance
|
|
|
Costs
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balances as of January 1, 2005
|
|
|
|
|
|
|
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 and other changes 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 and other changes in 2006
|
|
|
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
(159
|
)
|
|
|
(497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2006
|
|
|
|
|
|
|
2,949
|
|
|
|
|
|
|
|
352
|
|
|
|
3,301
|
|
Provision for 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in estimates
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
(40
|
)
|
|
|
(110
|
)
|
Payments and other changes in 2007
|
|
|
|
|
|
|
(290
|
)
|
|
|
|
|
|
|
37
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2007
|
|
$
|
|
|
|
$
|
2,589
|
|
|
$
|
|
|
|
$
|
349
|
|
|
$
|
2,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations for the fiscal year ended
December 31, 2007 primarily related to changes in estimates
for lease obligations.
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 and other changes
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 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, which after conversion into U.S. Dollars amounted
to $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.
59
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loss before income taxes for domestic and
non-U.S. continuing
operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
1,113
|
|
|
$
|
(2,709
|
)
|
|
$
|
24,017
|
|
Foreign
|
|
|
(4,292
|
)
|
|
|
(4,908
|
)
|
|
|
(32,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
$
|
(3,179
|
)
|
|
$
|
(7,617
|
)
|
|
$
|
(8,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The benefit (provision) for income taxes consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
26
|
|
|
|
(2
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
(2
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(31
|
)
|
|
|
(4
|
)
|
|
|
(162
|
)
|
Foreign
|
|
|
(73
|
)
|
|
|
(67
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139
|
)
|
|
|
(71
|
)
|
|
|
(183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
(113
|
)
|
|
$
|
(73
|
)
|
|
$
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant items making up deferred tax assets and liabilities
are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowances not currently deductible for tax purposes
|
|
$
|
842
|
|
|
$
|
1,370
|
|
Net operating loss carryforwards
|
|
|
39,924
|
|
|
|
44,814
|
|
Accrued and other
|
|
|
440
|
|
|
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,206
|
|
|
|
47,470
|
|
Less valuation allowance
|
|
|
(41,206
|
)
|
|
|
(47,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
104
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(77
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(77
|
)
|
|
$
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2007 and 2006, SCM
recognized a benefit of $0.5 million and $0.8 million,
respectively, from the utilization of net operating loss
carryforwards for which the Company had
60
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 provision for taxes reconciles to the amount computed by
applying the statutory federal rate to loss before income taxes
from continuing operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
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
|
|
|
3
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
Change in valuation allowance
|
|
|
(15
|
)%
|
|
|
(44
|
)%
|
|
|
(41
|
)%
|
Permanent Differences
|
|
|
(24
|
)%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
Other
|
|
|
(1
|
)%
|
|
|
(0
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(4
|
)%
|
|
|
(1
|
)%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, SCM has net operating loss
carryforwards of approximately $72.2 million for federal,
$31.4 million for state and $54.9 million for foreign
income tax purposes. If not utilized, these carryforwards will
begin to expire beginning in 2012 for federal purposes and have
already begun to expire for state and foreign purposes.
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.
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.
During the first quarter of fiscal 2007, SCM adopted the
provisions of, and accounted for uncertain tax positions in
accordance with 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.
As a result of the implementation, SCM recognized a
$1.5 million decrease to income taxes payable for uncertain
tax positions. This decrease was accounted for as an adjustment
to the beginning balance of accumulated deficit on the balance
sheet.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits with an impact on the Companys
consolidated balance sheets or results of operations for 2007 is
as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
142
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
15
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
157
|
|
|
|
|
|
|
61
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
While timing of the resolution
and/or
finalization of tax audits is uncertain, the Company does not
believe that its unrecognized tax benefits as disclosed in the
above table would materially change in the next 12 months.
As a result of adoption of FIN 48, unrecognized tax
benefits were reclassified to long-term income taxes payable,
where applicable.
In addition, as of December 31, 2007, the Company
determined $4.1 million in liability for unrecognized tax
benefits, which was accounted for as a decrease to deferred tax
assets which had a full valuation allowance against them and has
no impact on the Companys consolidated balance sheets or
results of operations for 2007.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. As of
December 31, 2007, approximately $43,000 of accrued
interest and penalties related to uncertain tax positions.
SCM files U.S. federal, U.S. state and foreign tax
returns. The Company is generally no longer subject to tax
examinations for years prior to 1999. When loss carryforwards of
tax years prior to 1999 would be utilized in the U.S., these tax
years also might become subject to investigation by the tax
authorities.
|
|
10.
|
Net
Income (Loss) Per Common Share
|
The following is a reconciliation of the numerators and
denominators used in computing basic and diluted net income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Loss from continuing operations
|
|
$
|
(3,292
|
)
|
|
$
|
(7,690
|
)
|
|
$
|
(8,155
|
)
|
Discontinued operations
|
|
|
1,371
|
|
|
|
8,732
|
|
|
|
(4,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,921
|
)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in computation
of basic and diluted income (loss) per share
|
|
|
15,725
|
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.21
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
Discontinued operations
|
|
|
0.09
|
|
|
|
0.56
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common equivalent shares issuable
|
|
|
30,554
|
|
|
|
24,094
|
|
|
|
48,533
|
|
Weighted average exercise price of shares issuable
|
|
$
|
3.00
|
|
|
$
|
2.78
|
|
|
$
|
2.84
|
|
|
|
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,
62
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, Executive Vice
President, Strategic Sales and Business Development and
Executive Vice President, Strategy, Marketing and Engineering.
The Companys continuing operations provide secure digital
access solutions to OEM customers in two markets segments: PC
Security and Digital 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 or assets by segment. The Company does not
include intercompany transfers between segments for management
purposes.
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, 2007, 2006 and 2005, 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.
Summary information by segment for the years ended
December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
PC Security:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,427
|
|
|
$
|
23,745
|
|
|
$
|
17,415
|
|
Gross profit
|
|
|
10,472
|
|
|
|
9,725
|
|
|
|
6,120
|
|
Gross profit%
|
|
|
43
|
%
|
|
|
41
|
%
|
|
|
35
|
%
|
Digital Media Readers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,008
|
|
|
$
|
9,868
|
|
|
$
|
10,521
|
|
Gross profit
|
|
|
2,182
|
|
|
|
2,132
|
|
|
|
4,710
|
|
Gross profit%
|
|
|
36
|
%
|
|
|
22
|
%
|
|
|
45
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
30,435
|
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
Gross profit
|
|
|
12,654
|
|
|
|
11,857
|
|
|
|
10,830
|
|
Gross profit%
|
|
|
42
|
%
|
|
|
35
|
%
|
|
|
39
|
%
|
63
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Geographic revenue is based on selling location. Information
regarding revenue by geographic region is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,744
|
|
|
$
|
14,695
|
|
|
$
|
11,623
|
|
Europe
|
|
|
8,722
|
|
|
|
13,294
|
|
|
|
9,749
|
|
Asia-Pacific
|
|
|
5,969
|
|
|
|
5,624
|
|
|
|
6,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,435
|
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
51
|
%
|
|
|
43
|
%
|
|
|
42
|
%
|
Europe
|
|
|
29
|
%
|
|
|
40
|
%
|
|
|
35
|
%
|
Asia-Pacific
|
|
|
20
|
%
|
|
|
17
|
%
|
|
|
23
|
%
|
One customer exceeded 10% of total revenue for each of 2007 and
2006 and two customers exceeded 10% of total revenue for 2005.
Two U.S. based customers represented 30% and 15%,
respectively of the Companys accounts receivable balance
at December 31, 2007. One Asia-based customer and one
U.S.-based
customer represented 19% and 17%, respectively, of the
Companys accounts receivable balance at December 31,
2006.
Long-lived assets by geographic location as of December 2007 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14
|
|
|
$
|
27
|
|
Europe
|
|
|
171
|
|
|
|
150
|
|
Asia-Pacific
|
|
|
1,337
|
|
|
|
1,280
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,522
|
|
|
$
|
1,457
|
|
|
|
|
|
|
|
|
|
|
All of the long-lived assets as of December 31, 2007, and
$1,264,000 of the long-lived assets as of December 31,
2006, disclosed for Asia-Pacific, relate to our facilities in
India.
The Company leases its facilities, certain equipment, and
automobiles under noncancelable operating lease agreements.
These lease agreements expire at various dates during the next
nine years for agreements existing as of December 31, 2007.
64
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum lease payments under noncancelable operating
leases as of December 31, 2007 are as follows for the years
ending:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
1,870
|
|
2009
|
|
|
954
|
|
2010
|
|
|
866
|
|
2011
|
|
|
386
|
|
2012
|
|
|
247
|
|
Thereafter
|
|
|
864
|
|
|
|
|
|
|
Committed gross lease payments
|
|
|
5,187
|
|
Less: sublease rental income
|
|
|
(201
|
)
|
|
|
|
|
|
Net operating lease obligation
|
|
$
|
4,986
|
|
|
|
|
|
|
At December 31, 2007, the Company has accrued approximately
$2.6 million of restructuring charges in connection with a
portion of the above lease commitments. Rent expense from
continuing operations was $1.2 million, $1.5 million
and $1.8 million in 2007, 2006 and 2005, respectively.
Purchases for inventories are highly dependent upon forecasts of
the customers demand. Due to the uncertainty in demand
from its customers, the Company may have to change, reschedule,
or cancel purchases or purchase orders from its suppliers. These
changes may lead to vendor cancellation charges on these
purchases or contractual commitments. As of December 31,
2007, purchase and contractual commitments were approximately
$3.8 million.
SCM provides warranties on certain product sales, which range
from twelve to twenty-four months, and allowances for estimated
warranty costs are recorded during the period of sale. The
determination of such allowances requires the Company to make
estimates of product return rates and expected costs to repair
or to replace the products under warranty. SCM currently
establishes warranty reserves based on historical warranty costs
for each product line combined with liability estimates based on
the prior twelve months sales activities. If actual return
rates and/or
repair and replacement costs differ significantly from
SCMs estimates, adjustments to recognize additional cost
of sales may be required in future periods.
65
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of the reserve for warranty costs during the years
ended December 31, 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2005
|
|
|
150
|
|
|
|
94
|
|
|
|
244
|
|
Additions related to current period sales
|
|
|
158
|
|
|
|
251
|
|
|
|
409
|
|
Warranty costs incurred in the current period
|
|
|
(67
|
)
|
|
|
(53
|
)
|
|
|
(120
|
)
|
Adjustments to accruals related to prior period sales
|
|
|
(185
|
)
|
|
|
(195
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
56
|
|
|
|
97
|
|
|
|
153
|
|
Additions related to current period sales
|
|
|
215
|
|
|
|
12
|
|
|
|
227
|
|
Warranty costs incurred in the current period
|
|
|
(64
|
)
|
|
|
(13
|
)
|
|
|
(77
|
)
|
Adjustments to accruals related to prior period sales
|
|
|
(173
|
)
|
|
|
(96
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
34
|
|
|
|
0
|
|
|
|
34
|
|
Additions related to current period sales
|
|
|
67
|
|
|
|
|
|
|
|
67
|
|
Warranty costs incurred in the current period
|
|
|
(61
|
)
|
|
|
|
|
|
|
(61
|
)
|
Adjustments to accruals related to prior period sales
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
36
|
|
|
$
|
0
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Related
Party-Transactions
|
Werner Koepf, SCMs Chairman of the Board, also served
until June 2007 as a director and as Chairman of the
Compensation Committee of Gemplus International S.A., a company
engaged in the development and distribution of smart-card based
systems. During 2007, SCM incurred license expenses of
approximately $0.1 million to Gemplus. Approximately
$80,000 of this amount related to continuing operations. License
expenses of approximately $0.2 million and
$0.4 million were incurred for 2006 and 2005, respectively,
of which approximately $76,000 and $232,000 related to
continuing operations. As of December 31, 2007 and as of
December 31, 2005, no accounts payable were due to Gemplus.
As of December 31, 2006, approximately $30,000 was due as
accounts payable to Gemplus. During 2007, SCM realized revenue
of approximately $0.2 million from sales to Gemplus.
Revenues of approximately $11,000 and $0 were realized for 2006
and 2005, respectively. As of December 31, 2007 and as of
December 31, 2005, no accounts receivable were outstanding
from Gemplus. As of December 31, 2006, approximately
$11,000 was due as accounts receivable from Gemplus. SCMs
business relationship with Gemplus has been in existence for
many years and predates Werner Koepfs appointment to the
Companys Board of Directors in February 2006.
Mr. Koepf was not directly compensated for revenue
transactions between the two companies. The related-party
transactions have been performed following at arms
length principles.
From time to time, SCM could be subject to claims arising in the
ordinary course of business or be a defendant in lawsuits. While
the outcome of such claims or other proceedings cannot be
predicted with certainty, SCMs management expects that any
such liabilities, to the extent not provided for by insurance or
otherwise, will not have a material adverse effect on the
Companys financial condition, results of operations or
cash flows.
66
SCM
MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Quarterly
Results of Operations (Unaudited)
|
The following is a summary of the unaudited quarterly results of
operations for 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
8,457
|
|
|
$
|
4,647
|
|
|
$
|
7,617
|
|
|
$
|
9,714
|
|
Gross profit
|
|
|
3,740
|
|
|
|
1,333
|
|
|
|
3,447
|
|
|
|
4,134
|
|
Income (loss) from operations
|
|
|
(114
|
)
|
|
|
(4,053
|
)
|
|
|
(363
|
)
|
|
|
58
|
|
Income (loss) from continuing operations
|
|
|
134
|
|
|
|
(3,673
|
)
|
|
|
(116
|
)
|
|
|
363
|
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
(17
|
)
|
|
|
(102
|
)
|
|
|
(83
|
)
|
|
|
(13
|
)
|
Gain (loss) on sale of discontinued operations, net of income
taxes
|
|
|
23
|
|
|
|
1,530
|
|
|
|
16
|
|
|
|
17
|
|
Net income (loss)
|
|
|
140
|
|
|
|
(2,245
|
)
|
|
|
(183
|
)
|
|
|
367
|
|
Basic and diluted income (loss) per share from continuing
operations
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
Basic and diluted income (loss) per share from discontinued
operations
|
|
$
|
(0.00
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
Shares used to compute basic income (loss) per share:
|
|
|
15,700
|
|
|
|
15,730
|
|
|
|
15,736
|
|
|
|
15,736
|
|
Shares used to compute diluted income (loss) per share:
|
|
|
15,742
|
|
|
|
15,730
|
|
|
|
15,736
|
|
|
|
15,759
|
|