e424b3
Filed
Pursuant to Rule 424(b)(3)
Registration
No. 333-157067
JOINT PROXY STATEMENT/INFORMATION STATEMENT AND PROSPECTUS
PROPOSED
MERGER
To the Stockholders of SCM Microsystems, Inc. and Shareholders
of Hirsch Electronics Corporation:
The boards of directors of each of SCM Microsystems, Inc.
(SCM) and Hirsch Electronics Corporation
(Hirsch) have approved a merger transaction in which
the businesses of SCM and Hirsch will be combined. We are
sending the accompanying joint proxy statement/information
statement and prospectus to you to ask you to vote in favor of
this merger and the related transactions.
SCM is holding a special meeting of its stockholders in order to
obtain the stockholder approval necessary to complete the merger
with Hirsch and certain related matters. At the SCM special
meeting, which will be held at 1:00 p.m., local time, on
March 23, 2009, at SCMs U.S. office located at
41740 Christy Street, Fremont, California 94538, unless
postponed or adjourned to a later date, SCM will ask its
stockholders to approve, among other items, the issuance of
shares of SCM common stock and warrants to purchase shares of
SCM common stock to the securityholders of Hirsch in connection
with the merger, as described in the accompanying joint proxy
statement/information statement and prospectus.
After careful consideration, SCMs board of directors has
approved the merger and the related issuance of up to
9,661,470 shares of SCM common stock, par value $0.001, and
warrants to purchase up to 4,945,353 shares of SCM common stock
and has determined that the merger and such issuance of shares
and warrants is in the best interests of SCM and its
stockholders. Accordingly, SCMs board of directors
unanimously recommends that the SCM stockholders vote FOR each
of the proposals put to the SCM stockholders at the SCM special
meeting.
Hirsch is holding a special meeting of its shareholders in order
to obtain the shareholder approval necessary to complete the
merger with SCM. At the Hirsch special meeting, which will be
held at 7:30 p.m., local time, on March 11, 2009, at
Hirschs corporate headquarters located at 1900 Carnegie
Avenue, Building B, Santa Ana, California 92705, unless
postponed or adjourned to a later date, Hirsch will ask its
shareholders to approve, among other items, the merger, as
described in the accompanying joint proxy statement/information
statement and prospectus.
After careful consideration, Hirschs board of directors
has approved the merger and has determined that the merger is in
the best interests of Hirsch and its shareholders.
Accordingly, Hirschs board of directors unanimously
recommends that the Hirsch shareholders vote FOR each of the
proposals put to the Hirsch shareholders at the Hirsch special
meeting.
Certain Hirsch shareholders, including Lawrence W. Midland, the
president of Hirsch, who in the aggregate own approximately 22%
of the outstanding shares of Hirsch common stock, have entered
into an irrevocable proxy and voting agreement whereby they have
agreed to vote in favor of the merger.
SCMs common stock is currently listed on the NASDAQ Stock
Markets National Market under the symbol SCMM
and on the Prime Standard of the Frankfort Stock Exchange under
the symbol SMY. On February 11, 2009, the last
practicable trading day before the date of this proxy
statement/information statement and prospectus, the closing sale
price of SCM common stock was $2.67 per share as reported
on the NASDAQ Stock Market.
More information about SCM, Hirsch and the proposed merger is
contained in the accompanying joint proxy statement/information
statement and prospectus. SCM and Hirsch urge you to read
the accompanying joint proxy statement/information statement and
prospectus carefully and in its entirety. In particular, you
should carefully consider the matters discussed in the section
entitled Risk Factors, beginning on page 12 of the
accompanying joint proxy statement/information statement and
prospectus.
Your vote is very important, regardless of the number of
shares you own of SCM or Hirsch. Please read the accompanying
joint proxy statement/information statement and prospectus
carefully and cast your proxy vote as promptly as possible.
SCM and Hirsch are excited about the opportunities the proposed
merger may bring to SCM stockholders and Hirsch shareholders,
and thank you for your consideration and continued support.
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Felix Marx
Chief Executive Officer
SCM Microsystems, Inc.
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Lawrence W. Midland
President
Hirsch Electronics Corporation
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the merger or
the securities of SCM to be issued in connection with the
merger, or determined if this joint proxy statement/information
statement and prospectus is adequate or accurate. Any
representation to the contrary is a criminal offense.
The accompanying joint proxy statement/information statement and
prospectus is dated February 13, 2009, and is first being
mailed to SCM stockholders and Hirsch shareholders on or about
February 18, 2009.
SCM Microsystems, Inc.
Oskar-Messter-Str. 13, 85737
Ismaning, Germany
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
To Be Held On March 23,
2009
To SCM Microsystems, Inc. Stockholders:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
SCM Microsystems, Inc., a Delaware corporation, will be held at
SCMs U.S. office located at 41740 Christy Street,
Fremont, California 94538, on March 23, 2009 at 1:00 p.m.,
local time for the following purposes:
1. To consider and vote upon a proposal to approve the
issuance of new shares of SCM common stock, par value $0.001 per
share, and warrants to purchase shares of SCM common stock, to
securityholders of Hirsch, in connection with the merger
proposed under the Agreement and Plan of Merger, dated as of
December 10, 2008, by and among SCM, Hirsch Electronics
Corporation, a California corporation, and two wholly-owned
subsidiaries of SCM, pursuant to which Hirsch will become a new
Delaware limited liability company and a wholly-owned subsidiary
of SCM through a two-step merger;
2. To consider and vote upon an adjournment of the SCM
special meeting, if necessary, to solicit additional proxies if
there are not sufficient votes in favor of the proposal
described immediately above; and
To transact such other business that properly comes before the
SCM special meeting or any adjournment or postponement thereof.
The foregoing proposals and the Agreement and Plan of Merger are
more fully described in the joint proxy statement/information
statement and prospectus accompanying this Notice. Only SCM
stockholders of record at the close of business on
February 11, 2009 will be entitled to notice of, and a vote
at, the SCM special meeting. At the close of business on
February 11, 2009, SCM had 15,743,515 shares of stock
outstanding and entitled to vote. A list of SCM stockholders
entitled to vote at the SCM special meeting will be available
for inspection at SCMs principal executive offices in
Ismaning, Germany and at its U.S. office in Fremont,
California.
All SCM stockholders are cordially invited to attend the SCM
special meeting in person. Whether or not you plan to attend
the SCM special meeting in person, please sign and return the
enclosed proxy card to ensure that your SCM shares will be
represented at the SCM special meeting. Voting instructions
are included with your SCM proxy card. You may revoke your SCM
proxy card at any time prior to the SCM special meeting by
following the instructions in the accompanying joint proxy
statement/information statement and prospectus. If you attend
the SCM special meeting and vote by ballot, then your proxy vote
will be revoked automatically and only your vote by ballot at
the SCM special meeting will be counted. Regardless of the
number shares of SCM that you own or whether or not you plan to
attend the SCM special meeting, it is important that your SCM
shares be represented and voted. No postage need be affixed if
your proxy card is mailed in the United States.
By Order of the SCM Board of Directors,
Stephan Rohaly
Secretary
Ismaning, Germany
February 13, 2009
SCMS
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR PROPOSAL 1 AND 2.
HIRSCH ELECTRONICS
CORPORATION
1900 CARNEGIE AVENUE, BUILDING B
SANTA ANA, CALIFORNIA 92705
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
To Be Held On March 11,
2009
Dear Hirsch Electronics Corporation Shareholders:
You are cordially invited to attend a special meeting of the
shareholders of Hirsch Electronics Corporation, a California
corporation (Hirsch). The meeting will be held at
Hirschs corporate headquarters located at
1900 Carnegie Avenue, Building B, Santa Ana, California
92705 on March 11, 2009 at 7:30 p.m. local time for the
following purposes:
1. To consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated December 10, 2008, by
and among Hirsch, SCM Microsystems, Inc., a Delaware corporation
(SCM), and two wholly-owned subsidiaries of SCM,
pursuant to which Hirsch will become a new Delaware limited
liability company and a wholly-owned subsidiary of SCM through a
two-step merger; and
2. To consider and vote upon an adjournment of the Hirsch
special meeting, if necessary, if a quorum is present, to
solicit additional proxies if there are not sufficient votes in
favor of the proposal described immediately above.
These proposals are more fully described in the accompanying
joint proxy statement/information statement and prospectus,
which we urge you to read very carefully. We have included a
copy of the Agreement and Plan of Merger as Annex A
to the accompanying joint proxy statement/information
statement and prospectus. Only Hirsch shareholders of record at
the close of business on February 10, 2009, the record date
for the Hirsch special meeting, are entitled to notice of and to
vote at the Hirsch special meeting or any adjournment or
postponement of the Hirsch special meeting.
The board of directors of Hirsch unanimously recommends that
you vote FOR Proposal No. 1 for adoption of the
Agreement and Plan of Merger and the transactions contemplated
thereby and FOR Proposal No. 2 for an adjournment of
the Hirsch special meeting, if necessary, to solicit additional
proxies if there are not sufficient votes in favor of the
foregoing Proposal No. 1.
Even if you plan to attend the Hirsch special meeting in
person, Hirsch requests that you sign and return the enclosed
Hirsch proxy card to ensure that your Hirsch shares will be
represented at the Hirsch special meeting if you are unable to
attend.
By Order of the Hirsch Board of Directors,
Lawrence W. Midland
President
Santa Ana, California
February 13, 2009
PLEASE DO
NOT SEND IN ANY HIRSCH STOCK CERTIFICATES AT THIS TIME; FURTHER
DOCUMENTATION FOR SUCH PURPOSE WILL BE SENT TO HIRSCH
SHAREHOLDERS AFTER
APPROVAL AND COMPLETION OF THE MERGER.
REFERENCE
TO ADDITIONAL INFORMATION
This joint proxy statement/information statement and prospectus
incorporates important business and financial information about
SCM from documents that SCM files with the SEC and which are not
included in or delivered with this joint proxy
statement/information statement and prospectus. You can obtain
such documents, other than certain exhibits to those documents,
by requesting them in writing or by telephone from SCM at the
following address:
In the United States:
SCM Microsystems, Inc.
41740 Christy Street
Fremont, CA 94538
+1
510-249-4883
ir@scmmicro.com
In Europe:
SCM Microsystems GmbH
Oskar-Messter-Straße 13
85737 Ismaning, Germany
+49 89
9595-5220
ir@scmmicro.com
You may also request more information directly from SCMs
proxy solicitor, Georgeson, Inc. by sending an email to the
following address: scm@georgeson.com.
You will not be charged for any documents that you request.
If you would like to request documents, please do so by
March 17, 2009 in order to receive timely delivery of the
documents in advance of the SCM special meeting. See the section
entitled Where You Can Find More Information for a
detailed description of the documents incorporated by reference
into this joint proxy statement/information statement and
prospectus.
Hirsch is not subject to the reporting requirements of
Section 13(a) or 15(d) of the Exchange Act. Accordingly,
Hirsch does not file documents with the SEC.
Information contained on the websites of SCM and Hirsch are
expressly not incorporated by reference into this joint proxy
statement/information statement and prospectus.
Important Notice Regarding the Availability of Proxy
Materials for the SCM Stockholder Meeting to Be Held on
March 23, 2009 and the Hirsch Shareholder Meeting to Be
Held on March 11, 2009.
The joint proxy statement/information statement and
prospectus is available at www.scmmicro.com.
ABOUT
THIS DOCUMENT
This joint proxy statement/information statement and prospectus
forms a part of a registration statement on
Form S-4
(Registration
No. 333-157067),
filed by SCM Microsystems, Inc. with the U.S. Securities
and Exchange Commission, and constitutes a prospectus of SCM
under Section 5 of the Securities Act of 1933, as amended,
and the rules thereunder, with respect to the shares of SCM
common stock and warrants to purchase shares of SCM common stock
to be issued to securityholders of Hirsch Electronics
Corporation in connection with the proposed merger and the
related transactions.
In addition, this joint proxy statement/information statement
and prospectus constitutes:
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A notice of meeting with respect to the SCM special meeting at
which SCMs stockholders will consider and vote on certain
proposals, including the proposal regarding the issuance of SCM
common stock and warrants to purchase shares of SCM common stock
in connection with merger;
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A proxy statement under Section 14(a) of the Securities
Exchange Act of 1934, as amended, and the rules thereunder, with
respect to the SCM special meeting;
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A notice of meeting with respect to the Hirsch special meeting
at which Hirschs shareholders will consider a proposal
regarding the merger; and
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An information statement with respect to the Hirsch special
meeting.
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NOTE REGARDING
TRADEMARKS
Opening the Digital World is a trademark of SCM; SCM, the SCM
logo, @MAXX, CHIPDRIVE and SmartOS are registered trademarks of
SCM.
The Hirsch logo, the Velocity logo, ScrambleSmart,
ScrambleSmartProx, MATCH, DIGI*TRAC, Hirsch Verification
Station, RUU-201, MOMENTUM, BioSmart, We Secure Buildings,
Upgrade to Hirsch, The Secure Decision, DigiLock, Rapid
Deployment Kit, ScrambleNet, XBox, NET*MUX4, S*NET, X*NET, SNIB
and SNIB2 are trademarks of Hirsch; ScramblePad, ScrambleProx
and IDK are registered trademarks of Hirsch.
This joint proxy statement/information statement and prospectus
may also include trademarks and trade names owned by other
parties, and all other such trademarks and trade names mentioned
in this joint proxy statement/information statement and
prospectus are the property of their respective owners.
TABLE OF
CONTENTS
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ii
ANNEXES
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Annex A
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Agreement and Plan of Merger
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Annex B
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Irrevocable Proxy and Voting Agreement
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Annex C
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Stockholder Agreement
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Annex D
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Form of Warrant Certificate
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Annex E
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Written Opinion of Avondale Partners, LLC
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Annex F
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Written Opinion of Imperial Capital, LLC
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Annex G
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First Amendment to SCM Rights Agreement
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Annex H
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Settlement Agreement between Hirsch Electronics Corporation,
Secure Keyboards, Ltd. and Secure Networks, Ltd.
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Annex I
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Amended and Restated Letters of Understanding between SCM and
each of Secure Keyboards, Ltd. and
Secure Networks, Ltd.
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Annex J
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Non-Competition and Non-Solicitation Agreement between SCM and
Lawrence W. Midland
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Annex K
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Employment Agreement between Hirsch Electronics Corporation and
Robert Beliles
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Annex L
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Employment Agreement between Hirsch Electronics Corporation and
Larry Midland
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Annex M
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Employment Agreement between Hirsch Electronics Corporation and
John Piccininni
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Annex N
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Employment Agreement between Hirsch Electronics Corporation and
Rob Zivney
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Annex O
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California Corporations Code, Sections 1300-1313
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iii
QUESTIONS
AND ANSWERS ABOUT THE MERGER,
THE SCM SPECIAL MEETING AND THE HIRSCH SPECIAL MEETING
The following section provides answers to certain frequently
asked questions about the proposed merger, SCM special meeting
of stockholders and Hirsch special meeting of shareholders.
Please note that this section may not address all issues that
may be important to you as an SCM stockholder or a Hirsch
shareholder. Accordingly, you should carefully read this entire
joint proxy statement/information statement and prospectus,
including each of the annexes.
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Why am I receiving this joint proxy statement/information
statement and prospectus? |
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You are receiving this joint proxy statement/information
statement and prospectus because you are either a stockholder of
SCM or a shareholder of Hirsch as of the respective record date
of SCMs special meeting of its stockholders or
Hirschs special meeting of its shareholders. This joint
proxy statement/information statement and prospectus is being
used by the boards of directors of each of SCM and Hirsch to
solicit your proxy for use at the SCM special meeting and to
solicit your proxy for use at the Hirsch special meeting,
respectively. This joint proxy statement/information statement
and prospectus also serves as the prospectus for shares of SCM
common stock and warrants to purchase shares of SCM common stock
to be issued in exchange for shares of Hirsch common stock and
warrants to purchase Hirsch common stock in connection with the
merger. |
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This joint proxy statement/information statement and prospectus
contains important information about the merger, the Merger
Agreement, the SCM special meeting and the Hirsch special
meeting, which you should read carefully before voting. The
enclosed voting materials allow you to cause your shares of SCM
common stock or Hirsch common stock, as the case may be, to be
voted, without attending the SCM special meeting and the Hirsch
special meeting in person. |
About the
Merger
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What is the merger? |
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The proposed merger is a two-step transaction that will result
in the combination of the businesses of SCM and Hirsch, whereby
Hirsch will become a wholly-owned subsidiary of SCM. |
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In exchange for their shares of Hirsch common stock and warrants
to purchase shares of Hirsch common stock, the securityholders
of Hirsch will receive cash, shares of SCM common stock and
warrants to purchase shares of SCM common stock. |
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More specifically, SCM, Deer Acquisition, Inc., a California
corporation and wholly-owned subsidiary of SCM (Merger Sub
1), Hart Acquisition LLC, a Delaware limited liability
company and wholly-owned subsidiary of SCM (Merger Sub
2) and Hirsch have entered into an Agreement and Plan of
Merger, dated as of December 10, 2008 (the Merger
Agreement). The Merger Agreement contains the terms and
conditions of the proposed combination of the businesses of SCM
and Hirsch. Under the terms of the Merger Agreement: |
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Merger Sub 1 will merge with and into Hirsch, with
Hirsch as the surviving corporation;
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as soon as reasonably practicable thereafter, Hirsch
will merge with and into Merger Sub 2, with Merger Sub 2 as the
surviving entity; and
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as a result of the mergers, the business and assets
of Hirsch will be held by a new Delaware limited liability
company and wholly-owned subsidiary of SCM (the Surviving
Subsidiary).
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The transactions described above are referred to as the
Merger in this joint proxy statement/information
statement and prospectus. |
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What if the Merger is not completed? |
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It is possible that the Merger and the other transactions
contemplated by the Merger Agreement will not be completed. This
might happen if, for example, SCMs stockholders do not
approve the issuance of the SCM shares and warrants in
connection with the Merger, or if Hirschs shareholders do
not approve the Merger. Should that occur, neither SCM nor
Hirsch will be under any obligation to make or consider any
alternative proposal regarding the combination of SCM and
Hirsch. In certain circumstances, however, SCM or Hirsch may be
obligated to pay the other party a termination fee and reimburse
the other party for certain expenses, as |
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further described in the section entitled The Merger
Agreement Termination in this joint proxy
statement/information statement and prospectus. |
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Why are SCM and Hirsch proposing to merge? |
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The board of directors of SCM has determined that the Merger and
the related transactions are in the best interests of SCM and
its stockholders in part because it presents a compelling
strategic opportunity for SCM to strengthen its position in the
security industry, expand its product offerings and customer
base, and increase its operational scale, among other reasons.
The board of directors of Hirsch has determined that the Merger
and the related transactions are in the best interests of Hirsch
and its shareholders in part because it allows Hirsch
shareholders to gain access to an equity interest in SCM and to
participate both in the future performance not only of Hirsch
but of SCM, and positions the combined company to pursue a
strategy focused on the industry trend towards convergence of
logical and physical access solutions. For a complete discussion
of SCMs and Hirschs reasons for the Merger, see the
sections entitled The Merger The SCM Reasons
for the Merger and The Merger The Hirsch
Reasons for the Merger in this joint proxy
statement/information statement and prospectus. |
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What vote is required by the SCM stockholders to consummate
the Merger? |
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To consummate the Merger, SCM stockholders must approve the
issuance of shares of SCM common stock and warrants to purchase
SCM common stock in the Merger. The approval of such issuance
requires the affirmative vote of a majority of the shares of SCM
common stock present in person or represented by proxy and
entitled to vote at the SCM special meeting at which a quorum is
present, whether voting in person or represented by proxy at the
SCM special meeting. |
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What vote is required by the Hirsch shareholders to
consummate the Merger? |
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To consummate the Merger, Hirsch shareholders must approve the
Merger, which requires the affirmative vote of the holders of a
majority of the outstanding Hirsch common stock as of the record
date for the Hirsch special meeting. In addition, pursuant to
the Merger Agreement, a condition to SCMs obligation to
complete the Merger is that the Merger shall have been approved
by Hirsch shareholders holding a majority of the shares of
Hirsch common stock outstanding as of the record date for the
Hirsch special meeting, without including the affirmative votes
of any shares of Hirsch common stock held or beneficially owned
by any of Hirschs directors who could be deemed to have a
material financial interest in the Merger or any of the
transactions contemplated in connection with the Merger. In
addition, pursuant to the Merger Agreement, an additional
condition to SCMs obligation to complete the Merger is
that not more than 10% of the outstanding shares of Hirsch shall
be dissenting shares which, among other things, are shares that
were not voted in favor of the Merger and for which a demand for
payment and appraisal has been properly made in accordance with
the California Corporations Code. |
|
Q. |
|
What is the irrevocable proxy and voting agreement and who
are the parties to that agreement? |
|
|
|
A. |
|
Each of the members of Hirschs board of directors, members
of management and their respective affiliates, have entered into
an irrevocable proxy and voting agreement with SCM, the Merger
Subs and Hirsch, providing that they will, solely in their
capacity as Hirsch shareholders, among other things, vote all of
their shares of Hirsch common stock in favor of the Merger and
the adoption of the Merger Agreement and against any other
action or agreement that is intended, or could reasonably be
expected to, impede, interfere with, delay, postpone, or
materially adversely affect the Merger or any of the other
transactions contemplated by the Merger Agreement. The Hirsch
shareholders party to the irrevocable proxy and voting agreement
also granted SCM an irrevocable proxy to vote their respective
shares of Hirsch common stock in accordance with such agreement
on their behalf. As of February 10, 2009, Hirsch
shareholders that entered into the irrevocable proxy and voting
agreement owned in the aggregate 1,021,456 shares of Hirsch
common stock, representing approximately 22% of the outstanding
shares of Hirsch common stock. For a more complete description
of the irrevocable proxy and voting agreement, see the section
entitled Certain Agreements Related to the
Merger Irrevocable Proxy and Voting Agreement
in this joint proxy statement/information statement and
prospectus. |
v
|
|
|
Q. |
|
Are there other conditions that need to be satisfied to
consummate the Merger? |
|
A. |
|
In addition to the requirement of obtaining SCM stockholder and
Hirsch shareholder approvals, each of the other closing
conditions set forth in the Merger Agreement must be satisfied
or waived by the appropriate party. For a summary of the
conditions that need to be satisfied to consummate the Merger,
see the section entitled The Merger Agreement
Conditions to the Completion of the Merger in this joint
proxy statement/information statement and prospectus. |
|
Q. |
|
What will Hirsch shareholders receive in the Merger? |
|
A. |
|
For each share of Hirsch common stock held immediately prior to
the effective time of the Merger, the record holder of such
share will received $3.00 cash (without interest and less any
applicable withholding taxes), two shares of SCM common stock
and one warrant to purchase one share of SCM common stock at an
exercise price of $3.00, exercisable for two years following the
third anniversary of the effective time of the Merger. |
|
Q. |
|
Will the amount of cash, number of shares of SCM common stock
or number of warrants to purchase shares of SCM common stock
payable or issuable to Hirsch shareholders in connection with
the Merger be subject to any adjustment, for example if
SCMs stock price fluctuates? |
|
A. |
|
No. The amount of cash, number of shares of SCM common
stock and number of warrants to purchase shares of SCM common
stock to be paid or issued, or reserved for issuance in
connection with the Merger for each share of Hirsch common
stock, is fixed. |
|
Q. |
|
Will SCM common stock issued in connection with the Merger be
registered and listed on an exchange? |
|
|
|
A. |
|
Yes. The SCM common stock issued as merger consideration will be
registered under the Securities Act of 1933, as amended, and
will be listed on the NASDAQ Stock Market under the symbol
SCMM and on the Prime Standard of the Frankfurt
Stock Exchange under the symbol SMY. The shares of
SCM common stock issuable upon the exercise of the warrants to
purchase SCM common stock in connection with the Merger will not
be registered on the registration statement on
Form S-4
of which this joint proxy statement/information statement is a
part. SCM intends to comply with any applicable securities
regulations and registration requirements for any such issuance
prior to the time the warrants become exercisable according to
their terms. |
|
|
|
Q. |
|
Will there be any transfer restrictions affecting the shares
of SCM common stock or warrants to purchase shares of SCM common
stock issuable to Hirsch shareholders in connection with the
Merger? |
|
A. |
|
Yes. The shares of SCM common stock to be issued to Hirsch
shareholders in connection with the Merger will be subject to a
lock-up that
prohibits Hirsch shareholders from, among other restrictions,
selling or otherwise disposing of or transferring any shares of
SCM common stock received in connection with the Merger. This
lock-up is
effective for six months from the closing date for 50% of the
SCM common stock issued to Hirsch shareholders in connection
with the Merger, and is effective for nine months from the
closing date for the remainder of the shares. Consequently, the
Hirsch shareholders will have to bear the economic risk of
holding the SCM shares for the period of the
lock-up. |
|
|
|
Subject to certain limited exceptions, the warrants to purchase
shares of SCM common stock issuable to Hirsch shareholders in
connection with the Merger will not be transferable by the
holder without the prior written consent of SCM, and will not be
listed on the NASDAQ Stock Market or otherwise publicly traded. |
|
|
|
In addition, if you will be an employee of SCM or the Surviving
Subsidiary after the closing, your shares may be subject to
SCMs insider trading policies. |
|
|
|
For more information regarding the transfer restrictions
affecting the shares of SCM common stock or warrants to purchase
shares of SCM common stock issuable to Hirsch shareholders in
connection with the Merger, see the sections entitled The
Merger Agreement
Lock-Up,
Certain Agreements Related to the Merger
Warrants, and Certain Agreements Related to the
Merger Stockholder Agreement in this joint
proxy statement/information statement and prospectus. |
vi
|
|
|
Q. |
|
What is the stockholder agreement and who are the parties to
that agreement? |
|
|
|
A. |
|
Several Hirsch shareholders, including each of the members of
Hirschs board of directors, members of management and
their respective affiliates, have entered into a stockholder
agreement with SCM. Under the terms of the stockholder
agreement, the Hirsch shareholders party thereto have agreed
that for three years following the closing date of the Merger
they will not propose or enter into any acquisition transaction
or take certain other hostile actions with respect to SCM. In
addition, under the terms of the stockholder agreement, Lawrence
W. Midland and certain of his affiliates have agreed not to sell
or transfer, or otherwise dispose of the shares of SCM common
stock received in the Merger until one year after the closing
date of the Merger with respect to 33% of the shares,
18 months after the closing date with respect to 33% of the
shares, and two years after the closing date with respect to the
remaining shares. As of February 10, 2009, the shareholders
of Hirsch that entered into the stockholder agreement owned in
the aggregate 1,021,456 shares of Hirsch common stock,
representing approximately 22% of the outstanding Hirsch common
stock. For more information regarding the stockholder agreement,
see the section entitled Certain Agreements Related to the
Merger Stockholder Agreement in this joint
proxy statement/information statement and prospectus. |
|
|
|
Q. |
|
What will happen to the Hirsch options? |
|
A. |
|
At the effective time of the Merger, each option to purchase
shares of Hirsch common stock outstanding and unexercised
immediately prior to the effective time of the Merger will be
terminated and cancelled. For more information regarding the
treatment of the Hirsch Options, see the section entitled
The Merger Agreement Merger
Consideration Treatment of Hirsch Options and
Warrants in this joint proxy statement/information
statement and prospectus. |
|
Q. |
|
What will happen to the Hirsch warrants? |
|
A. |
|
At the effective time, each warrant to purchase shares of Hirsch
common stock outstanding and not terminated or exercised
immediately prior to the effective time of the Merger will be
converted into a warrant to purchase the number of shares of SCM
common stock calculated according to the conversion ratio as
defined in the Merger Agreement. For more information regarding
the treatment of the Hirsch Warrants and the conversion ratio,
see the section entitled The Merger Agreement
Merger Consideration Treatment of Hirsch Options and
Warrants in this joint proxy statement/information
statement and prospectus. |
|
Q. |
|
Will there be any change to the shares of SCM common stock
held by SCMs stockholders? |
|
A. |
|
No. The Merger does not result in any changes to the
existing shares of SCM common stock. The current stockholders of
SCM will continue to be stockholders of SCM after the Merger. |
|
Q. |
|
Who will be the directors of SCM following the Merger? |
|
A. |
|
Immediately following the effective time of the Merger, the
board of directors of SCM is expected to be composed of the
following members: |
|
|
|
Name
|
|
Title
|
|
Werner Koepf
|
|
Chairman of the Board
|
Dr. Hagen Hultzsch
|
|
Director
|
Steven Humphreys
|
|
Director
|
Dr. Hans Liebler
|
|
Director
|
Felix Marx
|
|
Chief Executive Officer and Director
|
Lawrence W. Midland
|
|
Executive Vice President, President of the Surviving Subsidiary
and Director
|
Stephan Rohaly
|
|
Chief Financial Officer and Director
|
Simon Turner
|
|
Director
|
vii
|
|
|
Q. |
|
Who will be the executive officers of SCM immediately
following the Merger? |
|
A. |
|
Immediately following the effective time of the Merger, the
executive officers of SCM are expected to be composed of the
following members: |
|
|
|
Name
|
|
Title
|
|
Felix Marx
|
|
Chief Executive Officer
|
Stephan Rohaly
|
|
Vice President, Chief Financial Officer and Secretary
|
Eang Sour Chhor
|
|
Executive Vice President, Strategy, Marketing and Engineering
|
Lawrence W. Midland
|
|
Executive Vice President, Hirsch Business Division
|
Dr. Manfred Mueller
|
|
Executive Vice President, Strategic Sales and Business
Development
|
|
|
|
Q. |
|
Who will be the directors of the Surviving Subsidiary
immediately following the Merger? |
|
A. |
|
As a result of the Merger, the Surviving Subsidiary will be a
new Delaware limited liability company and a wholly-owned
subsidiary of SCM. The Surviving Subsidiary will have no
directors and will be managed by SCM as the sole member. |
|
Q. |
|
Who will be the executive management of the Surviving
Subsidiary immediately following the Merger? |
|
A. |
|
Immediately following the effective time of the Merger, the
executive management team of the Surviving Subsidiary is
expected to be composed of the following members: |
|
|
|
Name
|
|
Title
|
|
Lawrence W. Midland
|
|
President
|
Robert Beliles
|
|
Vice President of Enterprise Business Development
|
John Piccininni
|
|
Vice President of Sales
|
Robert Zivney
|
|
Vice President of Marketing
|
|
|
|
Q. |
|
What are the material U.S. federal income tax consequences of
the Merger to Hirsch shareholders and warrant holders? |
|
|
|
A. |
|
SCM and Hirsch have structured the Merger with the intent that
it qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986. If the Merger qualifies as such a
reorganization, Hirsch shareholders will recognize taxable
income as a result of the Merger equal to the lesser of
(i) the amount of cash received and (ii) the total
gain on the transaction. If the Merger qualifies as such a
reorganization, Hirsch warrant holders will not be subject to
tax as a result of the Merger. The qualification of the Merger
as a reorganization depends on numerous factors including
whether Hirsch shareholders will receive a sufficient amount of
SCM common stock to satisfy the continuity of
interest test applicable to reorganizations under
Section 368 of the Internal Revenue Code of 1986, as
amended. Whether the Merger meets that test depends in large
part on the value of the SCM stock issued to Hirsch shareholders
as compared to the value of all consideration issued to Hirsch
shareholders. Based on an estimated valuation, the Merger should
satisfy the continuity of interest test. If, however, the
Internal Revenue Service were to challenge the valuation and
successfully contend that the Merger failed to qualify as a
reorganization, the Merger would be a fully taxable transaction
to Hirsch shareholders and warrant holders. In such case, Hirsch
shareholders and warrant holders would recognize gain or loss
measured by the difference between the value of all
consideration received by them in the Merger and their tax basis
in the Hirsch common stock and the warrants, as the case may be,
surrendered in the Merger. For additional discussion of the tax
treatment of the Merger, see the section entitled Material
United States Income Tax Consequences of the Merger in
this joint proxy statement/information statement and prospectus. |
|
|
|
Q: |
|
What are the material U.S. federal income tax consequences of
the Merger to SCM stockholders? |
|
|
|
A: |
|
SCM stockholders will not recognize a gain or loss as a result
of the Merger, whether or not the Merger qualifies as a
reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended. |
viii
|
|
|
Q: |
|
Do Hirsch shareholders have appraisal or dissenters
rights in connection with the Merger? |
|
A: |
|
Yes. Hirsch shareholders are entitled to exercise
dissenters rights in connection with the Merger by
complying with all of the California law procedures discussed in
the section entitled The Merger Appraisal
Rights and Dissenters Rights and in
Annex O. To exercise dissenters rights in
connection with the Merger, a Hirsch shareholder must not vote
his or her shares of Hirsch common stock in favor of the Merger
and must make a written demand to have Hirsch purchase the
shares at their fair market value. Failure to follow precisely
any of the statutory procedures set forth in Annex O
may result in the loss or waiver of dissenters rights
under California law. |
|
Q: |
|
Do SCM stockholders have appraisal or dissenters rights
in connection with the Merger? |
|
A: |
|
No. SCM stockholders do not have appraisal or
dissenters rights in connection with the issuance of the
shares of SCM common stock or warrants to purchase shares of SCM
common stock in connection with the Merger or the Merger. |
|
Q. |
|
As a SCM stockholder, how does the SCM board of directors
recommend that I vote? |
|
A. |
|
After careful consideration, the SCM board of directors
recommends that SCM stockholders vote: |
|
|
|
FOR Proposal No. 1 to approve the issuance
of the shares of SCM common stock and the warrants to purchase
shares of SCM common stock in connection with the Merger; and
|
|
|
|
FOR Proposal No. 2 to adjourn the SCM
special meeting, if necessary, to solicit additional proxies if
there are not sufficient votes in favor of
Proposal No. 1.
|
|
Q. |
|
As a Hirsch shareholder, how does the Hirsch board of
directors recommend that I vote? |
|
A. |
|
After careful consideration, the Hirsch board of directors
recommends that Hirsch shareholders vote: |
|
|
|
FOR Proposal No. 1 to approve and adopt
the Merger and the Merger Agreement; and
|
|
|
|
FOR Proposal No. 2 to adjourn the Hirsch
special meeting, if necessary, to solicit additional proxies if
there are not sufficient votes in favor of
Proposal No. 1.
|
|
Q. |
|
What risks should I consider in deciding how to vote? |
|
A. |
|
You should carefully read this entire joint proxy
statement/information statement and prospectus, including each
of the annexes, and pay specific attention to the section
entitled Risk Factors, which sets forth certain
risks and uncertainties related to the Merger and the businesses
of SCM and Hirsch. |
|
Q. |
|
When do you expect the Merger to be consummated? |
|
|
|
A. |
|
Hirsch and SCM cannot predict the exact timing of the completion
of the Merger and the related transactions. We currently
anticipate that the Merger will occur as soon as reasonably
practicable after the satisfaction or waiver by the appropriate
party of each of the closing conditions set forth in the Merger
Agreement. One of the closing conditions is that the required
approvals are obtained at the SCM special meeting to be held on
March 23, 2009 and the Hirsch special meeting to be held
March 11, 2009. For more information regarding timing, see
the section entitled The Merger Agreement
Conditions to the Completion of the Merger in this joint
proxy statement/information statement and prospectus. |
|
|
|
Q. |
|
What do SCM stockholders need to do now? |
|
A. |
|
SCM urges its stockholders to read this joint proxy
statement/information statement and prospectus carefully,
including its annexes, and to consider how the Merger affects
them. If you are a stockholder of SCM, you are further urged to
provide your proxy instructions by mailing your signed SCM proxy
card in the enclosed return envelope or by voting by telephone
or via the Internet following the instructions on your proxy
card. Please provide your proxy instructions only once, unless
you are revoking a previously delivered proxy instruction, and
as soon as possible so that your shares can be voted at the SCM
special meeting. |
ix
|
|
|
Q. |
|
What do Hirsch shareholders need to do now? |
|
A. |
|
Hirsch urges its shareholders to read this joint proxy
statement/information statement and prospectus carefully,
including its annexes, and to consider how the Merger affects
them. If you are a shareholder of Hirsch, you are further urged
to provide your proxy instructions by mailing your Hirsch signed
proxy in the enclosed return envelope. Please provide your proxy
instructions only once, unless you are revoking a previously
delivered proxy instruction, and as soon as possible so that
your shares can be voted at the Hirsch special meeting. |
About the
SCM special meeting and the Hirsch special meeting
|
|
|
Q. |
|
When and where is the SCM special meeting of stockholders? |
|
|
|
A. |
|
The SCM special meeting will be held at SCMs U.S. office,
located at 41740 Christy Street, Fremont, California 94538, at
1:00 p.m., local time, on March 23, 2009. All SCM
stockholders as of the record date, or their duly appointed
proxies, may attend the SCM special meeting. |
|
|
|
Q. |
|
When and where is the Hirsch special meeting of
shareholders? |
|
|
|
A. |
|
The Hirsch special meeting will be held at Hirschs
corporate headquarters located at 1900 Carnegie Avenue,
Santa Ana, California 92705, at 7:30 p.m., local time, on
March 11, 2009. Subject to space availability, all Hirsch
shareholders as of the record date, or their duly appointed
proxies, may attend the Hirsch special meeting. Since seating
may be limited, admission to the Hirsch special meeting will be
on a first-come, first-served basis. |
|
|
|
Q. |
|
Who can attend and vote at the SCM special meeting of
stockholders? |
|
|
|
A. |
|
Only holders of record of SCM common stock at the close of
business on February 11, 2009 (the SCM record
date), are entitled to notice of, and to vote at, the SCM
special meeting. As of the SCM record date, there were
15,743,515 shares of SCM common stock outstanding and entitled
to vote at the SCM special meeting, held by approximately
55 holders of record. Each holder of SCM common stock is
entitled to one vote for each share of SCM common stock owned as
of the SCM record date. |
|
|
|
Q. |
|
Who can attend and vote at the Hirsch special meeting of
shareholders? |
|
|
|
A. |
|
Only holders of record of Hirsch stock at the close of business
on February 10, 2009 (the Hirsch record date),
are entitled to notice of and to vote at the Hirsch special
meeting. As of the Hirsch record date, there were 4,705,735
shares of Hirsch stock outstanding and entitled to vote at the
Hirsch special meeting, held by approximately 315 holders
of record. Each holder of Hirsch stock is entitled to one vote
for each share of Hirsch stock owned as of the Hirsch record
date. |
|
|
|
Q. |
|
What happens if I do not return a proxy card or otherwise
provide proxy instructions, as applicable? |
|
A. |
|
If you are a SCM stockholder, the failure to return your proxy
card or otherwise provide proxy instructions or vote your shares
in person will result in your shares not being counted for
purposes of determining whether a quorum is present at the SCM
special meeting. In the event that a quorum is not reached or
the necessary votes are not received, the SCM special meeting
will have to be adjourned to provide more time to obtain a
quorum and the necessary votes. |
|
|
|
If you are a Hirsch shareholder, the failure to return your
proxy or otherwise provide proxy instructions or vote your
shares in person will have the same effect as voting against
Hirsch Proposal No. 1 and your shares will not be counted
for purposes of determining whether a quorum is present at the
Hirsch special meeting. In the event that a quorum is not
reached or the necessary votes are not received, the Hirsch
special meeting will have to be adjourned and recalled for
another vote. |
|
Q. |
|
May I vote in person at the SCM special meeting of
stockholders? |
|
A. |
|
If your shares of SCM common stock are registered directly in
your name with the SCM transfer agent, then you are considered
to be the stockholder of record with respect to those shares,
and the proxy materials and SCM proxy card are being sent
directly to you by SCM. If you are a SCM stockholder of record,
you may attend the |
x
|
|
|
|
|
SCM special meeting and vote your shares in person. However,
even if you plan to attend the SCM special meeting in person,
SCM requests that you sign and return the enclosed SCM proxy
card or vote your shares by telephone or via the Internet to
ensure that your shares will be represented at the SCM special
meeting, if you are unable to attend. If your shares of SCM
common stock are held in a brokerage account or by another
nominee, then you are considered the beneficial owner of shares
held in street name, and the proxy materials are
being forwarded to you by your broker or other nominee together
with a voting instruction card to return to your broker or other
nominee to direct them to vote on your behalf. As the beneficial
owner, you are also invited to attend the SCM special meeting.
Because a beneficial owner is not the stockholder of record,
however, you may not vote these shares in person at the SCM
special meeting unless you obtain a proxy from the broker,
trustee or nominee that holds your shares, giving you the right
to vote the shares at the meeting. |
|
Q. |
|
May I vote in person at the Hirsch special meeting of
shareholders? |
|
A. |
|
If your shares of Hirsch common stock are registered directly in
your name with Hirsch, then you are considered to be the
shareholder of record with respect to those shares, and the
proxy materials and Hirsch proxy are being sent directly to you
by Hirsch. If you are a Hirsch shareholder of record, you may
attend the Hirsch special meeting and vote your shares in
person. However, even if you plan to attend the Hirsch special
meeting in person, Hirsch requests that you sign and return the
enclosed proxy to ensure that your shares will be represented at
the Hirsch special meeting. |
|
Q. |
|
If my shares are held in street name by my
broker, will my broker vote my shares for me? |
|
A. |
|
Unless your broker has discretionary authority to vote on
certain matters, your broker will not be able to vote your
shares of SCM or Hirsch stock without instructions from you.
Brokers are not expected to have discretionary authority to vote
for the SCM or Hirsch proposals, respectively. Therefore, in
order to make sure that your vote is counted, you should
instruct your broker to vote your shares following the
procedures provided by your broker. |
|
Q. |
|
May I change my vote after I have submitted a proxy or
provided proxy instructions? |
|
A. |
|
SCM stockholders of record may change their vote at any time
before their proxy is voted at the SCM special meeting in either
of the following manners: First, a stockholder of record of SCM
can send a written notice to the Secretary of SCM stating that
he or she would like to revoke his or her prior proxy
submission. Second, a stockholder of record of SCM can attend
the SCM special meeting and vote in person. Attendance alone
will not revoke a proxy. If a SCM stockholder of record or a
stockholder who owns SCM shares in street name has
instructed a broker to vote his or her shares of SCM common
stock, the stockholder must follow directions received from his
or her broker to change those instructions. |
|
|
|
Hirsch shareholders of record, other than those Hirsch
shareholders who have executed voting agreements, may change
their vote at any time before their proxy is voted at the Hirsch
special meeting in either of the following manners: First, a
shareholder of record of Hirsch can send a written notice to the
Secretary of Hirsch stating that he or she would like to revoke
his or her proxy. Second, a shareholder of record of Hirsch can
attend the Hirsch special meeting and vote in person. Attendance
alone will not revoke a proxy. |
|
Q. |
|
What should a SCM stockholder do if he or she receives more
than one set of voting materials? |
|
A. |
|
As a SCM stockholder, you may receive more than one set of
voting materials, including multiple copies of this joint proxy
statement/information statement and prospectus and multiple SCM
proxy cards or voting instruction cards. For example, if you
hold your SCM shares in more than one brokerage account, you
will receive a separate voting instruction card for each
brokerage account in which you hold SCM shares. If you are a
holder of record and your SCM shares are registered in more than
one name, you will receive more than one proxy card. In
addition, if you are a holder of both SCM common stock and
Hirsch common stock, you will receive one or more separate proxy
cards or voting instruction cards for each company. Please
complete, sign, date and return each proxy card and voting
instruction card that you receive or otherwise follow the voting
instructions set forth in this joint proxy statement/information
statement and prospectus in the sections entitled The SCM
special meeting of Stockholders and The Hirsch
special meeting of Shareholders. |
xi
|
|
|
Q. |
|
What should a Hirsch shareholder do if he or she receives
more than one set of voting materials? |
|
A. |
|
As a Hirsch shareholder, you may receive more than one set of
voting materials, including multiple copies of this joint proxy
statement/information statement and prospectus and multiple
proxy cards or voting instruction cards. For example, if you
hold your Hirsch shares in more than one brokerage account, you
will receive a separate voting instruction card for each
brokerage account in which you hold Hirsch shares. If you are a
holder of record and your Hirsch shares are registered in more
than one name, you will receive more than one proxy card. In
addition, if you are a holder of both SCM common stock and
Hirsch common stock, you will receive one or more separate proxy
cards or voting instruction cards for each company. Please
complete, sign, date and return each proxy card and voting
instruction card that you receive or otherwise follow the voting
instructions set forth in this joint proxy statement/information
statement and prospectus in the sections entitled The SCM
special meeting of Stockholders and The Hirsch
special meeting of Shareholders. |
|
Q. |
|
Should Hirsch shareholders send in their Hirsch stock or
warrant certificates now? |
|
A. |
|
No. After the Merger is completed, Hirsch shareholders will
be sent written instructions for exchanging their Hirsch stock
and warrant certificates for the merger consideration. PLEASE
DO NOT SEND IN YOUR HIRSCH SHARE CERTIFICATES NOW OR WITH YOUR
HIRSCH PROXY CARD. |
|
Q. |
|
Who can help answer my questions? |
|
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If you are a SCM stockholder and would like additional copies,
without charge, of this joint proxy statement/information
statement and prospectus, or if you have questions about the
Merger, including the procedures for voting your shares, you
should contact: |
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In the United States: |
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SCM Microsystems, Inc.
41740 Christy Street
Fremont, CA 94538
+1
510-249-4883
ir@scmmicro.com |
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In Europe: |
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SCM Microsystems GmbH
Oskar-Messter-Straße 13
85737 Ismaning, Germany
+49 89
9595-5220
ir@scmmicro.com |
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You may also request more information directly from SCMs
proxy solicitor, Georgeson, Inc. by sending an email to the
following address: scm@georgeson.com. |
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If you are a Hirsch shareholder, and would like additional
copies, without charge, of this proxy statement/information
statement and prospectus, or if you have questions about the
Merger, including the procedures for voting your shares, you
should contact: |
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Hirsch Electronics Corporation
1900 Carnegie Avenue, Building B
Santa Ana, California 92705
Telephone:
949-250-8888
Extension 106
Attn: Secretary |
xii
SUMMARY
This summary highlights selected information from this joint
proxy statement/information statement and prospectus. It does
not contain all of the information that may be important to you.
We encourage you to carefully read this entire joint proxy
statement/information statement and prospectus, including
annexes, and the other documents to which this joint proxy
statement/information statement and prospectus refers, to fully
understand the merger proposals to be considered at the SCM
special meeting and the Hirsch special meeting.
Information
About SCM Microsystems and Hirsch Electronics
SCM
Microsystems, Inc.
SCM Microsystems, Inc.
41740 Christy Street
Fremont, CA 94538
+1 510-249-4883
SCM Microsystems GmbH
Oskar-Messter-Straße 13
85737 Ismaning, Germany
+49 89 9595-5220
Founded in 1990 in Munich, Germany, incorporated in Delaware in
1996 and publicly traded on both the NASDAQ Stock Market and the
Prime Standard of the Frankfurt Stock Exchange, SCM designs,
develops and sells hardware and system solutions that enable
people to conveniently and securely access digital content and
services. SCM sells its secure digital access products into two
market segments: Secure Authentication and Digital Media and
Connectivity. SCMs Secure Authentication products enable
authentication of individuals for applications such as
electronic passports and drivers licenses, electronic
healthcare cards, secure logical access to PCs and networks, and
physical access to facilities. In the Digital Media and
Connectivity market, SCM offers commercial digital media readers
that are used in digital photo kiosks to transfer digital
content to and from various flash media. SCM sells its products
to original equipment manufacturers, government contractors,
systems integrators, large enterprises, computer manufacturers,
banks, and other financial institutions.
Hirsch
Electronics Corporation
Hirsch Electronics Corporation
1900 Carnegie Avenue, Building B
Santa Ana, CA. 92705
949-250-8888
Incorporated in California in 1981, Hirsch Electronics
Corporation, a privately-held corporation, designs, engineers,
manufactures and markets software and hardware in the security
management system/physical access control market. Hirschs
business includes full-featured electronic access control
systems and a wide range of products and professional services
including enterprise-class security management systems with
integrated access control, intrusion detection, badging and
video features. Hirsch also buys and resells various security
related products, computers, peripherals and accessories. Hirsch
sells its products through a dealer/systems integrator
distribution channel. Hirsch products are sold in dozens of
countries, and the majority of sales are located in the United
States. The next most significant regions for Hirschs
business are Europe and Asia. Hirsch products are sold in every
major industry segment, with the highest number of Hirsch sales
occurring in market segments requiring a
higher-than-average
level of security effectiveness, such as government, critical
infrastructure, banking, healthcare and education.
Merger
Subs
Deer Acquisition, Inc. is a California corporation and
wholly-owned subsidiary of SCM. Merger Sub 1 was formed solely
for the purposes of carrying out the Merger and it has not
conducted any business operations.
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Hart Acquisition LLC is a Delaware limited liability company and
wholly-owned subsidiary of SCM. Merger Sub 2 was formed solely
for the purposes of carrying out the Merger and has not
conducted any business operations.
The
Merger (see page 53)
Through a two-step merger, Hirsch will become a new Delaware
limited liability company and a wholly-owned subsidiary of SCM.
The business of Hirsch and SCM will be combined and Merger Sub 1
will merge with and into Hirsch, with Hirsch as the surviving
corporation. As soon as reasonably practicable thereafter,
Hirsch will merge with and into Merger Sub 2, with Merger Sub 2
as the surviving entity.
In exchange for their shares of Hirsch common stock, Hirsch
shareholders will receive $3.00 cash (without interest and less
any applicable withholding taxes), two shares of SCM common
stock and a warrant to purchase one share of SCM common stock at
an exercise price of $3.00. Each warrant to purchase Hirsch
common stock outstanding and not terminated or exercised
immediately prior to the effective time of the Merger will be
converted into a warrant to purchase shares of SCM common stock.
All options to purchase shares of Hirsch common stock
outstanding and unexercised immediately prior to the effective
time of the Merger will be terminated and cancelled.
Reasons
for the Merger (see page 56)
SCMs
Reasons for the Merger
In reaching its unanimous decision to approve the Merger, the
SCM board of directors considered a number of factors including,
among other factors:
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the belief of the SCM board of directors that SCM after the
Merger will be better positioned to pursue and implement a
strategy focused on the concept of convergence, the much
anticipated industry trend which combines both the logical and
physical methods of access for security systems;
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the fact that both companies are strong in the
U.S. government sector, but have complementary areas of
concentration;
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the fact that Hirschs strength in the U.S. commercial
market is complemented by SCMs activities in the
enterprise and financial markets in Europe and Asia;
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the belief that the Merger would increase SCMs revenues,
net income and internal resources and provide greater
operational scale and financial solidity; and
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the results of SCMs due diligence review of Hirschs
business, finances and operations and its evaluation of
Hirschs management, competitive positions and prospects.
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For more information regarding SCMs reasons for approving
the Merger, see the section entitled The
Merger The SCM Reasons for the Merger.
Hirschs
Reasons for the Merger
In reaching its unanimous decision to approve the Merger, the
Hirsch board of directors considered a number of factors
including, among other factors:
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the fact that the Merger will allow the Hirsch shareholders to
gain an equity interest in SCM, thus providing a vehicle for
continued participation by the Hirsch shareholders in the future
performance of not only the Surviving Subsidiary, but also of
SCM;
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the increased liquidity available to Hirsch shareholders through
receipt of the cash portion of the consideration and the
registered shares of SCM;
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the belief of the Hirsch board of directors that the combined
company after the Merger will be better positioned to pursue and
implement a strategy focused on the concept of convergence, the
much anticipated industry trend which combines both the logical
and physical methods of access for security systems;
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the likelihood in the judgment of the board of directors of
Hirsch that the conditions to be satisfied prior to consummation
of the Merger transaction will be satisfied or waived; and
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under the terms of the Merger Agreement, another party could
make a superior acquisition proposal which could be accepted by
the board of directors of Hirsch, and that the termination fee,
payable to SCM in such situation, would not be a significant
impediment to accepting such proposal.
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For more information regarding Hirschs reasons for
approving the Merger, see the section entitled The
Merger The Hirsch Reasons for the Merger.
Both SCM and Hirsch believe that the Merger will be in the best
interests of their respective stockholders and shareholders.
However, achieving these anticipated benefits of the Merger is
subject to risk and uncertainty, including those risks discussed
in the section entitled Risk Factors.
Risk
Factors (see page 12)
SCM and Hirsch are subject to numerous risks associated with
their businesses and their industries. In addition, the Merger,
including the possibility that the closing of the Merger may be
delayed or not be completed at all, poses a number of unique
risks to both SCM stockholders and the Hirsch shareholders,
including the following risks:
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SCM and Hirsch may not realize all of the anticipated benefits
of the transactions;
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SCM may pay a higher price for Hirsch common stock if the value
of SCM common stock increases, because the value of the SCM
common stock issued in connection with the Merger will depend on
its market price at the time of the Merger and the exchange
ratio for the Hirsch shares of common stock at the closing of
the Merger is fixed;
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the Merger may not qualify as a reorganization under
Section 368 of the Internal Revenue Code, as amended, in
which case the Merger may be a fully-taxable transaction to
Hirsch shareholders;
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provisions of the Merger Agreement may deter alternative
business combinations;
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Hirschs current shareholders will own a large percentage
of the SCM common stock after consummation of the Merger, and
will have significant influence over the outcome of corporate
actions requiring stockholder approval; and such
shareholders priorities for SCMs business may be
different from SCMs or its other stockholders;
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SCM and Hirsch will incur significant transaction and
merger-related costs in connection with the Merger;
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if SCM or Hirsch has to pay the termination fee, it could
negatively affect Hirschs business operations or
SCMs business operations;
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the market price of SCM common stock could decline as a result
of the large number of shares that will become eligible for sale
after consummation of the Merger;
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SCM may not have uncovered all the risks associated with the
acquisition of Hirsch and a significant liability may be
discovered after closing of the Merger, and the Merger Agreement
does not provide for SCMs indemnification by the former
Hirsch shareholders against any of Hirschs liabilities,
should they arise or become known after the closing of the
Merger;
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directors of Hirsch have interests in the transaction that may
be different from, or in addition to, the interests of other
Hirsch shareholders, which may influence their recommendation
and vote;
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there has been no public market for the Hirsch common stock and
warrants to purchase Hirsch common stock, and the lack of a
public market makes it extremely difficult to determine the fair
market value of Hirsch; and
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if the conditions to the Merger are not met or waived, the
Merger will not occur.
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These risks and other risks are discussed in greater detail in
the section entitled Risk Factors in this joint
proxy statement/information statement and prospectus. SCM and
Hirsch encourage SCM stockholders and Hirsch shareholders to
read and consider all of these risks carefully.
Market
Price And Dividend Information (see page 51)
The closing sale price per share of SCM common stock as reported
on the NASDAQ Stock Market on December 10, 2008, the last
full trading day prior to the public announcement of entry into
the Merger Agreement was $1.27, and the closing sale price per
share of SCM common stock on February 11, 2009 (the last
practicable trading date before the filing of this joint proxy
statement/information statement and prospectus) as reported on
the NASDAQ Stock Market was $2.67 per share. Following the
consummation of the Merger, SCMs common stock, including
the shares of SCM common stock issued in connection with the
Merger, are expected to continue to trade on the NASDAQ Stock
Market under the symbol SCMM and on the Prime
Standard of the Frankfurt Stock Exchange under the symbol
SMY.
SCM has never declared nor paid cash dividends on its capital
stock. SCM currently intends to retain earnings, if any, to
finance the growth and development of its business, and does not
expect to pay any cash dividends to its stockholders in the
foreseeable future.
There has never been, nor is there expected to be in the future,
a public market for Hirschs ordinary shares. As of
February 10, 2009, Hirsch had approximately 315
shareholders of record. Hirsch has never declared or paid any
cash dividends on its capital stock, nor does it intend to do so
in the foreseeable future.
For more information, see the section entitled Market
Price and Dividend Information.
Opinion
of the Financial Advisor of SCM (see page 64)
Avondale Partners, the financial advisor of SCM, delivered a
written opinion, dated December 9, 2008, addressed to the
board of directors of SCM, to the effect that, as of the date of
the opinion and based on and subject to various assumptions,
qualifications, and limitations described in the opinion, the
consideration to be to be paid by SCM in the Merger was fair,
from a financial point of view, to SCM. The full text of this
written opinion to the SCM board of directors, which describes,
among other things, the assumptions made, procedures followed,
factors considered and limitations on the review undertaken, is
attached as Annex E to this joint proxy
statement/information statement and prospectus. Holders of SCM
common stock are encouraged to read the opinion carefully in its
entirety.
Opinion
of Imperial Capital, LLC to the Board of Directors of Hirsch
(see page 70)
Imperial Capital, LLC rendered a written opinion to the board of
directors of Hirsch, on December 10, 2008, that, as of that
date, and based on and subject to various assumptions,
qualifications and limitations set forth in the opinion, the
Aggregate Consideration to Non-Insiders (as defined in the
opinion) was fair, from a financial point of view, to the
holders of Hirsch common stock other than Lawrence W. Midland.
The full text of this written opinion to the Hirsch board of
directors, which describes, among other things, the assumptions
made, procedures followed, factors considered and limitations on
the review undertaken, is attached as Annex F to
this joint proxy statement/information statement and prospectus.
Holders of Hirsch common stock are encouraged to read the
opinion carefully in its entirety.
Overview
of the Merger Agreement
The Merger Agreement contains the terms and conditions of the
proposed combination of the businesses of SCM and Hirsch.
Merger
Consideration
At the effective time of the Merger, each share of issued and
outstanding Hirsch common stock existing immediately prior to
the effective time of the Merger will, without any action on the
part of the shareholder thereof, automatically be retired and
cease to exist, and be converted into the right to receive $3.00
cash, without interest and less any applicable withholding
taxes, two shares of SCM common stock, and a warrant to purchase
one share of SCM common stock at an exercise price of $3.00;
provided that the following shares will not be so converted:
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shares owned by SCM or the Merger Subs;
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shares held by Hirsch; and
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shares which are held by shareholders properly demanding and
perfecting dissenters rights pursuant to
Sections 1300-1313
of the California Corporations Code.
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At the effective time, each option to purchase shares of Hirsch
common stock outstanding and unexercised immediately prior to
the effective time of the Merger will be terminated and
cancelled, and neither SCM, the Merger Subs, nor the Surviving
Subsidiary will assume or be bound by any obligation with
respect to such options.
At the effective time of the Merger, each warrant to purchase
shares of Hirsch common stock outstanding and not terminated or
exercised immediately prior to the effective time of the Merger
will be converted into a warrant to purchase the number of
shares of SCM common stock equal to the number of shares of
Hirsch common stock that could have been purchased upon the full
exercise of such warrant, multiplied by a conversion ratio,
rounded down to the nearest whole share. The per share exercise
price for each new warrant to purchase SCM common stock issued
in exchange for existing warrants to purchase Hirsch common
stock will be determined by dividing the per share exercise
price of the Hirsch common stock subject to each warrant as in
effect immediately prior to the effective time of the Merger by
the conversion ratio, and rounding that result up to the nearest
cent. As used in this joint proxy statement/information
statement and prospectus, the term conversion ratio
means the quotient obtained by dividing the aggregate value of
the merger consideration per share, by the volume weighted
average price of SCMs common stock (as reported on the
NASDAQ Stock Market) during the 30 days preceding the day
prior to the day of the effective time of the Merger. For a more
complete description of the merger consideration, see the
section entitled The Merger Agreement Merger
Consideration in this joint proxy statement/information
statement and prospectus.
The merger consideration and conversion ratio will be
appropriately and proportionately adjusted to reflect any stock
dividend, subdivision, reclassification, recapitalization,
split, combination, or exchange of shares with respect to SCM
common stock between the date of the Merger Agreement and the
effective time of the Merger.
Lock-up
Provisions
The Merger Agreement provides that each Hirsch shareholder will
be prohibited during the period beginning on the closing date of
the Merger and continuing until the six month anniversary of the
closing date from, among other restrictions, directly or
indirectly, selling any shares of SCM common stock received in
the Merger. During the period commencing on the day after the
six month anniversary of the closing date and ending the on date
of the nine month anniversary of the closing date, a Hirsch
shareholder may sell or transfer only up to 50% of the SCM
common stock received by such Hirsch shareholder in connection
with the Merger.
No
Solicitation
With certain exceptions, Hirsch and SCM agreed that immediately
following the execution and delivery of the Merger Agreement,
each of the parties and their subsidiaries would cease any and
all existing activities, discussions, or negotiations with any
person relating to any acquisition proposals. The parties
further agreed that until the earlier of the termination of the
Merger Agreement and the effective time of the Merger neither
Hirsch nor SCM may, nor may any of their respective
representatives or affiliates:
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solicit, encourage, seek, entertain, support, assist, initiate
or participate in any inquiry, negotiations or discussions, or
enter into any agreement, with respect to any acquisition
proposal;
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disclose or furnish any information in connection with an
acquisition proposal concerning the business, technologies or
properties of either Hirsch or SCM, or any of their respective
subsidiaries, or afford access to its properties, technologies,
books or records, in connection with an acquisition proposal;
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approve, endorse or recommend an acquisition proposal relating
to Hirsch or SCM, respectively;
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enter into any letter of intent, memorandum of understanding or
other contract contemplating or otherwise relating to an
acquisition proposal relating to Hirsch or SCM,
respectively; or
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terminate, amend or waive any rights under any
standstill or other similar contract between it or
any of its subsidiaries and any person (other than the other
party to the Merger Agreement).
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For a more complete discussion of the exclusivity provisions and
permitted acquisition proposals, see the sections entitled
The Merger Agreement Certain Covenants of both
SCM and Hirsch Exclusivity, The Merger
Agreement Certain Covenants of both SCM and
Hirsch SCM Acquisition Proposals, and
The Merger Agreement Certain Covenants of both
SCM and Hirsch Hirsch Acquisition Proposals.
Conditions
to Completion of the Merger
In addition to the requirement of obtaining SCM stockholder
approval and Hirsch shareholder approval, each of the other
closing conditions set forth in the Merger Agreement must be
satisfied or waived by the appropriate party. For a summary of
the conditions that need to be satisfied to consummate the
Merger, see the section entitled The Merger
Agreement Conditions to the Completion of the
Merger in this joint proxy statement/information statement
and prospectus.
Termination
of the Merger Agreement
It is possible that the Merger and the other transactions
contemplated by the Merger Agreement will not be completed. This
might happen if, for example, SCMs stockholders do not
approve the issuance of the SCM shares and warrants in
connection with the Merger, or if Hirschs shareholders do
not approve the Merger or if other conditions to the Merger are
not satisfied. Should that occur, neither SCM nor Hirsch will be
under any obligation to make or consider any alternative
proposal regarding the combination of SCM and Hirsch. For a more
complete discussion of the manners in which the Merger Agreement
may terminate, see the section entitled The Merger
Agreement Termination in this joint proxy
statement/information statement and prospectus.
Termination
Fee
In certain circumstances, SCM or Hirsch may be obligated to pay
the other party a termination fee of $1.5 million, plus an
amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) incurred by the
recipient party in connection with the Merger Agreement, the
ancillary agreements, and the transactions contemplated thereby.
For a more complete discussion of the termination fee, see the
section entitled The Merger Agreement
Termination in this joint proxy statement/information
statement and prospectus.
Irrevocable
Proxy and Voting Agreement
As of the record date for the Hirsch special meeting, Hirsch
shareholders that owned in the aggregate 1,021,456 shares
of Hirsch common stock, representing approximately 22% of the
outstanding shares of Hirsch common stock as of the record date
for the Hirsch special meeting, had entered into the irrevocable
proxy and voting agreement.
The Hirsch shareholders who are parties to the irrevocable proxy
and voting agreement have agreed, solely in their capacity as
Hirsch shareholders and among other things, to vote all of their
shares of Hirsch common stock in favor of the Merger and the
adoption of the Merger Agreement, against any other Hirsch
acquisition proposals, against any action or agreement that
would reasonably be expected to result in a breach of the Merger
Agreement by Hirsch, against any change in a majority of the
individuals serving on the Hirsch board of directors as of the
date of the signing of the Merger Agreement (subject to certain
exceptions), and against any other action or agreement which is
intended, or could reasonably be expected to, impede, interfere
with, delay, postpone, or materially adversely affect the Merger
or any of the other transactions contemplated by the Merger
Agreement. The Hirsch shareholders that are parties to the
irrevocable proxy and voting agreement also granted SCM an
irrevocable proxy to vote their respective Hirsch common stock
in accordance with the terms of the irrevocable proxy and voting
agreement. A copy of the irrevocable proxy and voting agreement
is attached as Annex B to this joint proxy
statement/information statement and prospectus.
Stockholder
Agreement (see page 113)
As of the record date for the Hirsch special meeting, Hirsch
shareholders that owned in the aggregate 1,021,456 shares
of Hirsch common stock, representing approximately 22% of the
outstanding shares of Hirsch common stock as of the record date
for the Hirsch special meeting had entered into the stockholder
agreement. A
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brief summary of some of the material provisions of the
stockholder agreements are included below, and a copy of the
stockholder agreement is attached as Annex C to this
joint proxy statement/information statement and prospectus.
Standstill
Provision
The stockholder agreement includes a standstill provision
whereby the Hirsch shareholders who are parties to the
stockholder agreement agreed to a three-year
standstill period beginning on the closing date of
the Merger. During the standstill period, such parties agreed
that, subject to limited circumstances, they would not take
certain actions that could be hostile to SCM, including without
limitation proposing or entering into any acquisition
transaction with a third party with respect to SCM, acquiring
shares of SCM common stock that would result in such stockholder
holding more than 10% of SCMs outstanding shares,
participating in or encouraging the solicitation of proxies with
respect to SCM securities or the securities of its subsidiaries,
participating in or encouraging the formation of any group which
owns, seeks, or offers to acquire beneficial ownership of
SCMs voting securities or which seeks to control SCM, or
otherwise act alone or in concert with others seeking or
offering to control or influence the management of SCMs
board of directors or the policies of SCM or its subsidiaries.
Lock-Up
Agreement
Lawrence W. Midland and his controlled affiliates have agreed to
a more restrictive
lock-up
arrangement than other Hirsch shareholders with respect to the
shares of SCM common stock and warrants to purchase shares of
SCM common stock issued in connection with the Merger.
Specifically, except in limited circumstances, Mr. Midland
and his affiliates are prohibited from selling or transferring,
or granting or lending or otherwise disposing of, such
securities for up to 24 months following the closing date
of the Merger. As of the record date for the Hirsch special
meeting, Lawrence W. Midland and his controlled affiliates
beneficially owned in the aggregate 628,800 shares of
Hirsch common stock, representing approximately 13% of the
outstanding Hirsch common stock as of the record date for the
Hirsch special meeting. For a more complete discussion of the
lock-up
agreement, see the section entitled Certain Agreements
Related to the Merger Stockholder
Agreement
Lock-Up
Agreement.
Agreement
to Vote; Election of Directors
The stockholder agreement includes a provision whereby the
Hirsch shareholders who are parties to the stockholder agreement
agreed that for a period of three years after the closing date
of the Merger, subject to limited circumstances relating to
Lawrence W. Midlands status as a director on SCMs
board of directors, they will vote all shares of SCM common
stock owned by them to elect any director nominee that is
recommended by the majority of SCMs board of directors,
remove any director if such removal is requested or approved by
a majority of SCMs board of directors or the SCM
nominating committee, or oppose the removal or any director
unless such removal is approved by a majority of SCMs
board of directors. The stockholders also granted SCM an
irrevocable proxy to vote their respective SCM common stock in
accordance with the stockholder agreement.
Interests
of Directors, Executive Officers and Affiliates of SCM and
Hirsch (see page 78)
Hirsch
In considering the recommendation of the Hirsch board of
directors with respect to adopting the Merger Agreement, Hirsch
shareholders should be aware that certain members of the Hirsch
board of directors and certain executive officers of Hirsch have
interests in the Merger that may be different from, or in
addition to, interests they may have as Hirsch shareholders. For
example:
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In connection with the Merger, the executive officers of Hirsch
have entered into employment agreements with Hirsch to become
effective at the closing of the Merger, including salary, bonus,
severance and other benefit provisions. For a more detailed
discussion of the employment agreements with the Hirsch
executive officers, see the section entitled Certain
Agreements Related to the Merger Employment
Agreements with Hirsch Executive Officers in this joint
proxy statement/information statement and prospectus.
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Lawrence W. Midland, a Hirsch director and the President of
Hirsch, will be appointed to the SCM board of directors
immediately following the effective time of the Merger.
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Upon consummation of the Merger, SCM will issue warrants to
purchase shares of SCM common stock to each of Hirschs
outside directors in 2008, with the number of shares subject to
the warrants to be determined based on the conversion ratio
under the Merger Agreement of warrants to purchase
3,000 shares of Hirsch common stock.
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Three current directors of Hirsch hold partnership interests in
Secure Keyboards, Ltd. (Keyboards)
and/or
Secure Networks, Ltd. (Networks), which are parties
to a settlement agreement with Hirsch that provides for Hirsch
to pay royalties based on Hirsch gross revenues to Secure
Keyboards, Ltd. until December 31, 2020 and to Secure
Networks, Ltd. until December 31, 2011. To the extent that
consummation of the Merger results in an increased in the amount
of Hirsch revenues, the amount of royalties payable under the
settlement agreement will increase. In connection with the entry
into the Merger Agreement, two of the four general partners of
Secure Keyboards, Ltd. delivered a letter of understanding to
SCM. In addition, the two general partners of Secure Networks,
Ltd., delivered a substantially similar letter of understanding
to SCM. Each letter of understanding contained certain
clarifications of the SCM and Hirsch business relationship and
its resulting impact on the companies respective revenue
streams and on Keyboards or Networks revenue base,
as applicable. For a more detailed discussion of the settlement
agreement see the section entitled Certain Agreements
Related to the Merger Settlement Agreement and
Certain Agreements Related to the
Merger Keyboards and Networks Letters of
Understanding in this joint proxy statement/information
statement and prospectus.
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Hirsch purchased the outstanding shares of capital stock of
Hirsch EMEA, Inc., a British Virgin Island corporation, which is
now a wholly-owned subsidiary of Hirsch. One of the parties from
which Hirsch purchased shares of Hirsch EMEA, Inc. was tSecu,
LLC, a Massachusetts limited liability company which is an
affiliate of Ayman Ashour, a former director of Hirsch. For a
more detailed discussion of the Hirsch EMEA purchase, see the
sections entitled Certain Agreements Related to the
Merger Settlement Agreement and Certain
Agreements Related to the Merger Hirsch EMEA, Inc.
Stock Purchase in this joint proxy statement/information
statement and prospectus.
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For a period of three years following the effective time of the
Merger, and to the extent of insurance coverage, for three
additional years, the surviving entity of the Merger will, to
the fullest extent permitted by law, indemnify and hold harmless
the Hirsch directors and officers serving as of the date of the
Merger Agreement; and for a period of six years following the
effective time of the Merger, the surviving entity of the Merger
will maintain, in effect, a directors and officers
liability insurance policy covering the directors and officers
of Hirsch, with coverage in amount and scope at least as
favorable as the coverage under the existing Hirsch policy at
the time the Merger becomes effective up to an aggregate premium
for such policy of $50,000.
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As of the record date for the Hirsch special meeting, the
directors and executive officers of Hirsch, together with their
affiliates, owned in the aggregate approximately
1,021,456 shares of Hirsch common stock, entitling them to
exercise approximately 22% of the voting power of the Hirsch
common stock at the Hirsch special meeting. Hirsch cannot
complete the Merger unless the Merger is approved by the
affirmative vote of the holders of a majority of the outstanding
Hirsch common stock as of the record date for the Hirsch special
meeting.
As of the record date for the Hirsch special meeting, the
directors and executive officers of Hirsch, together with their
affiliates, held in the aggregate options and warrants to
purchase approximately 57,000 shares of Hirsch common
stock. These options and warrants and any shares of Hirsch
common stock issued upon the exercise thereof between the record
date will not be entitled to vote at the Hirsch special meeting.
SCM
No director or executive officer of SCM since December 31,
2007, nor their affiliates, have any interests in the Merger
that differ from, or are in addition to, their interests as SCM
stockholders. As of the record date for the SCM special meeting,
the directors and executive officers of SCM, together with their
affiliates, owned in the aggregate
8
approximately 1,683,452 shares of SCM common stock,
entitling them to exercise approximately 11% of the voting power
of the SCM common stock at the SCM special meeting. SCM cannot
complete the Merger unless the issuance of the shares of SCM
common stock and warrants to purchase shares of SCM common stock
in connection with the Merger is approved by the affirmative
vote of the holders of a majority of the shares of SCM common
stock voting at the SCM special meeting.
In addition, as of the record date for the SCM special meeting,
the directors and executive officers of SCM, together with their
affiliates, held in the aggregate options to purchase
approximately 773,176 shares of SCM common stock. These
options and any shares of SCM common stock issued upon the
exercise thereof will not be entitled to vote at the SCM special
meeting.
Ownership
of SCM Following the Merger (see page 88)
After the Merger, Hirsch will be a wholly-owned subsidiary of
SCM, and Hirsch shareholders will no longer have any direct
interest in Hirsch, but will have an equity stake in SCM, the
new company of Hirschs operations. Immediately after the
Merger, existing SCM stockholders are expected to own
approximately 63% of the outstanding shares of SCM common stock
and the former Hirsch shareholders are expected to own
approximately 37% of the outstanding shares of SCM common stock.
For a more complete discussion of ownership of SCM after the
Merger, see the section entitled The Merger
Ownership of SCM Following the Merger.
Material
U.S. Federal Income Tax Consequences of the Merger (see
page 89)
SCM and Hirsch have structured the Merger with the intent that
it qualify as a reorganization under
Section 368 of the Internal Revenue Code of 1986, as
amended, and it is a closing condition to the Merger that the
parties receive an opinion of counsel regarding such
qualification. If the Merger qualifies as such a reorganization,
Hirsch shareholders will recognize taxable income as a result of
the Merger equal to the lesser of (i) the amount of cash
received and (ii) the total gain realized on the
transaction. If the Merger qualifies as such a reorganization,
Hirsch warrant holders will not be subject to tax as a result of
the Merger. The qualification of the Merger as a reorganization
depends on numerous factors including whether Hirsch
shareholders will receive a sufficient amount of SCM common
stock to satisfy the continuity of interest test
applicable to reorganizations under Section 368 of the
Internal Revenue Code of 1986, as amended. Whether the Merger
meets that test depends in large part on the value of the SCM
stock issued to Hirsch shareholders as compared to the value of
all consideration (i.e., cash, stock and warrants) issued to
Hirsch shareholders. If, however, the Internal Revenue Service
were to challenge the valuation and successfully contend that
the Merger failed to qualify as a reorganization, the Merger
would be a fully taxable transaction to Hirsch shareholders and
Hirsch warrant holders. In such case, Hirsch shareholders and
Hirsch warrant holders would recognize gain or loss measured by
the difference between the value of all consideration received
by them in the Merger and their tax basis in the Hirsch common
stock and warrants, as the case may be, surrendered in the
Merger. SCM stockholders will not recognize gain or loss as a
result of the Merger, whether or not the Merger qualifies as a
reorganization under Section 368 of the Internal Revenue
Code of 1986, as amended. Neither SCM nor Hirsch will recognize
gain or loss as a result of the Merger, except for any gain that
might arise if SCM pays cash or property to Hirsch in connection
with these transactions and such cash or property is not
distributed to Hirsch shareholders. SCM does not expect any such
gain to be material.
The second-step merger is intended to be treated, along with the
first merger, as one integrated transaction for
U.S. federal income tax purposes, and SCM and Hirsch do not
expect any further tax consequences to the SCM stockholders or
the Hirsch shareholders, other than those described above.
Tax matters are very complicated, and the tax consequences of
the Merger to a particular Hirsch shareholder or warrant holder
will depend in part on such shareholders or warrant
holders circumstances and jurisdiction. Accordingly,
Hirsch shareholders and warrant holders should consult their tax
advisors for a full understanding of the tax consequences of the
Merger, including the applicability and effect of federal,
state, local and foreign income and other tax laws. For
additional discussion of the tax treatment of the Merger, see
the section entitled Material United States Income Tax
Consequences of the Merger in this joint proxy
statement/information statement and prospectus.
9
Regulatory
Approvals (see page 203)
In the United States, SCM must comply with applicable federal
and state securities laws and the rules and regulations of the
NASDAQ Global Market in connection with the issuance of shares
of SCM common stock and warrants to purchase shares of SCM
common stock, and the filing of this joint proxy
statement/information statement and prospectus with the SEC. In
Germany SCM must comply with the applicable laws and regulations
related to the issuance of shares of SCM common stock and the
filing of a prospectus with the Frankfurt Stock Exchange.
NASDAQ
Stock Market Listing (see page 87)
Prior to consummation of the Merger, SCM intends to cause all
shares of SCM common stock to be issued in connection with the
Merger and all shares of SCM common stock to be issued upon
exercise of the warrants to purchase shares of SCM common stock
to be approved for listing (subject to notice of issuance) on
the NASDAQ Stock Market and the Prime Standard of the Frankfurt
Stock Exchange as of the effective time of the Merger, including
filing any required additional listing applications or notices
with the NASDAQ Stock Market pursuant to NASDAQ Stock Market LLC
rules.
Anticipated
Accounting Treatment (see page 88)
SCM will account for the acquisition of Hirsch as a purchase of
the business, which means that the assets and liabilities of
Hirsch will be recorded at their fair value and the results of
operations of Hirsch will be included in SCMs results from
and after the effective time of the Merger, in accordance with
Financial Accounting Standard No. 141 (revised 2007),
Business Combinations.
Appraisal
Rights and Dissenters Rights (see page 42)
SCM stockholders are not entitled to appraisal rights in
connection with the Merger under Delaware General Corporation
Law. Hirsch shareholders are entitled to appraisal rights in
connection with the Merger under California law. For more
information about such rights, see the provisions of
Sections 1300 through 1313 of Chapter 13 of the
California Corporations Code, attached hereto as
Annex O, and the section entitled The
Merger Appraisal Rights and Dissenters
Rights in this joint proxy statement/information statement
and prospectus.
Failure to follow precisely any of the statutory procedures set
forth in Annex O may result in the loss or waiver of
dissenters rights under California law.
SCM
Microsystems Director and Executive Officer Compensation (see
page 174)
SCM currently anticipates that Werner Koepf, Dr. Hagen
Hultzsch, Steven Humphreys, Dr. Hans Liebler, Felix Marx,
Lawrence W. Midland, Stephan Rohaly, and Simon Turner will serve
as its board of directors following completion of the Merger.
For a complete discussion of the expected board of directors
following the Merger, compensation of directors, and
compensation of executives, see the section entitled SCM
Microsystems Director and Executive Officer Compensation.
Comparison
of Stockholder Rights (see page 198)
The rights of Hirsch shareholders are currently governed by the
California Corporations Code, Hirschs articles of
incorporation, as amended, and the bylaws of Hirsch. The rights
of SCM stockholders are currently governed by the Delaware
General Corporation Law, the Fourth Amended and Restated
Certificate of Incorporation of SCM, and the bylaws of SCM. If
the Merger is completed, Hirsch shareholders will become
stockholders of SCM, and their rights will be governed by the
Delaware General Corporation Law, and the certificate of
incorporation of SCM and bylaws of SCM. The rights of Hirsch
shareholders contained in the articles of incorporation and
bylaws of Hirsch differ from the rights of SCM stockholders
under the certificate of incorporation of SCM and bylaws of SCM,
as more fully described under the section entitled
Comparison of SCM Microsystems
10
Stockholders and Hirsch Electronics Shareholders Rights and
Corporate Governance Matters in this joint proxy
statement/information statement and prospectus.
The SCM
Special Meeting Of Stockholders (see page 207)
The SCM special meeting will be held at SCMs United States
office, located at 41740 Christy Street, Fremont, California
94538, at 1:00 p.m., local time, on March 23, 2009.
Only holders of record of SCM common stock at the close of
business on February 11, 2009 (the SCM record
date) are entitled to notice of, attendance at and to vote
at, the SCM special meeting. As of the record date for the SCM
special meeting, there were 15,743,515 shares of SCM common
stock outstanding and entitled to vote at the SCM special
meeting, held by approximately 55 holders of record. Each holder
of SCM common stock is entitled to one vote for each share of
SCM common stock owned as of the SCM record date.
There are two proposals at the SCM special meeting. The first
proposal at the SCM special meeting is a proposal to approve the
issuance of new shares of SCM common stock, par value $0.001 per
share, and warrants to purchase shares of SCM common stock, to
securityholders of Hirsch, in connection with Merger. The second
proposal at the SCM special meeting is a proposal to consider
and vote upon an adjournment of the SCM special meeting, if
necessary, to solicit additional proxies if there are not
sufficient votes in favor of the first proposal described
immediately above. If you are a SCM stockholder and fail to
return your proxy card or otherwise provide proxy instructions
or vote your shares in person will result in your shares not
being counted for purposes of determining whether a quorum is
present at the SCM special meeting. In the event that a quorum
is not reached or the necessary votes are not received, the SCM
special meeting will have to be adjourned and recalled to obtain
a quorum and the necessary votes.
The
Hirsch Special Meeting Of Shareholders (see
page 211)
The Hirsch special meeting will be held at Hirschs
Corporate Headquarters, 1900 Carnegie Avenue, Building B, Santa
Ana, California 92705, at 7:30 p.m., local time, on
March 11, 2009. Only holders of record of Hirsch stock at
the close of business on February 10, 2009 are entitled to
notice of, attendance at and to vote at the Hirsch special
meeting. As of the record date for the Hirsch special meeting,
there were 4,705,735 shares of Hirsch stock outstanding and
entitled to vote at the Hirsch special meeting, held by
approximately 315 holders of record. Each holder of Hirsch
stock is entitled to one vote for each share of Hirsch stock
owned as of the Hirsch record date.
There are two proposals at the Hirsch special meeting. The first
proposal at the Hirsch special meeting is a proposal to adopt
the Merger Agreement. The second proposal at the Hirsch special
meeting is a proposal to consider and vote upon an adjournment
of the Hirsch special meeting, if necessary, if a quorum is
present, to solicit additional proxies if there are not
sufficient votes in favor of the proposal described immediately
above to satisfy each of the conditions to closing concerning
the vote set forth in the Merger Agreement. If you are a Hirsch
shareholder, the failure to return your proxy or otherwise
provide proxy instructions or vote your shares in person will
have the same effect as voting against Hirsch Proposal No.
1 and your shares will not be counted for purposes of
determining whether a quorum is present at the Hirsch special
meeting. In the event that a quorum is not reached or the
necessary votes are not received, the Hirsch special meeting
will have to be adjourned and recalled for another vote.
11
RISK
FACTORS
The Merger involves risks for SCM stockholders and Hirsch
shareholders. SCM stockholders will be choosing to permit
significant dilution of their percentage ownership of SCM by
voting in favor of the issuance of additional shares of SCM
Common Stock and warrants to purchase shares of SCM common stock
in order to complete the Merger. Hirsch shareholders will be
choosing to no longer control 100% of Hirsch and to become
stockholders of SCM by voting in favor of the Merger. In
addition to the risks that their respective businesses currently
face, after the Merger, SCM and the Surviving Subsidiary will be
faced with a market environment that cannot be predicted and
that involves significant risks, many of which will be beyond
their control. These risk factors are not intended to represent
a complete list of the general or specific risk factors that may
affect SCM, Hirsch and the combined business, and these risk
factors may not be exhaustive. You should carefully consider the
risks described below and the other information contained in
this joint proxy statement/information statement and prospectus,
including the matters addressed in the section entitled
Cautionary Statement Concerning Forward-Looking
Statements, before deciding how to vote your shares of
common stock.
Risks
Relating to the Merger
SCM
and Hirsch may not realize all of the anticipated benefits of
the transactions.
To be successful after the Merger, SCM and Hirsch will need to
combine and integrate the businesses and operations of their
separate companies. The combination of two independent companies
is a complex, costly and time-consuming process. As a result,
after the Merger, the combined company will be required to
devote significant management attention and resources to
integrating the diverse business practices and operations of SCM
and Hirsch. The integration process may divert the attention of
the combined companys executive officers and management
from
day-to-day
operations and disrupt the business of either or both of the
companies and, if implemented ineffectively, preclude
realization of the full benefits of the transaction expected by
SCM and Hirsch. SCM has not recently completed a merger or
acquisition comparable in size or scope to the transaction. The
failure of the combined company, after the Merger, to meet the
challenges involved in successfully integrating the operations
of SCM and Hirsch or otherwise to realize any of the anticipated
benefits of the Merger could cause an interruption of, or a loss
of momentum in, the activities of the combined company and could
adversely affect its results of operations. In addition, the
overall integration of the two companies may result in
unanticipated problems, expenses, liabilities, competitive
responses and loss of customer relationships, and may cause
SCMs stock price to decline. The difficulties of combining
the operations of the companies include, among others:
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maintaining employee morale and retaining key employees;
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preserving important strategic and customer relationships;
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the diversion of managements attention from ongoing
business concerns;
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coordinating geographically separate organizations;
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unanticipated issues in integrating information, communications
and other systems;
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coordinating marketing functions;
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consolidating corporate and administrative infrastructures and
eliminating duplicative operations; and
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integrating the cultures of SCM and Hirsch.
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In addition, even if the businesses and operations of SCM and
Hirsch are integrated successfully, the combined company may not
fully realize the expected benefits of the Merger, including
sales or growth opportunities that were anticipated, within the
intended time frame, or at all. Further, because the businesses
of SCM and Hirsch differ, the results of operations of the
combined company and the market price of SCM common stock after
the Merger may be affected by factors different from those
existing prior to the Merger and may suffer as a result of the
Merger. As a result, SCM and Hirsch cannot assure you that the
combination of the businesses and operations of SCM with Hirsch
will result in the realization of the full benefits anticipated
from the Merger.
12
Provisions
of the Merger Agreement may deter alternative business
combinations.
Restrictions in the Merger Agreement prohibit, in certain
contexts, SCM and Hirsch from soliciting any acquisition
proposal or offer for a merger or business combination with any
other party, including a proposal that could be advantageous to
the stockholders of SCM or shareholders of Hirsch when compared
to the terms and conditions of the Merger described in this
joint proxy statement/information statement and prospectus. In
addition, if the Merger Agreement is terminated under certain
specified circumstances relating to effecting a business
combination with a different party, SCM or Hirsch may be
required to pay the other a termination fee of
$1.5 million, plus an amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) incurred by the
recipient party in connection with the Merger Agreement, the
ancillary agreements, and the transactions contemplated thereby.
These provisions may deter third parties from proposing or
pursuing alternative business combinations that could result in
greater value to SCM stockholders or Hirsch shareholders than
the Merger.
There
has been no public market for the Hirsch common stock and
warrants to purchase Hirsch common stock, and the lack of a
public market makes it extremely difficult to determine the fair
market value of Hirsch .
The outstanding capital stock of Hirsch is privately held and is
not traded in any public market. The lack of a public market
makes it extremely difficult to determine the fair market value
of Hirsch. The number of shares of SCM common stock and warrants
to purchase SCM common stock to be issued to Hirsch shareholders
was determined based on negotiations between the parties, and it
may not be indicative of the price of the Hirsch common stock
and warrants to purchase Hirsch common stock may have traded at
if they were traded in a public market.
The
amount of merger consideration is fixed and not subject to
adjustment based on the market price of SCM common
stock.
The merger consideration to be received by the holders of the
shares of Hirsch common stock in the Merger includes shares of
SCM common stock and warrants to purchase shares of SCM common
stock. The Merger Agreement does not include an exchange ratio
or adjustment mechanism based on the market price of SCM common
stock for the determination of the amount of merger
consideration that will be paid.
The
value of the SCM common stock issued in the Merger will depend
on its market price at the time of the Merger, as the exchange
ratio for the Hirsch shares of common stock at the closing of
the Merger is fixed.
Pursuant to the Merger Agreement, the exchange ratio used to
determine the number of shares of SCMs common stock that
Hirsch shareholders will receive is unaffected by the share
price of SCMs common stock, as reflected on the NASDAQ
Stock Market. Increases in the value of SCM common stock will
result in a higher price being paid by SCM for Hirsch common
stock and more value received by Hirsch shareholders in the
Merger. Pursuant to the Merger Agreement, SCM will not have the
right to terminate or renegotiate the Merger Agreement or to
re-solicit proxies as a result of any increase in the value of
SCMs outstanding common stock.
SCM
common stock has historically traded at a very low volume. If
substantial amounts of SCM common stock begin to trade on the
open market following the end of the
lock-up
period, the price of SCM common stock may be materially and
adversely affected.
If the current Hirsch shareholders sell, or it is perceived that
they will sell, substantial amounts of SCM common stock in the
public market after the
lock-up
lapses, the trading price of SCM common stock could be
materially and adversely affected.
The
market price of SCM common stock could decline as a result of
the large number of shares that will become eligible for sale
after consummation of the Merger.
If the Merger is consummated, the new shares of SCM common stock
issued as merger consideration will become saleable beginning
six months after the closing of the Merger and the warrants to
purchases shares of SCM common stock will be exercisable for two
years following the third anniversary of the effective time of
the Merger. Consequently, after such periods, a substantial
number of additional shares of SCM common stock will be eligible
13
for resale in the public market. Current stockholders of SCM and
former shareholders of Hirsch may not wish to continue to invest
in the operations of the combined company after the Merger, or
for other reasons, may wish to dispose of some or all of their
interests in SCM after the Merger. Sales of substantial numbers
of shares of both the newly issued and the existing SCM common
stock in the public market following the Merger could adversely
affect the market price of such shares.
The
issuance of shares of SCM common stock to Hirsch shareholders in
connection with the Merger will substantially reduce the
percentage ownership of current SCM stockholders.
If the transaction is completed, SCM and Hirsch expect that,
based on shares of Hirsch common stock outstanding as of
February 10, 2009, and assuming no options or warrants to
purchase shares of Hirsch common stock are exercised prior to
close, SCM will pay, in the aggregate, approximately
$14.1 million in cash and issue approximately
9,411,470 shares of SCM common stock, and warrants to
purchase an additional 4,705,735 shares of SCM common
stock, as consideration for the outstanding shares of Hirsch
common stock. Following the Merger, current holders of Hirsch
stock are expected to own approximately 37% of the shares of SCM
common stock outstanding after the Merger and current holders of
SCM stock are expected to own approximately 63% of the shares of
SCM common stock outstanding after the Merger. SCM stockholders
will continue to own their existing shares of SCM common stock,
which will not be affected by the Merger, other than by the
dilution resulting from the issuance of the merger consideration
described above. In addition, based on the number of warrants to
purchase shares of Hirsch common stock outstanding as of
February 10, 2009 and excluding the warrants to be issued
by SCM to Hirsch directors for service in 2008, SCM estimates
that it will issue warrants to purchase an additional
164,618 shares of SCM common stock to the holders of Hirsch
warrants to purchase Hirsch common stock, in connection with the
Merger. Additionally, if all of the existing options and
warrants to purchase shares of Hirsch common stock outstanding
as of February 10, 2009 were exercised prior to the
effective time of the Merger, SCM estimates that it will issue
up to an additional $375,000 in cash, 250,000 shares of SCM
common stock and warrants to purchase 125,000 shares of SCM
common stock to current holders of Hirsch options as merger
consideration. The issuance of the shares of SCM common stock
and warrants to purchase SCM common stock described above will
cause a significant reduction in the relative percentage
interests of current SCM stockholders in earnings, voting, and
liquidation, book and market value.
Hirschs
current shareholders will own a large percentage of the SCM
common stock after consummation of the Merger, and will have
significant influence over the outcome of corporate actions
requiring stockholder approval; such shareholders
priorities for SCMs business may be different from
SCMs or its other stockholders.
After completion of the Merger, the former Hirsch shareholders
will beneficially own approximately 37% of the outstanding SCM
common stock and the current SCM stockholders will beneficially
own approximately 63% of the SCM common stock. Accordingly, such
former Hirsch shareholders will be able to significantly
influence the outcome of any corporate transaction or other
matter submitted to the SCM stockholders for approval, including
the election of directors, any merger, consolidation or sale of
all or substantially all of SCMs assets or any other
significant corporate transaction, such that such former
shareholders of Hirsch could delay or prevent a change of
control of SCM, even if such a change of control would benefit
SCMs other stockholders. The interests of such former
Hirsch shareholders may differ from the interests of other
stockholders.
Hirsch
shareholders will no longer exercise 100% control over
Hirsch.
The Hirsch shareholders currently own and control 100% of
Hirsch. Upon the closing of the Merger, Hirsch shareholders will
become SCM stockholders and, consequently, will no longer
control Hirsch. Hirsch will be transformed into a wholly-owned
subsidiary of SCM and will be controlled by SCM. The former
Hirsch shareholders will own 37% of the outstanding SCM common
stock after the Merger.
14
The
shares of SCM common stock to be received by Hirsch shareholders
as a result of the Merger will have different rights from the
shares of Hirsch common stock.
Upon completion of the Merger, Hirsch shareholders will become
SCM stockholders and their rights as stockholders will be
governed by SCMs certificate of incorporation and
SCMs bylaws and Delaware law. The rights associated with
Hirsch common stock are different from the rights associated
with SCM common stock. Furthermore, the rights of SCM
stockholders are governed by Delaware law, rather than
California law. Delaware law differs from California law,
including, among other things, the laws regarding appraisal
rights and shareholder voting requirements. After the Merger,
Hirsch shareholders will become SCM stockholders and will have
rights that are different from those they have now as Hirsch
shareholders. See the section entitled Comparison of
Stockholders Rights and Corporate Governance Matters for a
discussion of the different rights associated with SCM common
stock and Hirsch common stock.
The
SCM warrants to be issued in connection with the Merger will
have limited transferability and will only be exercisable for a
period of two years following the third anniversary of the
closing.
The warrants to purchase shares of SCM common stock to be issued
in connection with the Merger will not be freely transferable
and will not be listed on the NASDAQ Stock Market or otherwise
publicly traded. Further, the warrants cannot be exercised for a
period of three years following the closing of the Merger and
only have a five year term. There is no guarantee that the
warrants will be
in-the-money
at any point during the two-year period of exercisability
beginning on the third anniversary of the closing of the Merger.
Consequently, the Hirsch shareholders will have to bear the
economic risk of holding the warrants to purchase shares of SCM
common stock during the three year period following the closing
of the Merger.
The
shares of SCM common stock issuable upon the exercise of the
warrants to purchase SCM common stock in connection with the
Merger will not be registered on the registration statement on
Form S-4
of which this joint proxy statement/information statement is a
part; if SCM is unable to comply with any applicable
registration requirements prior to the time of exercise, SCM may
not issue such shares.
The shares of SCM common stock issuable upon the exercise of the
warrants to purchase SCM common stock in connection with the
Merger will not be registered on the registration statement on
Form S-4
of which this joint proxy statement/information statement is a
part. Although SCM intends to comply with any applicable
securities regulations and registration requirements for any
such issuance prior to the time the warrants become exercisable
according to their terms, if for any reason required
registration is not available or effective, SCM will not be able
to issue the shares of common stock upon any attempted exercise
of warrants, until such time as applicable registration
requirements are complied with or an exception therefrom is
available.
Hirsch
shareholders will bear the economic risk of holding SCM shares
during the
lock-up
period.
The shares of SCM common stock to be issued to Hirsch
shareholders in connection with the Merger will be subject to a
lock-up that
prohibits Hirsch shareholders from, among other restrictions,
selling, offering to sell, pledging, granting any option, right
or warrant for the sale, lending or otherwise disposing of or
transferring any shares of SCM common stock received in
connection with the Merger. Other than with respect to Lawrence
W. Midland and his controlled affiliates, who have a longer
lock-up under the stockholder agreement, this
lock-up is
effective for six months from the closing date for all of the
shares of SCM common stock issued to Hirsch shareholders in
connection with the Merger and is effective for nine months from
the closing date for 50% of the shares. Consequently, the Hirsch
shareholders will have to bear the economic risk of holding the
shares of SCM common stock during the period of the
lock-up.
Standstill
agreements may delay or prevent a change in the management or
acquisition of SCM after the Merger.
Several Hirsch shareholders, including certain members of
Hirschs board of directors, management
and/or their
respective affiliates, will be subject to a three-year
standstill period to begin on the closing date of
the Merger. During the standstill period, such parties agreed
that, subject to limited circumstances, they would not take
15
certain actions with respect to SCM and SCM common stock
including, for example, proposing or entering into any
acquisition transaction with a third party with respect to SCM,
acquiring shares of SCM common stock that would result in such
stockholder holding more than 10% of SCMs outstanding
shares, or participating in the solicitation of proxies with
respect to SCM securities or the securities of its subsidiaries.
After the Merger, these agreements may delay or prevent a change
in management of SCM
and/or a
later acquisition of SCM. These commitments may not be in the
best interests of the other Hirsch shareholders.
The
conditions to closing of the Merger may be waived by SCM or
Hirsch without re-soliciting SCM stockholder or Hirsch
shareholder approval of the Merger Agreement.
The Merger is subject to the satisfaction of the closing
conditions set forth in the Merger Agreement. These conditions
may be waived by SCM or Hirsch, subject to the agreement of the
other party in specific cases. See The Merger
Agreement Conditions to Completion of the
Merger. In the event of a waiver of any condition, SCM and
Hirsch will not be required to re-solicited the SCM stockholders
or Hirsch shareholders, and may complete the transaction without
seeking further stockholder or shareholder approval.
The
date on which the Merger will close is uncertain.
The date on which the Merger will close depends on the
satisfaction of the closing conditions set forth in the Merger
Agreement, or the waiver of those conditions by the parties
thereto. While SCM and Hirsch expect to complete the Merger in
the first half of 2009, the completion date of the Merger might
be later than expected because of unforeseen events.
If
NASDAQ determines that the Merger will result in a change of
control of SCM, SCM will be required to submit an initial
listing application and meet all initial NASDAQ Stock Market
inclusion criteria.
In connection with the proposed Merger, NASDAQ will review the
terms and anticipated effect of the Merger to determine if a
change of control will be deemed to occur under its
rules. If NASDAQ determines that the Merger will result in a
change of control of SCM, SCM will be required to submit an
initial listing application and meet all initial NASDAQ Stock
Market inclusion criteria as set forth in the Marketplace Rules
of the NASDAQ Stock Market, and pay all applicable fees, before
consummation of the Merger. If SCM and Hirsch are required to
submit an initial listing application, NASDAQs review of
such application may take up to six to eight weeks, which could
cause a delay in the Mergers consummation. There is also a
risk that NASDAQ may not approve the initial listing application
without substantial revision or delay, or at all.
If the
conditions to the Merger are not met or waived, the Merger will
not occur.
Even if the Merger is approved by the stockholders of SCM and
the shareholders of Hirsch, specified conditions must be
satisfied or waived to complete the Merger. These conditions are
described in the section entitled The Merger
Agreement Conditions to the Completion of the
Merger of the joint proxy statement/information statement
and prospectus and in the Merger Agreement attached hereto as
Annex A. SCM and Hirsch cannot assure you that all
of the conditions will be satisfied. If the conditions are not
satisfied or waived, the Merger will not occur or will be
delayed, which would result in the loss of some or all of the
expected benefits of the Merger.
If the
two remaining general partners of Secure Keyboards, Ltd. who are
not currently a party to the letter of understanding do not
consent to become a party to and be bound by the letter of
understanding or consent to the Merger, a condition to
SCMs obligation to close the merger will not have been
satisfied.
In connection with the signing of the Merger Agreement,
Robert J. Parsons and Lawrence W. Midland, as two of
the four general partners of Secure Keyboards, Ltd.
(Keyboards) delivered a letter of understanding to
SCM, as amended and restated on January 30, 2009. Among
other conditions, the obligation of SCM and Merger Subs to
complete the Merger is subject to SCMs receipt or waiver
of Keyboards consent to the Merger and waiver of any
rights to notice pursuant to the terms of the settlement
agreement (with such consent executed by each of its four
respective general partners), and the consent of each of the
other two general partners of Keyboards to become a
16
party to and be bound by the letter of understanding delivered
to SCM by Robert J. Parsons and Lawrence W. Midland.
On February 9, 2009 and February 11, 2009, counsel
representing the two general partners of Keyboards who are not
currently a party to the letter of understanding sent
communications to SCM and Hirsch objecting to the letter of
understanding, and indicating that the two general partners will
not sign the letter of understanding. There can be no assurance
that any disagreements relating to the letter of understanding
or the settlement agreement can be resolved amicably between the
parties. If the parties are not able to resolve the matter, a
condition to SCMs obligation to close the Merger will not
be satisfied and, if SCM decides not to waive this condition,
the Merger will not be consummated.
If the
Merger is not consummated, SCM may not be successful in its
strategy to grow revenue and become profitable.
One of the components of SCMs growth strategy is to
increase its revenues and operational scale through merger and
acquisition activity. If the proposed Merger with Hirsch is not
consummated, then SCM may not be able to increase its revenues
or operational scale as rapidly as it has planned, or at all. If
SCM is unable to increase its revenues or its operational scale,
it may not be able to fully leverage its global infrastructure,
or to pursue its other growth strategies effectively.
Additionally, if the Merger is not consummated, then the
financial and other resources that SCM has expended on the
Merger may not be recoverable.
Hirschs
business may be negatively affected if the Merger is not
consummated and Hirsch remains a stand-alone
entity.
If the Merger is not completed for any reason, the consequences
could adversely affect Hirschs business and results of
operations, including the following:
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Hirsch would not realize the benefits expected from becoming
part of SCM, including the potentially enhanced financial and
competitive position;
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Hirsch may be required to pay SCM a termination fee of
$1.5 million, plus an amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) incurred by SCM
in connection with the Merger Agreement, the ancillary
agreements, and the Merger;
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some costs related to the transaction, such as legal, accounting
and financial advisor fees, must be paid even if the transaction
is not completed;
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activities relating to the transaction and related uncertainties
may divert Hirsch managements attention away from the
day-to-day
business and cause substantial disruptions among its employees
and relationships with customers and business partners, thus
detracting from its ability to grow revenue and minimize costs
and possibly leading to a loss of revenue and market position
that it may not be able to regain if the Merger does not
occur; and
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Hirsch may be unable to locate another entity to merge with at a
later date, or under terms as favorable as those in the Merger
Agreement.
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The
Merger may not qualify as a reorganization, in which case the
Merger may be a fully taxable transaction to Hirsch shareholders
and warrant holders.
The parties have structured the Merger with the intent that it
qualify as a reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended. If the Merger
qualifies as a reorganization, Hirsch shareholders will
recognize taxable income equal to the lesser of (i) the
amount of cash received or (ii) the total gain on the
transaction. However, the qualification of the Merger as a
reorganization depends on numerous factors including whether
Hirsch shareholders will receive a sufficient amount of SCM
common stock to satisfy the continuity of interest test
applicable to reorganizations under Section 368 of the
Internal Revenue Code of 1986, as amended. Whether the Merger
meets that test depends in large part on the value of the SCM
common stock issued to Hirsch shareholders as compared to the
value of all consideration issued to Hirsch shareholders. Based
on an estimated
17
valuation, the Merger should satisfy the continuity of interest
test. If, however, the Internal Revenue Service were to
challenge the valuations in the appraisal and successfully
contend that the Merger failed to qualify as a reorganization,
the Merger would be a fully taxable transaction to Hirsch
shareholders and warrant holders. In such case, Hirsch
shareholders and warrant holders would recognize gain or loss
measured by the difference between the value of all
consideration received by them in the Merger and their tax basis
in their Hirsch common stock or warrants, as the case may be,
surrendered in the Merger. For additional discussion of the tax
treatment of the Merger, see the section entitled Material
United States Income Tax Consequences of the Merger in
this joint proxy statement/information statement and prospectus.
The
SCM financial projections and the Hirsch financial projections
are only estimates of future results and there is no assurance
that actual results will not be different.
The SCM financial projections created by SCM and the Hirsch
financial projections created by Hirsch are only estimates of
possible future operating results and not guarantees of future
performance. The future operating results of SCM and Hirsch and
the combined company will be affected by numerous factors,
including those discussed in this Risk Factors
section of this joint proxy statement/information statement and
prospectus. SCM stockholders and Hirsch shareholders should not
assume that future operating results will conform to either of
the SCM financial projections or the Hirsch financial
projections. The actual operating results will likely differ
from these financial projections.
Directors
of Hirsch have interests in the transaction that may be
different from, or in addition to, the interests of other Hirsch
shareholders, which may influence their
recommendation.
In considering the recommendation of Hirschs board of
directors, Hirsch shareholders should be aware that
Hirschs directors and executive officers have interests in
the Merger and have arrangements that are different from, or in
addition to, those of Hirsch shareholders generally. These
interests and arrangements may create potential conflicts of
interest. As a result of these interests, directors of Hirsch
could be more likely to vote, and recommend to shareholders that
they vote, to adopt the Merger Agreement and approve the Merger
than if they did not hold these interests, and may have reasons
for doing so that are not the same as the interests of other
Hirsch shareholders. For a full description of the interests of
directors and executive officers of Hirsch in the Merger, see
The Merger Interests of Hirsch Directors and
Executive Officers in the Merger.
SCM
and Hirsch both have incurred and will incur significant
expenses as a result of the Merger, which will reduce the amount
of capital available to fund the business after the
Merger.
SCM and Hirsch have incurred, and will continue to incur,
significant expenses related to the Merger. These expenses
include investment banking fees, legal fees, accounting fees,
and printing and other costs. There may also be unanticipated
costs related to the Merger. As a result, the combined company
will have less capital available to fund its activities after
the Merger.
After
the Merger, SCM will continue to incur significant costs as a
result of operating as a public company, and its management may
be required to devote substantial time to compliance
initiatives.
As a public company, SCM currently incurs significant legal,
accounting and other expenses. In addition, the Sarbanes-Oxley
Act, as well as rules subsequently implemented by the SEC and
the NASDAQ Stock Market, have imposed various requirements on
public companies, including requiring establishment and
maintenance of effective disclosure and financial controls and
changes in corporate governance practices. SCMs management
and other personnel devote a substantial amount of time and
financial resources to these compliance initiatives.
After the Merger, SCM will be subject to all of the same
obligations, and bringing Hirsch into compliance with the
Sarbanes-Oxley Act will require significant expenditures.
Complying with the Sarbanes-Oxley Act will require significant
additional expenditures, place additional demands on SCMs
management and may divert managements time and attention
away from the
day-to-day
operations of the business. These additional obligations may
also require SCM to hire additional personnel after the Merger.
Hirsch is currently evaluating its internal controls systems in
order to enable SCM to report on, and SCMs independent
registered public accounting firm after the Merger to attest to,
internal controls, as required by Section 404 of the
Sarbanes-Oxley Act. Hirsch cannot be certain
18
as to the timing of completion of the evaluation, testing and
remediation actions or the impact of the same on the operations
of SCM after the Merger. If, after the Merger, SCM fails to
staff its accounting and finance function adequately, or
maintain internal controls adequate to meet the demands that are
placed upon it as a public company, including the requirements
of the Sarbanes-Oxley Act, it may be unable to report its
financial results accurately or in a timely manner and its
business and stock price may suffer. The costs of being a public
company, as well as diversion of managements time and
attention, may have a material adverse effect on SCMs
future business, financial condition and results of operations.
Qualified
management, marketing, and sales personnel are difficult to
locate, hire and train, and if SCM cannot attract and retain
qualified personnel after the Merger, it will harm the ability
of the business to grow.
SCM and Hirsch have each grown their businesses through the
services of many people. The success of the combined company
after the Merger depends, in part, on the continued service of
key managerial, marketing and sales personnel. Competition for
qualified management, technical, sales and marketing employees
is intense. In addition, the personnel policies and practices of
SCM and Hirsch may be less compatible than anticipated and some
employees might leave the combined company after the Merger and
go to work for competitors. SCM cannot assure you that it will
be able to attract, retain and integrate employees to develop
and continue its business and strategies after the Merger.
Completion
of the Merger will require a significant amount of attention
from Hirsch management and this diversion of management
attention away from ongoing operations could adversely affect
ongoing operations and business relationships.
Because completing the Merger requires a substantial amount of
attention from Hirsch management, Hirsch management will divert
a significant amount of its attention away from the
day-to-day
operations of the business. As a result, Hirschs business
relationships and ongoing operations may suffer during this
period.
After
the closing of the Merger, SCM faces risks of disagreements or
litigation relating to the settlement agreement and letters of
understanding, which may adversely affect SCMs results of
operations.
Effective November 14, 1994, Hirsch entered into a
settlement agreement with two limited partnerships, Secure
Keyboards, Ltd. and Secure Networks, Ltd., pursuant to which
Hirsch is obligated to pay a royalty of 4.25% on Hirsch revenues
allocated to Secure Keyboards, Ltd. for the period from
December 1, 1994 to December 31, 2020, and a royalty
of 5.5% on Hirsch revenues allocated to Secure Networks, Ltd.
for the period from December 1, 1994 to December 31,
2011. In connection with the entry into the Merger Agreement, on
December 10, 2008, Robert J. Parsons and Lawrence W.
Midland, as two of the four general partners of Secure
Keyboards, Ltd., delivered a letter of understanding to SCM, as
amended and restated January 30, 2009. In addition, Robert
J. Parsons and Lawrence W. Midland, as the two general partners
of Secure Networks, Ltd., delivered a substantially similar
letter of understanding to SCM, also amended and restated
January 30, 2009. Each letter of understanding contained
certain clarifications of the SCM and Hirsch business
relationship and its resulting impact on the companies
respective revenue streams and on Keyboards or
Networks revenue base, as applicable. Despite the letters
of understandings attempt to clarify the revenue base
subject to the royalty arrangement under the settlement
agreement, there is a risk that future disagreements between SCM
and Secure Keyboards, Ltd. and Secure Networks, Ltd. regarding
the settlement agreement
and/or the
letters of understanding, including disagreements regarding the
revenues subject to the royalty arrangement following the
Merger, could result in litigation that may cause material harm
to SCMs results of operations. See the sections entitled
Certain Agreements Related to the Merger
Settlement Agreement and Certain Agreements Related
to the Merger Keyboards and Networks Letters of
Understanding, for additional information about these
agreements.
If the
two remaining general partners of Secure Keyboards, Ltd. who are
not currently a party to the letter of understanding do not
consent to become a party to and be bound by the letter of
understanding or consent to the Merger, and SCM decides to waive
this closing condition and consummate the Merger
19
without their consent, SCM and Hirsh may face litigation
from these other Secure Keyboards, Ltd. general partners.
As discussed above, a condition to SCMs and Merger
Subs obligations to complete the Merger is the receipt of
Secure Keyboards, Ltd.s (Keyboards) consent to
the Merger and waiver of any rights to notice pursuant to the
terms of the settlement agreement (with such consent executed by
each of its four respective general partners), and the consent
of each of the other two general partners of Keyboards to become
a party to and be bound by the letter of understanding delivered
to SCM by Robert J. Parsons and Lawrence W. Midland. On
February 9, 2009 and February 11, 2009, counsel
representing the two general partners of Keyboards who are not
currently a party to the letter of understanding sent
communications to SCM and Hirsch objecting to the letter of
understanding, and indicating that the two general partners will
not sign the letter of understanding. If the parties are not
able to resolve the matter, a condition to SCMs obligation
to close the merger will not be satisfied. If SCM decides to
waive this closing condition and the Merger is consummated
without the consent of the two other general partners of
Keyboards, SCM and Hirsch face the risk of litigation being
brought by these two general partners including with respect to
the amount of royalties to which Keyboards is entitled. There is
no guarantee that SCM and Hirsch will prevail in any such
litigation and SCMs results of operations may be
materially harmed as a result of the litigation, in addition to
diverting managements attention away from operations to
attend to the litigation.
SCM
may not have uncovered all the risks associated with the
acquisition of Hirsch and a significant liability may be
discovered after closing of the Merger.
There may be risks that SCM failed to discover in the course of
performing its due diligence investigations related to the
acquisition of Hirsch, which could result in significant
liabilities arising after the consummation of the Merger. In
connection with the acquisition of Hirsch, SCM will assume all
of Hirschs liabilities, both pre-existing and contingent,
as a matter of law upon the exchange of all Hirsch shares of
common stock. The Merger Agreement does not provide for
SCMs indemnification by the former Hirsch shareholders
against any of Hirschs liabilities, should they arise or
become known after the closing of the Merger. Furthermore, there
is no escrow account or indemnity agreement protecting SCM in
the event of any breach of Hirschs representations and
warranties in the Merger Agreement. While SCM tried to minimize
risks by conducting due diligence that SCM deemed appropriate
under the circumstances, SCM may not have identified all
existing or potential risks. Any significant liability that may
arise may harm SCMs business, financial condition, results
of operations and prospects by requiring SCM to expend
significant funds to satisfy such liability.
The
representations and warranties contained in the Merger Agreement
were made solely for purposes of the contract among SCM, Hirsch,
and Merger Subs, and used as a tool for allocating risk among
the parties, and therefore they may not accurately characterize
the actual state of facts or conditions of SCM or
Hirsch.
The representations and warranties contained in the Merger
Agreement were made solely for purposes of the contract among
SCM, Hirsch, and Merger Subs, and are used for the purpose of
allocating risk among the parties, rather than establishing
matters of facts. Because the representations and warranties may
not accurately characterize the actual state of facts or
conditions of SCM or Hirsch, no third party should rely upon the
representations and warranties in the Merger Agreement as
statements of factual information.
Provisions
of the Merger Agreement regarding the payment of a termination
fee by SCM to Hirsch or by Hirsch to SCM could negatively affect
Hirschs business operations or SCMs business
operations if the Merger Agreement is terminated.
In the event the Merger is terminated by SCM or Hirsch in
circumstances that obligate either of SCM or Hirsch, as the case
may be, to pay the termination fee of $1.5 million, plus an
amount equal to all
out-of-pocket
expenses (excluding the cost of employee time) incurred by
either of SCM or Hirsch in connection with the Merger Agreement,
the ancillary agreements, and the transactions contemplated
thereby to the other party, the results of either of SCMs
business operations or Hirschs business operations, as the
case may be, may be adversely impacted.
20
SCMs
and Hirschs customers may seek to change the existing
business relationship with SCM and Hirsch in reaction to the
announcement of the Merger.
In response to the announcement of the Merger, existing or
prospective customers of SCM and Hirsch may delay or defer their
purchase of products or services or other decisions concerning
SCM and Hirsch, or they may seek to change their existing
business relationship. Any delay or deferral in product purchase
or other decisions by customers could have a material adverse
effect on SCMs and Hirschs respective business,
regardless of whether the transaction is ultimately completed.
Risks
Relating to SCMs Business
SCMs 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 are not the only ones facing SCM. Additional risks,
uncertainties and other factors not presently known to SCM or
that SCM currently deems immaterial may also impair its business
operations. Any of the risks, uncertainties and other factors
could have a materially adverse effect on SCMs business,
financial condition, results of operations, cash flows or
product market share and could cause the trading price of its
common stock to decline substantially.
SCMs
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 SCMs 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 SCMs stock, particular
in the U.S.;
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variations in SCMs or its competitors financial
and/or
operational results;
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the fluctuation in market value of comparable companies in any
of SCMs 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 SCMs stock on the NASDAQ Stock Market
or Prime Standard of the Frankfurt Stock Exchange;
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the inclusion or removal of SCMs 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
SCM or its 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 SCM were the object of securities
class action litigation, it could result in substantial costs
and a diversion of SCMs managements attention and
resources.
21
SCM
has incurred operating losses and may not achieve
profitability.
SCM has a history of losses with an accumulated deficit of
$198.1 million as of September 30, 2008. SCM may not
be able to achieve expected results, including any guidance or
outlook it may provide from time to time; SCM may continue to
incur losses; and it may be unable to achieve or maintain
profitability.
SCMs
quarterly and annual operating results fluctuate.
SCMs 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 its control. SCMs 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 SCMs
markets;
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the timing and amount of orders SCM receives from its 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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SCMs ability to obtain an adequate supply of components on
a timely basis;
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poor quality in the supply of SCMs components;
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delays in the manufacture of SCMs products;
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the absence of significant backlog in SCMs business;
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SCMs inventory levels;
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SCMs 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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SCMs ability to develop, introduce and market new products
and product enhancements on a timely basis, if at all;
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SCMs 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
SCM sells;
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technological changes in the markets for SCMs products;
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the rate of adoption of industry-wide standards;
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reductions in the average selling prices that SCM is 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, SCMs revenues may decrease
from their current levels. Because a majority of its operating
expenses are fixed, a small variation in SCMs revenues can
cause significant variations in its operational results from
quarter to quarter and its operating results may vary
significantly in future periods. Therefore, SCMs
historical results may not be a reliable indicator of its future
performance.
22
SCM is
exposed to credit risk on its accounts receivable. This risk is
heightened in times of economic weakness.
SCM distributes its products both through third-party resellers
and directly to certain customers. A majority of SCMs
outstanding trade receivables are not covered by collateral or
credit insurance. SCM may not be able to monitor and limit its
exposure to credit risk on its trade and non-trade receivables,
and it may not be effective in limiting credit risk and avoiding
losses. Additionally, if the global economy and regional
economies continue to deteriorate, one or more of SCMs
customers could experience a weakened financial condition and
SCM could incur a material loss or losses as a result. Beginning
in the third quarter of 2008, global economic uncertainty has
resulted in a lower level of realization of amounts owed to SCM
by some customers.
Disruption
in the global financial markets may adversely impact the
availability and cost of credit.
In the future, SCM may raise additional funds. SCMs
ability to obtain financing for acquisitions or other general
corporate and commercial purposes depends on its operating and
financial performance and is also subject to prevailing economic
conditions and to financial, business and other factors beyond
its control. Recently, global credit markets and the financial
services industry have been experiencing a period of
unprecedented turmoil characterized by the bankruptcy, failure
or sale of various financial institutions. As a result, an
unprecedented level of intervention from the United States and
other governments has been seen. As a result of such disruption,
SCMs ability to raise capital may be severely restricted
and the cost of raising capital through such markets or
privately may increase significantly at a time when it would
like, or need, to do so. Either of these events could have an
impact on SCMs flexibility to pursue additional expansion
or acquisition opportunities, make capital expenditures, or make
another discretionary use of cash and could adversely impact its
financial results. In any case, there can be no assurance that
such funds, if available at all, can be obtained on terms
reasonable to SCM. If SCM is able to obtain additional capital,
the aggregate percentage ownership of its existing stockholders
may be reduced. In addition, any new securities that SCM issues
may have rights senior to those of its common stock.
Disruption
in the global financial markets may adversely impact SCMs
customers and customer spending patterns.
The current financial crisis may cause consumers, businesses and
governments to defer purchases in response to tighter credit,
decreased cash availability and declining consumer confidence.
Accordingly, demand for SCMs products could decrease and
differ materially from its current expectations. Further, some
of SCMs customers may require substantial financing in
order to fund their operations and make purchases from SCM. The
inability of these customers to obtain sufficient credit to
finance purchases of SCMs products and meet their payment
obligations to SCM or possible insolvencies of SCMs
customers could result in decreased customer demand, an impaired
ability for SCM to collect on outstanding accounts receivable,
significant delays in accounts receivable payments, and
significant write-offs of accounts receivable, each of which
could adversely impact SCMs financial results.
Disruption
in the global financial markets may adversely impact SCMs
suppliers.
SCMs ability to meet customers demands depends, in
part, on its ability to obtain timely and adequate delivery of
quality materials, parts and components or products from its
suppliers. Certain of SCMs components are available only
from a single source or limited sources. If certain key
suppliers were to become capacity constrained or insolvent as a
result of the financial crisis, it could result in a reduction
or interruption in supplies or a significant increase in the
price of supplies, each of which would adversely impact
SCMs financial results. In addition, credit constraints at
key suppliers could result in accelerated payment of accounts
payable by SCM, impacting SCMs cash flow.
It is
difficult to estimate operating results prior to the end of a
quarter.
SCM does 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 SCMs 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
23
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,
SCMs operating results for that quarter could be
materially adversely affected. In addition, from time to time,
SCM may experience unexpected increases or decreases in demand
for its products resulting from fluctuations in its
customers budgets, purchasing patterns or deployment
schedules. These occurrences are not always predictable and can
have a significant impact on SCMs results in the period in
which they occur.
SCM is
subject to a lengthy sales cycle and additional delays could
result in significant fluctuations in its quarterly operating
results.
SCMs initial sales cycle for a new customer usually takes
a minimum of six to nine months. During this sales cycle, SCM
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 SCM may not be able to control. These factors
include the customers product and technical requirements
and the level of competition SCM faces for that customers
business. Any delays in the sales cycle for new customers could
delay or reduce SCMs receipt of new revenue and could
cause SCM to expend more resources to obtain new customer wins.
If SCM is unsuccessful in managing sales cycles, its business
could be adversely affected.
SCMs
listing on both the NASDAQ Stock Market and the Prime Standard
of the Frankfurt Stock Exchange exposes its stock price to
additional risks of fluctuation.
SCMs common stock is listed both on the NASDAQ Stock
Market and the Prime Standard of the Frankfurt Stock Exchange
and most of the trading of SCMs stock is on the Prime
Standard. Because of this, factors that would not otherwise
affect a stock traded solely on the NASDAQ Stock Market may
cause SCMs 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 significant
positive or negative reaction by investors in Europe to such
events could cause SCMs 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 SCMs stock price.
A
significant portion of SCMs sales typically come 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 SCMs operating results.
SCMs products are generally targeted at original equipment
manufacturers (OEM) customers in the consumer
electronics, digital photo processing and computer industries,
as well as the government sector, the financial sector and
corporate enterprises. Sales to a relatively small number of
customers historically have accounted for a significant
percentage of SCMs revenues. Sales to SCMs top ten
customers accounted for approximately 56% of revenue in the
first nine months of 2008 and 61% of revenue in fiscal year
2007. SCM expects that sales of its products to a relatively
small number of customers will continue to account for a high
percentage of its total sales for the foreseeable future,
particularly in its Digital Media and Connectivity business,
where approximately two-thirds of SCMs 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 its market segments, could significantly lower
SCMs revenues in any period and would increase its
dependence on a smaller group of its remaining customers. For
example, in the third quarter of 2008, sales of SCMs
digital media readers were significantly lower than in previous
quarters due to variability in the timing of orders from one
large customer in this business. Variations in the timing or
patterns of customer orders could also increase SCMs
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
SCMs business and operating results.
24
Sales
of SCMs products depend on the development of emerging
applications in its target markets and on diversifying and
expanding its customer base in new markets and geographic
regions, and with new products.
SCM sells its products primarily to address emerging
applications that have not yet reached a stage of mass adoption
or deployment. For example, SCM sells its smart card readers for
use in various smart card-based security programs in Europe,
such as electronic drivers licenses, national IDs and
e-passports,
which are applications that are not yet widely implemented. In
recent months, SCM also has focused on expanding sales of
existing product lines into new geographic markets and
diversifying and expanding its customer base. For example,
recently SCM has added sales resources to target authentication
programs in the government and enterprise sectors in Latin
America and Asia, and has begun to target the photo kiosk
markets in Europe and Asia. SCM also has initiated business
development activities aimed at penetrating the worldwide
financial services and enterprise markets with new contactless
reader products. SCM introduced the first of these products in
October 2008. Because the markets for SCMs products are
still emerging, demand for SCMs products is subject to
variability from period to period. 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, SCMs revenue and gross profit
margins could decline or fail to grow. SCM cannot predict the
future growth rate, if any, or the size or composition of the
market for any of its products. SCMs target markets have
not consistently grown or developed as quickly as SCM has
expected, and SCM has 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 SCMs 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, for example the economic
uncertainty caused by the current global banking crisis;
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SCMs ability to demonstrate to its potential customers and
partners the value and benefits of new products;
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the ability of SCMs competitors to develop and market
competitive solutions for emerging applications in its target
markets and its 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 SCMs smart card
readers;
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the timing of large scale security programs involving smart
cards and related technology by governments, banks and
enterprises;
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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 security
applications that will drive demand for reader solutions such as
SCMs; and
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the ability of high capacity flash memory cards to drive demand
for digital media readers, such as SCMs, that enable rapid
transfer of large amounts of data, for example digital
photographs.
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A
significant portion of SCMs revenue is dependent upon
sales to 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.
Large government programs are a primary target for SCMs
Secure Authentication business, as smart card technology is
increasingly used to enable applications ranging from paying
taxes online, to citizen identification, to receiving health
care. Historically, SCM has sold a significant proportion of its
Secure Authentication products to the U.S. government for
PC and network access by military and federal employees, and
these sales have been an important component of its overall
revenue. In recent periods, SCM has experienced a significant
decrease in sales of its external smart card readers to the
U.S. government, primarily due to weaker demand in this
market as a result of ongoing project and budget delays and a
movement by the U.S. government towards purchasing computer
25
equipment with embedded reader capabilities. SCM continues to
believe that it remains a leading supplier of smart card reader
technology to the U.S. government market and that it is not
losing share to competitors. However, lower overall market
demand and the replacement of external smart card reader sales
with sales of lower-priced interface chips for embedded readers
have resulted in reduced revenue from the U.S. government
sector, which SCM believes is not likely to consistently return
to previous levels. SCM anticipates that a significant portion
of its future revenues will come from government programs
outside the U.S., such as national identity,
e-government,
e-health and
others applications. SCM currently supplies smart card readers
for various government programs in Europe and Asia and is
actively targeting additional programs in these areas as well as
in Latin America. SCM also has spent significant resources
developing a range of
e-health
smart card terminals for the German governments electronic
healthcard program. However, the timing of government smart card
programs is not always certain and delays in program
implementation are common. For example, while the German
government has stated that it plans to distribute new electronic
health cards to its citizens beginning in early 2009, and to put
in place a corresponding network and card reader infrastructure
during 2009, there have already been delays in this program and
the actual timing of equipment and card deployments in the
German
e-health
program remain uncertain. The continued delay of government
projects for any reason could negatively impact SCMs sales.
Some
of SCMs sales are made through distributors, and the loss
of such distributors could result in decreased
revenue.
SCM currently uses distributors to sell some of its products,
primarily into markets or customers where the distributor may
have closer relationships or greater access than SCM.
Distribution arrangements are intended to benefit both SCM and
the distributor, and may be long- or short-term relationships,
depending on market conditions, competition in the marketplace
and other factors. If SCM is unable to maintain effective
distribution channels, there could be a reduction in the amount
of product the Company is able to sell, and revenues could
decrease.
SCMs
products may have defects, which could damage its reputation,
decrease market acceptance of its products, cause it to lose
customers and revenue and result in costly litigation or
liability.
Products such as SCMs 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 SCMs
products contain defects or perceived defects or have
reliability, quality or compatibility problems or perceived
problems, SCMs reputation might be damaged significantly,
it could lose or experience a delay in market acceptance of the
affected product or products and it might be unable to retain
existing customers or attract new customers. In addition, these
defects could interrupt or delay sales or SCMs ability to
recognize revenue for products shipped. In the event of an
actual or perceived defect or other problem, SCM 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 SCM is unable to provide a solution to
the potential defect or problem that is acceptable to its
customers, it may be required to incur substantial product
recall, repair and replacement and even litigation costs. These
costs could have a material adverse effect on SCMs
business and operating results.
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 SCM 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.
In addition, because SCMs customers rely on its Secure
Authentication products to prevent unauthorized access to PCs,
networks or facilities, a malfunction of or design defect in its
products (or even a perceived defect) could result in legal or
warranty claims against SCM for damages resulting from security
breaches. If such claims are adversely decided against SCM, the
potential liability could be substantial and have a material
adverse effect on SCMs business and operating results.
Furthermore, the possible publicity associated with any such
claim, whether
26
or not decided against SCM, could adversely affect SCMs
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
SCMs in general, or SCMs products in particular,
regardless of whether the breach is actual or attributable to
SCMs products. Any of the foregoing events could cause
demand for SCMs products to decline, which would cause its
business and operating results to suffer.
If SCM
does not accurately anticipate the correct mix of products that
will be sold, it may be required to record charges related to
excess inventories.
Due to the unpredictable nature of the demand for its products,
SCM is required to place orders with its 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, SCM 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 SCM were to
determine that it could not utilize or sell this inventory, it
may be required to write down the inventorys value, which
it has done in the past. Writing down inventory or reducing
product prices could adversely impact SCMs cost of
revenues and financial condition.
SCMs
business could suffer if its third-party manufacturers cannot
meet production requirements.
SCMs products are manufactured outside the United States
by contract manufacturers. SCMs 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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export controls;
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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 SCMs products;
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late delivery of SCMs products, whether because of limited
access to product components, transportation delays and
interruptions, difficulties in staffing, or disruptions such as
natural disasters;
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capacity limitations of SCMs manufacturers, particularly
in the context of new large contracts for its products, whether
because its manufacturers lack the required capacity or are
unwilling to produce the quantities SCM desires; and
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obsolescence of SCMs hardware products at the end of the
manufacturing cycle.
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The use of contract manufacturing requires SCM to exercise
strong planning and management in order to ensure that its
products are manufactured on schedule, to correct specifications
and to a high standard of quality. If any of SCMs contract
manufacturers cannot meet its production requirements, it may be
required to rely on other contract manufacturing sources or
identify and qualify new contract manufacturers. SCM 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 SCM in
order to meet SCMs requirements. Any significant delay in
SCMs ability to obtain adequate supplies of its products
from its current or alternative manufacturers would materially
and adversely affect its business and operating results. In
addition, if SCM is not successful at managing the contract
manufacturing process, the quality of its products could be
jeopardized or inventories could be too low or too high, which
could result in damage to SCMs reputation with its
customers and in the marketplace, as well as possible write-offs
of excess inventory.
27
SCM
has a limited number of suppliers of key components, and may
experience difficulties in obtaining components for which there
is significant demand.
SCM relies upon a limited number of suppliers for some key
components of its products. For example, SCM currently utilizes
the foundry services of external suppliers to produce its ASICs
for smart cards readers, and uses chips and antenna components
from third-party suppliers in its contactless smart card
readers. SCMs reliance on a limited number of suppliers
may expose it 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 SCM uses in its products, such as digital flash
media, may at any time be in great demand. This could result in
components not being available to SCM 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 SCMs products
could delay shipments of these products. These delays could have
a material adverse effect on SCMs business and operating
results and could also damage relationships with current and
prospective customers.
SCMs
markets are highly competitive.
The markets for SCMs products are competitive and
characterized by rapidly changing technology. SCM believes that
the principal competitive factors affecting the markets for its
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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SCM currently experiences competition from a number of companies
in each of its target market segments and it believes that
competition in its markets is likely to intensify as a result of
anticipated increased demand for secure digital access products.
SCM may not be successful in competing against offerings from
other companies and could lose business as a result.
SCM also experiences indirect competition from certain of its
customers who currently offer alternative products or are
expected to introduce competitive products in the future. For
example, SCM sells its products to many OEMs who incorporate its
products into their offerings or who resell its products in
order to provide a more complete solution to their customers. If
SCMs OEM customers develop their own products to replace
SCMs products, this would result in a loss of sales to
those customers, as well as increased competition for SCMs
products in the marketplace. In addition, these OEM customers
could cancel outstanding orders for SCMs products, which
could cause it to write down inventory already designated for
those customers. SCM 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 SCM. In addition, the market for digital
information security and access control products may ultimately
be dominated by approaches other than the approach marketed by
SCM.
Many of SCMs current and potential competitors have
significantly greater financial, technical, marketing,
purchasing and other resources than SCM does. As a result,
SCMs competitors may be able to respond more quickly to
new or emerging technologies or standards and to changes in
customer requirements. SCMs 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 SCMs 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.
28
SCM
may have to take back unsold inventory from its
customers.
If demand is less than anticipated, customers may ask that SCM
accept returned products that they do not believe they can sell.
SCM does not have a policy relating to product returns;
however, SCM may determine that it is in its best
interest to accept returns in order to maintain good relations
with its customers. If SCM were to accept product returns, it
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 SCMs future
results.
A number of factors impact SCMs 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 SCMs 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 SCM has not previously provided for U.S. taxes.
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Each of these factors makes it more difficult for SCM to project
or achieve expected tax results. An increase or decrease in
SCMs tax liabilities due to these or other factors could
adversely affect its financial results in future periods.
Large
stock holdings outside the U.S. make it difficult for SCM to
achieve a quorum at stockholder meetings and this could
restrict, delay or prevent its ability to implement future
corporate actions, as well as have other effects, such as the
delisting of SCMs 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 SCMs stock entitled to
vote must be present at such a meeting in person or by proxy. In
addition, certain actions, including the approval of a
significant transaction, may require approval of a majority of
the total number of SCMs shares then outstanding. As of
February 11, 2009, the record date for SCMs special
meeting, approximately 50% of SCMs 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 SCMs
proxy materials to its 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 SCM before the votes it
represents can be counted for purposes of establishing a quorum.
As a result, it is often difficult and costly for SCM, and
requires considerable management resources, to achieve a quorum
at annual and special meetings of its stockholders. If SCM is
unable to achieve a quorum or the required approval of a matter
at a future annual or special meeting of its 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 SCMs stockholders, part of its strategic plan or
necessary for its corporate governance, such as the Merger and
related actions and corporate mergers, acquisitions,
dispositions, sales or reorganizations, financings, stock
incentive plans or the election of directors. Even if SCM is
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 SCMs shares then outstanding, and it
may not be successful in obtaining such approval. The failure to
hold an annual meeting of stockholders may also result in SCM
being out of compliance with Delaware law and the qualitative
listing requirements of the NASDAQ Stock Market, each of which
requires SCM to hold an annual meeting of its stockholders.
SCMs 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 SCMs common stock
on the NASDAQ Stock Market. Either of these events would divert
29
managements attention from SCMs operations and would
likely be costly and could also have an adverse effect on the
trading price of the SCMs common stock.
One of
SCMs directors is a partner in the largest shareholder of
SCM, and both of them have significant influence over the
outcome of corporate actions requiring board and shareholder
approval, respectively; however, the shareholders
priorities for SCMs business may be different from
SCMs or its other shareholders.
As of February 11, 2009, Lincoln Vale European Partners
(Lincoln Vale) holds nearly 10% of the outstanding
shares of SCMs common stock. Dr. Hans Liebler, one of
SCMs directors, is a partner of Lincoln Vale and may also
be deemed to beneficially own, either directly or indirectly
through limited partnerships, the shares invested by Lincoln
Vale in SCM. Accordingly, Dr. Liebler
and/or
Lincoln Vale could have significant influence over the outcome
of corporate actions requiring board and shareholder approval,
respectively, including the election of directors, any merger,
consolidation or sale of all or substantially all of SCMs
assets or any other significant corporate transaction. In
addition, Dr. Liebler
and/or
Lincoln Vale could delay or prevent a change of control of SCM,
even if such a change of control would benefit SCMs other
shareholders. SCM cannot assure you that Lincoln Vales
objectives are aligned with those of the other shareholders.
SCM
has global operations, which require significant financial,
managerial and administrative resources.
SCMs 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 its products, each product line requires
significant research and development effort to address the
evolving needs of SCMs customers and markets. To support
its development and sales efforts, SCM maintains company offices
and business operations in several locations around the world
including Germany, Hong Kong, India, Japan and the United
States. SCM also must manage contract manufacturers in several
different countries, including, China and Singapore. Managing
its various development, sales, administrative and manufacturing
operations places a significant burden on SCMs financial
systems and has resulted in a level of operational spending that
is disproportionately high compared to SCMs current
revenue levels.
Operating in diverse geographic locations also imposes
significant burdens on SCMs managerial resources. In
particular, SCMs 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 SCMs 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 SCMs 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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A failure to effectively manage our operations globally could
have a material adverse effect on our business and operating
results.
SCM
conducts a significant portion of its operations outside the
United States. Economic, political, regulatory and other risks
associated with international sales and operations could have an
adverse effect on SCMs results of
operations.
In addition to its corporate headquarters being located in
Germany, SCM conducts a substantial portion of its business in
Europe and Asia. Approximately 63% of SCMs revenue for the
nine months ended September 30, 2008 and approximately 49%
of its revenue for the year ended December 31, 2007 was
derived from customers located outside the United States.
Because a significant number of its principal customers are
located in other countries,
30
SCM anticipates that international sales will continue to
account for a substantial portion of its revenues. As a result,
a significant portion of SCMs sales and operations may
continue to be subject to risks associated with foreign
operations, any of which could impact its sales
and/or
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 impact costs and/or
revenues SCM discloses in U.S. dollars, and could result in
foreign currency losses.
A significant portion of SCMs 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. If 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. For example, excluding a one-time
severance payment made to its former chief executive officer in
the second quarter of 2007, SCMs general and
administrative expenses in the first half of 2008 were higher
than in the same period of the previous year, primarily due to
the devaluation of the dollar as compared with the Euro. In
addition, the valuation of current assets and liabilities that
are denominated in a currency other than the functional currency
can result in currency exchange gains and losses. For example
when an SCM subsidiary has the Euro as the functional currency,
and this subsidiary has a receivable in U.S. dollars, a
devaluation of the U.S. dollar against the Euro of 10%
would result in a foreign exchange loss of the reporting entity
of 10% of the value of the underlying U.S. dollar
receivable. SCM 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 SCMs costs
and/or
revenues in any given quarter, and it may experience currency
losses in the future. To date, SCM has not adopted a hedging
program to protect it from risks associated with foreign
currency fluctuations.
SCMs
key personnel and directors are critical to its business, and
such key personnel may not remain with SCM in the
future.
SCM depends on the continued employment of its senior executive
officers and other key management and technical personnel. If
any of its key personnel were to leave and not be replaced with
sufficiently qualified and experienced personnel, SCMs
business could be adversely affected. In particular, SCMs
current strategy to penetrate the market for contactless payment
solutions is heavily dependent on the vision, leadership and
experience of its chief executive officer, Felix Marx.
SCM also believes that its future success will depend in large
part on its ability to attract and retain highly qualified
technical and management personnel. However, competition for
such personnel is intense. SCM may not be able to retain its key
technical and management employees or to attract, assimilate or
retain other highly qualified technical and management personnel
in the future.
Likewise, as a small, dual-traded company, SCM is challenged to
identify, attract and retain experienced professionals with
diverse skills and backgrounds who are qualified and willing to
serve on its 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 SCMs business and lack of growth in
its stock price make it
31
difficult for SCM to offer attractive director compensation
packages. If SCM is not able to attract and retain qualified
board members, its ability to practice a high level of corporate
governance could be impaired.
SCM
faces risks associated with strategic
transactions.
A component of SCMs ongoing business strategy is to seek
to buy businesses, products and technologies that complement or
augment its existing businesses, products and technologies. SCM
has 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 it believes are complementary to its
existing businesses, products and technologies. Any future
acquisition could expose SCM to significant risks, including,
without limitation, the use of its 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 SCM 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 management resources; failure
to realize anticipated benefits; costly fees for legal and
transaction-related services; and the unanticipated assumption
of liabilities. Any of the foregoing could have a material
adverse effect on SCMs financial condition and results of
operations. SCM may not be successful with any such acquisition.
SCMs business strategy also contemplates divesting
portions of its business from time to time, if and when it
believes it would be able to realize greater value for its
stockholders in so doing. SCM has in the past sold, and may from
time to time in the future sell, all or one or more portions of
its business. Any divestiture or disposition could expose SCM 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, SCM may be required to retain or indemnify the
buyer against certain liabilities and obligations in connection
with any such divestiture or disposition and it may also become
subject to third-party claims arising out of such divestiture or
disposition. In addition, SCM may not achieve the expected price
in a divestiture transaction. Failure to overcome these risks
could have a material adverse effect on SCMs financial
condition and results of operations.
SCM
may be exposed to risks of intellectual property infringement by
third parties.
SCMs success depends significantly upon its proprietary
technology. SCM currently relies on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect its proprietary
rights, which afford only limited protection. SCM may not be
successful in protecting its proprietary technology through
patents, it is possible that no new patents will be issued, that
its proprietary products or technologies are not patentable or
that any issued patent will fail to provide SCM 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 SCM may be required to use litigation to protect its
proprietary technology. This may result in SCM incurring
substantial costs and it may not be successful in any such
litigation.
Despite SCMs efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of its products
or to use its 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 its products are sold and a significant portion of its
business is conducted outside the United States, SCMs
exposure to intellectual property risks may be higher.
SCMs means of protecting its proprietary and intellectual
property rights may not be adequate. There is a risk that
SCMs competitors will independently develop similar
technology or duplicate its products or design around patents or
other intellectual property rights. If SCM is unsuccessful in
protecting its intellectual property or its products or
technologies are duplicated by others, its business could be
harmed.
32
Changes
to financial accounting standards may affect SCMs results
of operations and cause SCM to change its business
practices.
SCM prepares its financial statements to conform with
U.S. GAAP. These accounting principles are subject to
interpretation by the Financial Standards Accounting Board, the
American Institute of Certified Public Accountants, the
Securities and Exchange Commission and various other bodies
formed to interpret and create appropriate accounting rules and
policies. A change in those rules or policies could have a
significant effect on SCMs reported results and may affect
its reporting of transactions completed before a change is
announced. Any changes in accounting rules or policies in the
future may result in significant accounting charges.
SCM
faces costs and risks associated with maintaining effective
internal controls over financial reporting, and if it fails to
achieve and maintain adequate internal controls over financial
reporting, its business, results of operations and financial
condition, and investors confidence in SCM could be
materially affected.
Under Sections 302 and 404 of the Sarbanes-Oxley Act of
2002, SCMs management is required to make certain
assessments and certifications regarding its disclosure controls
and internal controls over financial reporting. SCM has
dedicated, and expects to continue to dedicate, significant
management, financial and other resources in connection with its
compliance with Section 404 of the Sarbanes-Oxley Act. The
process of maintaining and evaluating the effectiveness of these
controls is expensive, time-consuming and requires significant
attention from SCMs management and staff. During the
course of its evaluation, SCM 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 SCM and require
it to divert substantial resources, including management time
from other activities. SCM has found a material weakness in its
internal controls in the past and cannot be certain in the
future that it will be able to report that its controls are
without material weakness or to complete its evaluation of those
controls in a timely fashion.
If SCM fails to maintain an effective system of disclosure
controls or internal control over financial reporting, it may
not be able to rely on the integrity of its financial results,
which could result in inaccurate or late reporting of its
financial results and investigation by regulatory authorities.
If SCM fails to achieve and maintain adequate internal controls,
the financial position of its business could be harmed; current
and potential future shareholders could lose confidence in SCM
and/or its
reported financial results, which may cause a negative effect on
the trading price of its common stock; and SCM 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 controls can provide absolute assurance that all control
issues and instances of fraud, if any, within SCM 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. Any failure of SCMs internal control systems
to be effective could adversely affect its business.
SCM
faces risks from litigation.
From time to time, SCM may be subject to litigation, which could
include, among other things, 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 SCM to
redesign its products, require SCM to accept returns of products
and to write off inventory, or have other adverse effects on its
business. Any of the foregoing could have a material adverse
effect on SCMs results of operations and could require SCM
to pay significant monetary damages.
SCM expects the likelihood of intellectual property infringement
and misappropriation claims may increase as the number of
products and competitors in its markets grows and as it
increasingly incorporates third-party technology into its
products. As a result of infringement claims, SCM could be
required to license intellectual
33
property from a third-party or redesign its products. Licenses
may not be offered when needed or on acceptable terms. If SCM
does obtain licenses from third parties, it may be required to
pay license fees or royalty payments or it may be required to
license some of its intellectual property to others in return
for such licenses. If SCM is unable to obtain a license that is
necessary for it or its third-party manufacturers to manufacture
its allegedly infringing products, SCM could be required to
suspend the manufacture of products or stop its suppliers from
using processes that may infringe the rights of third parties.
SCM also may be unsuccessful in redesigning its products.
SCMs suppliers and customers may be subject to
infringement claims based on intellectual property included in
its products. SCM historically has agreed to indemnify its
suppliers and customers for patent infringement claims relating
to its products. The scope of this indemnity varies, but may, in
some instances, include indemnification for damages and
expenses, including attorneys fees. SCM may periodically
engage in litigation as a result of these indemnification
obligations. SCMs insurance policies exclude coverage for
third-party claims for patent infringement.
Provisions
in SCMs agreements, charter documents, Delaware law and
SCMs rights plan may delay or prevent the acquisition of
SCM by another company, which could decrease the value of your
shares.
SCMs certificate of incorporation and bylaws and Delaware
law contain provisions that could make it more difficult for a
third party to acquire SCM or enter into a material transaction
with SCM without the consent of SCMs board of directors.
These provisions include a classified board of directors and
limitations on actions by SCMs stockholders by written
consent. Delaware law imposes some restrictions on mergers and
other business combinations between SCM and any holder of 15% or
more of SCMs outstanding common stock. In addition,
SCMs board of directors has the right to issue preferred
stock without stockholder approval, which could be used to
dilute the stock ownership of a potential hostile acquirer.
SCM has 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 SCM on terms or in a
manner not approved by SCMs 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 SCM,
they may have the effect of rendering more difficult or
discouraging an acquisition of SCM that was deemed to be
undesirable by its board of directors.
These provisions will apply even if the offer were to be
considered adequate by some of SCMs stockholders. Because
these provisions may be deemed to discourage a change of
control, they may delay or prevent the acquisition of SCM, which
could decrease the value of SCMs common stock.
You
may experience dilution of your ownership interests due to the
future issuance of additional shares of SCMs stock, and
future sales of shares of its common stock could have an adverse
effect on SCMs stock price.
From time to time, in the future SCM may issue previously
authorized and unissued securities, resulting in the dilution of
the ownership interests of its current stockholders. SCM
currently is authorized to issue up to 40,000,000 shares of
common stock. As of February 11, 2009,
15,743,515 shares of common stock were outstanding.
In 2007, SCMs board of directors and its stockholders
approved SCMs 2007 Stock Option Plan, under which options
to purchase 1.5 million shares of SCM common stock may be
granted. As of September 30, 2008, an aggregate of
approximately 3.1 million shares of common stock was
reserved for future issuance under SCMs stock option
plans, of which 1.9 million shares were subject to
outstanding options. SCM may issue additional shares of its
common stock or other securities that are convertible into or
exercisable for shares of its common stock in connection with
the hiring of personnel, future acquisitions, future private
placements, or future public offerings of its securities for
capital raising or for other business purposes. If SCM issues
additional securities, the aggregate percentage ownership of its
existing stockholders will be reduced. In addition, any new
securities that SCM issues may have rights senior to those of
its common stock.
In addition, the potential issuance of additional shares of its
common stock or preferred stock, or the perception that such
issuances could occur, may create downward pressure on the
trading price of SCMs common stock.
34
Risks
Relating to Hirschs Business
Hirschs 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 are not the only ones facing Hirsch.
Additional risks, uncertainties and other factors not presently
known to Hirsch or that Hirsch currently deems immaterial may
also impair its business operations. Any of the risks,
uncertainties and other factors could have a materially adverse
effect on Hirschs business, financial condition, results
of operations, cash flows or product market share.
Hirschs
business could be materially adversely affected as a result of
conditions in the general economy and financial
markets.
Hirsch is subject to the effects of general economic and
financial market conditions. Recently, global credit markets and
the financial services industry have been experiencing a period
of unprecedented turmoil characterized by the bankruptcy,
failure or sale of various financial institutions. As a result,
an unprecedented level of intervention from the United States
and other governments has been seen. As a result of such
disruption, Hirschs ability to raise capital may be
severely restricted and the cost of raising capital through such
markets or privately may increase significantly at a time when
it would like, or need, to do so. If these economic conditions
further deteriorate, the Hirsch business, results of operations
or financial condition could be materially adversely affected.
The
Hirsch business could be materially adversely affected as a
result of adverse conditions in the commercial construction and
renovation markets.
As part of its focus on commercial and industrial markets,
Hirsch is subject to the effects of conditions in the commercial
construction and renovation sector. If these conditions
deteriorate further, resulting in a significant decline in new
commercial construction or a significant decline in renovation
projects, the Hirsch business, results of operations or
financial condition could be materially adversely affected.
The
markets Hirsch serves are highly competitive and it may be
unable to compete effectively.
Hirsch competes with many other companies that manufacture and
market security equipment. Some of these competitors may have
substantially greater financial, engineering, manufacturing,
sales, marketing, channel and partner resources than Hirsch.
Hirsch competes primarily on the basis of its reputation,
product features, product reliability, breadth of product line,
ability to attract and work with other companies as strategic
partners, ability to customize middleware and develop user
interfaces to meet specific customer needs, interoperability
with other systems, databases and devices, ability to offer
end-to-end
identity and access management, and training services. The
inability of Hirsch to compete with respect to any one or more
of the aforementioned factors could have an adverse impact on
Hirschs business.
If the
security management system market does not experience
significant growth or if Hirschs products do not achieve
broad acceptance both domestically and internationally, it will
not be able to achieve its anticipated level of
growth.
Hirschs revenues are derived from sales of its security
solutions. Hirsch cannot accurately predict the future growth
rate or the size of the security management system market. The
expansion of the security management system market and the
market for Hirschs security solutions depends on a number
of factors, such as:
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the cost, performance and reliability of its solutions, and the
products and services offered by Hirschs competitors;
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customers perceptions regarding the benefits of and need
for security solutions;
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the development and growth of demand for security solutions in
new markets;
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public perceptions regarding the intrusiveness of
identity-related solutions and the manner in which organizations
use the information collected;
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public perceptions regarding the confidentiality of private
information;
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proposed or enacted legislation related to privacy of
information;
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customers satisfaction with security products; and
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marketing efforts and publicity regarding security products.
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Even if the security management systems market continues to
grow, Hirschs solutions may not adequately address market
requirements and may not gain market acceptance. If security
products generally, or Hirschs solutions specifically, do
not gain wide market acceptance, Hirsch may not be able to
achieve its anticipated level of growth and its revenues and
results of operations would suffer.
The
security management systems market is characterized by rapid
technological change and evolving industry standards, which
could render Hirschs existing solutions obsolete or could
result in increased research and development expenditures or
failure to attract or retain customers.
Hirschs future success will depend upon Hirschs
ability to develop and introduce a variety of new capabilities
and enhancements to its existing solutions in order to address
the changing and sophisticated needs of the marketplace.
Frequently, technical development programs in the security
industry require assessments to be made of the future direction
of technology, which is inherently difficult to predict.
A significant portion of Hirschs revenues result from the
sale of access control panels that include certain design
elements that are more than a decade old. These controllers are
typically used in a network architecture that may become
outdated or obsolete. Nearly all Hirschs revenue comes
from physical security products, and that product line alone may
be too narrow to meet future market demands. Hirschs
failure to develop, manufacture, launch and sell next-generation
security products and architectures for both physical and
logical security could significantly affect its financial
performance.
Delays in introducing new products and enhancements, the failure
to choose correctly among technical alternatives or the failure
to offer innovative products or enhancements at competitive
prices may cause customers to forego purchases of Hirschs
solutions and purchase its competitors solutions. Hirsch
may not have adequate resources available to it or may not
adequately keep pace with appropriate requirements in order to
effectively compete in the marketplace.
If
Hirsch does not accurately anticipate the correct mix of
products that will be sold, it may be required to record charges
related to excess inventories.
Due to the unpredictable nature of the demand for Hirschs
products, it is required to place orders with Hirschs
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,
Hirsch 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
Hirsch was to determine that it could not utilize or sell this
inventory, it may be required to write down its value. Writing
down inventory or reducing product prices could adversely impact
its cost of revenues and financial condition.
Hirschs
business could be adversely affected by changes in laws or
regulations pertaining to security.
The U.S. federal government, contractors to the federal
government and certain industries in the public sector currently
fall, or may in the future fall, under particular regulations
pertaining to security. Some of the laws, regulations,
certifications or requirements that may stimulate new security
systems sales include the following:
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Homeland Security Presidential Directive (HSPD) 12 and Federal
Information Processing Standards (FIPS) 201 produced by National
Institute of Standards and Technology (NIST).
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Transportation Security Administrations (TSA)
Transportation Worker Identification Credential (TWIC) program.
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Federal Information Security Management Act (FISMA);
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Sarbanes-Oxley Act of 2002 (also known as, the Public Company
Accounting Reform and Investor Protection Act).
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Health Insurance Portability and Accountability Act (HIPAA).
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Gramm-Leach Bliley Act of 1999 (GLBA, a.k.a., the Financial
Modernization Act).
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Customs-Trade Partnership Against Terrorism (C-TPAT).
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Free and Secure Trade Program (FAST).
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Chemical Facility Anti Terrorism Standards (CFATS).d
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Various Code of Federal Regulations (CFR).
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Discontinuance of, changes in, or lack of adoption of laws or
regulations pertaining to security could adversely affect
Hirschs performance.
Hirschs
business could be adversely affected by significant changes in
the contracting or fiscal policies of governments and
governmental entities.
Hirsch derives a substantial portion of its revenues from
contracts with international, federal, state and local
governments and government agencies, and subcontracts under
federal government prime contracts. Hirsch believes that the
success and growth of its business will continue to be
influenced by its successful procurement of government contracts
either directly or through prime contractors. Accordingly,
changes in government contracting policies or government
budgetary constraints could directly affect its financial
performance.
Among the factors that could adversely affect Hirschs
business are:
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changes in fiscal policies or decreases in available government
funding or grants;
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changes in government programs or applicable requirements;
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the adoption of new laws or regulations or changes to existing
laws or regulations;
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changes in political or social attitudes with respect to
security and defense issues;
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potential delays or changes in the government appropriations
process; and
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delays in the payment of its invoices by government payment
offices.
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These and other factors could cause governments and governmental
agencies, or prime contractors that purchase Hirsch products or
services, to reduce their purchases under existing contracts, to
exercise their rights to terminate contracts at-will or to
abstain from exercising options to renew contracts, any of which
could have an adverse effect on Hirschs business,
financial condition and results of operations. Many of
Hirschs government customers are subject to stringent
budgetary constraints. The award of additional contracts from
government agencies could be adversely affected by existing or
upcoming spending reduction efforts or budget cutbacks at these
agencies.
International
uncertainties and fluctuations in the value of foreign
currencies could harm Hirschs profitability.
During each of the years ended November 30, 2007 and
November 30, 2008, revenues outside of the Americas
accounted for approximately 11% and 12%, respectively, of
Hirschs total revenues. Hirsch also currently has
international operations, consisting primarily of its office in
Milan, Italy. Hirschs international revenues and
operations are subject to a number of material risks, including,
but not limited to:
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difficulties in building and managing foreign operations;
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regulatory uncertainties in foreign countries;
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difficulties in enforcing agreements and collecting receivables
through foreign legal systems and other relevant legal issues;
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longer payment cycles;
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foreign and U.S. taxation issues;
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potential weaknesses in foreign economies;
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fluctuations in the value of foreign currencies;
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general economic and political conditions in the markets in
which Hirsch operates; and
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unexpected domestic and international regulatory, economic or
political changes.
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Hirschs sales, including sales to customers outside the
United States, are primarily denominated in U.S. dollars,
and therefore downward fluctuations in the value of foreign
currencies relative to the U.S. dollar may make
Hirschs solutions more expensive than local solutions in
international locations. This would make its solutions less
price competitive than local solutions, which could harm its
business. Hirsch does not currently engage in currency hedging
activities to limit the risks of currency fluctuations.
Therefore, fluctuations in the value of foreign currencies could
harm results of operations.
Hirschs
strategy to increase its sales of professional services,
identity management, biometric and smart card-related products
and solutions may not be successful.
Historically, the majority of Hirschs business and
products has been focused on electronic access control and
integrated security management systems. A component of
Hirschs strategy is to develop and grow its sales of other
products and solutions, in particular professional services,
identity management, biometrics and smart card-related products
and solutions. The market for some of these solutions is at an
early stage of development compared to the market for
traditional access control. Hirsch cannot be certain that other
security solutions such as those described above will gain wide
market acceptance, that this market will develop and grow as it
expects, that Hirsch will successfully develop products for this
market, or that it will have the same success in this market as
its has had in its traditional access control systems market.
Competitors
may develop new technologies or products before Hirsch
does.
Hirschs business may be materially adversely affected by
the announcement or introduction of new products and services by
its competitors, and the implementation of effective marketing
or sales strategies by its competitors. There can be no
assurance that competitors will not develop products that are
superior to the Hirschs products. Further, there can be no
assurance that Hirsch will not experience additional price
competition, and that such competition may not adversely affect
Hirschs position and results of operations.
Hirsch expects the market to remain highly competitive. Some
current and potential competitors have substantially greater
financial, engineering, manufacturing, sales, marketing, channel
and partner resources than Hirsch. To compete effectively in
this environment, Hirsch must continually develop and market new
and enhanced solutions and technologies at competitive prices
and must have the resources available to invest in significant
research and development activities. Hirschs failure to
compete successfully could cause its revenues and market share
to decline.
Hirsch
relies on dealers/integrators to sell its products, and any
adverse change in its relationship with its distributors could
result in a loss of revenue and harm its business.
Hirsch distributes its products primarily through independent
dealers/integrators of security equipment. Some of these dealers
also sell Hirschs competitors products, and if they
favor its competitors products for any reason, they may
fail to market its products as effectively or to devote
resources necessary to provide effective sales, which would
cause Hirschs results to suffer. In addition, the
financial health of these dealers and Hirschs continuing
relationships with them are important to Hirschs success.
Some of these dealers may be unable to withstand adverse changes
in business conditions. The Hirsch business could be seriously
harmed if the financial condition of some of these dealers
substantially weakens.
38
Loss
of limited source suppliers may result in delays or additional
expenses.
Hirsch obtains hardware components and complete products from a
limited group of suppliers, and it does not have long-term
agreements with any of these suppliers obligating them to
continue to sell components or products to Hirsch. Hirschs
reliance on its suppliers involves significant risks, including
reduced control over quality, price and delivery schedules.
Because Hirsch has been building its core products for several
years, there are a few parts that have reached
end-of-life.
Hirsch so far has been able to continue to source those parts,
but the continued availability and pricing of older components
in the future is not guaranteed. A significant portion of
Hirschs revenue is derived from the resale of cards and
card readers from HID Corporation (HID), and if
supplies from that company were to be disrupted, Hirschs
business would be adversely affected. Hirsch resells Dell
computers and servers, and disruption of that supply would
adversely affect Hirsch. Hirsch out-sources the stuffing of
printed circuit boards to local manufacturers. The bulk of that
out-sourcing is with a single entity, and disruptions within
that company would adversely affect Hirsch.
Any financial instability of, or consolidation among,
Hirschs manufacturers or contractors could result in it
having to find new suppliers. Hirsch may experience significant
delays in manufacturing and shipping its products to customers
if it loses these sources or if the supplies from these sources
are delayed, or are of poor quality or supplied in insufficient
amounts. As a result, Hirsch may be required to incur additional
development, manufacturing and other costs to establish
alternative sources of supply. It may take several months to
locate alternative suppliers, if required, or to re-tool
Hirschs products to accommodate components from different
suppliers. Hirsch cannot predict if it will be able to obtain
replacement components within the time frames it requires at an
affordable cost, or at all. Any delays resulting from suppliers
failing to deliver components or products on a timely basis, in
sufficient quantities and of sufficient quality or any
significant increase in the price of components from existing or
alternative suppliers could disrupt Hirschs ability to
meet customer demands or reduce Hirschs gross margins.
Hirsch
derives a substantial portion of its revenue through the sale of
its solutions to U.S. government entities, pursuant to
government contracts which differ materially from standard
commercial contracts, involve competitive bidding and may be
subject to cancellation or delay without penalty, any of which
may produce volatility in its revenues and
earnings.
Government contracts frequently include provisions that are not
standard in private commercial transactions. For example,
government contracts may include bonding requirements and
provisions permitting the purchasing agency to cancel or delay
the contract without penalty in certain circumstances.
In addition, government contracts are frequently awarded only
after formal competitive bidding processes, which have been and
may continue to be protracted, and typically impose provisions
that permit cancellation in the event that necessary funds are
unavailable to the public agency. In many cases, unsuccessful
bidders for government agency contracts are provided the
opportunity to formally protest certain contract awards through
various agency, administrative and judicial channels. The
protest process may substantially delay a successful
bidders contract performance, result in cancellation of
the contract award entirely and distract management. Hirsch may
not be awarded contracts for which it bids, and substantial
delays or cancellation of purchases may even follow its
successful bids as a result of such protests.
Furthermore, local government agency contracts may be contingent
upon availability of matching funds from federal or state
entities. Law enforcement and other government agencies are
subject to political, budgetary, purchasing and delivery
constraints which may cause Hirschs quarterly and annual
revenues and operating results to fluctuate in a manner that is
difficult to predict.
Hirschs
business could be adversely affected by negative audits by
government agencies, and Hirsch could be required to reimburse
the U.S. government for costs that it has expended on its
contracts, and its ability to compete successfully for future
contracts could be materially impaired.
Government agencies may audit Hirsch as part of their routine
audits and investigations of government contracts. As part of an
audit, these agencies may review Hirschs performance on
contracts, cost structures and
39
compliance with applicable laws, regulations and standards.
These agencies may also review the adequacy of, and
Hirschs compliance with, its own internal control systems
and policies, including its purchasing, property, estimating,
compensation and management information systems. If any of its
costs are found to be improperly allocated to a specific
contract, the costs may not be reimbursed and any costs already
reimbursed for such contract may have to be refunded. An audit
could materially affect Hirschs competitive position and
result in a material adjustment to its financial results or
statement of operations. If a government agency audit uncovers
improper or illegal activities, Hirsch may be subject to civil
and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or debarment from doing business
with the federal government. In addition, Hirsch could suffer
serious harm to its reputation if allegations of impropriety
were made against it. While Hirsch has never had a negative
audit by a governmental agency, it cannot assure that one will
not occur. If Hirsch was suspended or barred from contracting
with the federal government generally, or if its reputation or
relationships with government agencies were impaired, or if the
government otherwise ceased doing business with it or
significantly decreased the amount of business it does with
Hirsch, its revenues and prospects would be materially harmed.
Hirsch
is subject to extensive government regulation, and its failure
to comply with applicable regulations could subject it to
penalties that may restrict its ability to conduct its
business.
Hirsch is affected by and must comply with various government
regulations that impact its operating costs, profit margins and
the internal organization and operation of its business.
Furthermore, Hirsch may be audited to assure its compliance with
these requirements. Its failure to comply with applicable
regulations, rules and approvals could result in the imposition
of penalties, the loss of Hirschs government contracts or
its cancellation of Hirschs General Services
Administration contract, any of which could adversely affect its
business, financial condition and results of operations. Among
the most significant regulations affecting Hirschs
business are the following:
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|
The Federal Acquisition Regulations, or the FAR, and agency
regulations supplemental to the FAR, which comprehensively
regulate the formation and administration of, and performance
under government contracts.
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|
The Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with
contract negotiations.
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|
The Cost Accounting Standards, which impose accounting
requirements that govern Hirschs right to reimbursement
under cost-based government contracts.
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|
The Foreign Corrupt Practices Act.
|
Laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
These regulations affect how Hirschs customers can do
business with it, and, in some instances, the regulations impose
added costs on its business. Any changes in applicable laws and
regulations could restrict its ability to conduct its business.
Any failure by Hirsch to comply with applicable laws and
regulations could result in contract termination, price or fee
reductions or suspension or debarment from contracting with the
federal government generally.
If
Hirsch is unable to continue to obtain U.S. government
authorization regarding the export of its products, or if
current or future export laws limit or otherwise restrict
Hirschs business, it could be prohibited from shipping
Hirschs products to certain countries, which could cause
its business, financial condition and results of operations to
suffer.
Hirsch must comply with U.S. laws regulating the export of
Hirschs products. In some cases, explicit authorization
from the U.S. government is needed to export its products.
The export regimes and the governing policies applicable to
Hirschs business are subject to changes. It cannot be
certain that such export authorizations will be available to
Hirsch or for Hirschs products in the future. In some
cases, Hirsch relies upon the compliance activities of its prime
contractors, and it cannot be certain they have taken or will
take all measures necessary to comply with applicable export
laws. If Hirsch or its prime contractor partners cannot obtain
required government approvals under applicable regulations, it
may not be able to sell Hirschs products in certain
international jurisdictions.
40
Hirschs
sometimes lengthy and variable sales cycle will make it
difficult to predict financial results.
Hirschs solutions often require a lengthy sales cycle
ranging from several months to sometimes over a year before it
can receive approvals for purchase. The length of the sales
cycle depends on the size and complexity of the solutions, the
customers budgeting process, the customers in-depth
evaluation of Hirschs solutions and a competitive bidding
process. As a result, Hirsch may incur substantial expense
before it earns associated revenues, since a significant portion
of Hirschs operating expenses is relatively fixed. The
lengthy sales cycles of its solutions make forecasting the
volume and timing of sales difficult. In addition, the delays
inherent in lengthy sales cycles raise additional risks that
customers may cancel contracts or change their minds. If
customer cancellations occur, they could result in the loss of
anticipated sales without allowing Hirsch sufficient time to
reduce Hirschs operating expenses.
Hirschs
financial results often vary significantly from quarter to
quarter and may be negatively affected by a number of
factors.
Hirsch bases its current and future expense levels on its
internal operating plans and sales forecasts, and its operating
costs are to a large extent fixed. As a result, it may not be
able to sufficiently reduce its costs in any quarter to
adequately compensate for an unexpected near-term shortfall in
revenues, and even a small shortfall could disproportionately
and adversely affect financial results for that quarter.
In addition, Hirschs financial results may fluctuate from
quarter to quarter and be negatively affected by a number of
factors, including the following:
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|
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the lack or reduction of government funding and the political,
budgetary and purchasing constraints of its government agency
customers;
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|
the terms of customer contracts that affect the timing of
revenue recognition;
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|
the size and timing of its receipt of customer orders;
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|
the inaccurate forecasts or incomplete information from its
channel partners;
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|
significant fluctuation in demand for its solutions;
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|
|
price reductions or adjustments, new competitors, or the
introduction of enhanced solutions from new or existing
competitors;
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|
|
cancellations, delays or contract amendments by government
agency customers;
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|
|
protests of federal, state or local government contract awards
by competitors;
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|
|
|
unforeseen legal expenses, including litigation
and/or
administrative protest costs;
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|
|
|
potential effects of providing services as a prime contractor
that may not carry gross margins as high as those of its core
solutions;
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|
|
impairment charges arising out of its assessments of goodwill
and intangibles; and
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|
|
other one-time financial charges.
|
Security
breaches in systems that Hirsch sells or maintains could result
in the disclosure of sensitive government information or private
personal information that could result in the loss of clients
and negative publicity.
Many of the systems Hirsch sells manage private personal
information and protect information involved in sensitive
government functions. A security breach in one of these systems
could cause serious harm to Hirschs business as a result
of negative publicity and could prevent Hirsch from having
further access to such systems or other similarly sensitive
areas for other governmental clients.
As part of its technical support services, Hirsch agrees, from
time to time, to possess all or a portion of the security system
database of its customers. This service is subject to a number
of risks. For example, its systems may be vulnerable to physical
or electronic break-ins and service disruptions that could lead
to interruptions, delays or
41
loss of data. If any such compromise of Hirschs security
were to occur, it could be very expensive to correct, could
damage Hirschs reputation and could discourage potential
customers from using its services. Although Hirsch has not
experienced attempted break-ins, it may experience such attempts
in the future. Its systems may also be affected by outages,
delays and other difficulties. Hirschs insurance coverage
may be insufficient to cover losses and liabilities that may
result from such events.
Hirschs
products may have defects, which could damage its reputation,
decrease market acceptance of its products, cause it to lose
customers and revenue and result in costly litigation or
liability.
Products and solutions as complex as those Hirsch offers 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 Hirschs products
contain defects or perceived defects or have reliability,
quality or compatibility problems or perceived problems, its
reputation might be damaged significantly, it could lose or
experience a delay in market acceptance of the affected product
or products and it might be unable to retain existing customers
or attract new customers. In addition, these defects could
interrupt or delay sales or its ability to recognize revenue for
products shipped. In the event of an actual or perceived defect
or other problem, Hirsch 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 it is unable
to provide a solution to the potential defect or problem that is
acceptable to Hirschs customers, it may be required to
incur substantial product recall, repair and replacement and
even litigation costs. These costs could have a material adverse
effect on its business and operating results.
In addition, because Hirschs customers rely on
Hirschs security products to prevent unauthorized access,
a malfunction of or design defect in its products (or even a
perceived defect) could result in legal or warranty claims
against it 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 its
business and operating results. Furthermore, the publicity
associated with any such claim, whether or not decided against
Hirsch, could adversely affect its reputation. In addition, a
well-publicized security breach involving security systems could
adversely affect the markets perception of security
products in general, or its products in particular, regardless
of whether the breach is actual or attributable to its products.
Any of the foregoing events could cause demand for Hirschs
products to decline, which would cause the Hirsch business and
operating results to suffer.
Hirsch
offers a warranty on its products for a period of two years,
which could result in warranty claims, possible litigation, and
liability.
Hirsch offers a warranty on its products for a period of two
years. Purchasers of Hirsch products may bring warranty claims
against Hirsch, which could result in litigation costs and
liability. These costs may adversely effect Hirschs
results of operations.
Failure
to properly manage projects may result in costs or claims
against Hirsch, and Hirschs financial results could be
adversely affected.
Deployments of Hirschs solutions often involve large-scale
projects. The quality of its performance on such projects
depends in large part upon Hirschs ability to manage
relationships with Hirschs customers and to effectively
manage the projects and deploy appropriate resources, including
its own project managers and third party subcontractors, in a
timely manner. Any defects or errors or failures to meet
clients expectations could result in damage to its
reputation or even claims for substantial monetary damages
against it. In addition, Hirsch sometimes guarantees customers
that it will complete a project by a scheduled date or that
Hirschs solutions will achieve defined performance
standards. If its solutions experience a performance problem, it
may not be able to recover the additional costs it will incur in
its remedial efforts, which could materially impair profit from
a particular project. Moreover, a portion of Hirschs
revenues are derived from fixed price contracts. Changes in the
actual and estimated costs and time to complete fixed-price,
time-certain projects may result in revenue adjustments for
contracts where revenue is recognized under the percentage of
completion method. Finally, if Hirsch miscalculates the amount
of resources or time it needs to complete a project for which it
has agreed to capped or fixed fees, its financial results could
be adversely affected.
42
Hirsch
is dependent on its management team and the loss of any key
member of its team may impair Hirschs ability to operate
effectively and may harm Hirschs business.
Hirschs success depends largely upon the continued
services of Hirschs senior management, sales staff, and
other key personnel. Some Hirsch employees have cultivated
relationships with its customers, which makes it particularly
dependent upon their continued employment with it. Hirsch is
also substantially dependent on the continued services of its
existing engineering and project management personnel because of
the highly technical nature of its solutions. Other than an
existing employment agreement with Robert Beliles which will
terminate upon the closing of the Merger, Hirsch does not have
employment agreements with any of its executive officers or key
personnel obligating them to provide continued services and
therefore, they could terminate their employment with it at any
time, without penalty. Hirsch does not maintain key person life
insurance policies on any of its employees. The loss of one or
more members of its management team or other key personnel could
seriously harm Hirschs business.
Any
failure to protect Hirschs intellectual property rights
could impair its ability to protect its proprietary technology,
which could have a material adverse effect on the Hirsch
business, financial condition and results of operations, and on
its ability to compete effectively.
Hirschs success depends significantly upon its proprietary
technology. Hirsch currently relies on a combination of patents,
copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect its proprietary
rights, which afford only limited protection. Although Hirsch
often seeks to protect its proprietary technology through
patents, it is possible that no new patents will be issued, that
Hirschs proprietary products or technologies are not
patentable, and that any issued patent will fail to provide it
with any competitive advantages. In addition, Hirsch has
historically not entered into proprietary information and
assignment agreements with its employees or consultants.
Unauthorized third parties may try to copy or reverse engineer
portions of Hirschs products or otherwise obtain and use
its intellectual property. If it fails to protect Hirschs
intellectual property rights adequately, its competitors may
gain access to Hirschs technology, and its business would
thus be harmed. In addition, defending Hirschs
intellectual property rights may entail significant expense. Any
of its trademarks or other intellectual property rights may be
challenged by others or invalidated through administrative
processes or litigation. In addition, its patents, or any
patents that may be issued to it in the future, may not provide
it with any competitive advantages, or may be challenged by
third parties. Furthermore, legal standards relating to the
validity, enforceability and scope of protection of intellectual
property rights are uncertain. Effective patent, trademark,
copyright and trade secret protection may not be available to
Hirsch in every country in which it markets its solutions. The
laws of some foreign countries may not be as protective of
intellectual property rights as those in the United States, and
domestic and international mechanisms for enforcement of
intellectual property rights may be inadequate. Accordingly,
despite its efforts, it may be unable to prevent third parties
from infringing upon or misappropriating its intellectual
property or otherwise gaining access to its technology.
Hirsch may be required to expend significant resources to
monitor and protect its intellectual property rights. It may
initiate claims or litigation against third parties for
infringement of Hirschs proprietary rights or to establish
the validity of its proprietary rights. Any such litigation,
whether or not it is ultimately resolved in its favor, could
result in significant expense to it and divert the efforts of
Hirschs technical and management personnel.
Hirsch
may be sued by third parties in connection with intellectual
property claims, such as for alleged infringement of any third
partys proprietary rights.
Any intellectual property claims, with or without merit, could
be time-consuming and expensive to litigate or settle, and could
divert management attention away from the execution of
Hirschs business plan. In addition, Hirsch may be required
to indemnify Hirschs customers for third-party
intellectual property infringement claims, which would increase
the cost of an adverse ruling in such a claim. An adverse
determination could also prevent it from offering its solutions
to others.
43
Changes
in tax laws or the interpretation thereof, adverse tax audits
and other tax matters may adversely affect Hirschs future
results.
A number of factors may impact Hirschs 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 its 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 it has not previously provided for U.S. taxes.
|
Any of these factors could make it more difficult for Hirsch to
project or achieve expected tax results. An increase or decrease
in its tax liabilities due to these or other factors could
adversely affect its financial results in future periods.
44
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/information statement and prospectus
and the documents incorporated by reference herein contain
forward-looking statements that involve risks and uncertainties,
as well as assumptions, that could cause the results of SCM and
Hirsch to differ materially from those expressed or implied by
such forward-looking statements. Forward-looking statements
generally are identified by the words may,
will, project, might,
expects, anticipates,
believes, intends,
estimates, should, could,
would, strategy, plan,
continue, pursue, or the negative of
these words or other words or expressions of similar meaning.
All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements. For
example, forward-looking statements include any statements of
the plans, strategies and objectives of management for future
operations, including the execution of integration and
restructuring plans and the anticipated timing of filings; any
statements concerning proposed new products, services or
developments; any statements regarding future economic
conditions or performance; statements of belief and any
statement of assumptions underlying any of the foregoing.
Forward-looking statements may also include any statements of
the plans, strategies and objectives of management with respect
to the approval and closing of the Merger, SCMs and
Hirschs ability to solicit a sufficient number of proxies
to approve the Merger and other matters related to the
consummation of the Merger.
For a discussion of risks associated with the ability of SCM and
Hirsch to complete the Merger and the effect of the Merger on
the present business of SCM, Hirsch and the business of SCM
after the Merger, see the section entitled Risk
Factors, beginning on page 12.
Additional factors that could cause actual results to differ
materially from those expressed in the forward-looking
statements are discussed in reports filed with the SEC by SCM.
See the section entitled Where You Can Find More
Information, beginning on page 210.
If any of these risks or uncertainties materializes or any of
these assumptions proves incorrect, the results of SCM or Hirsch
could differ materially from the forward-looking statements. All
forward-looking statements in this joint proxy
statement/information statement and prospectus are current only
as of the date on which the statements were made. SCM and Hirsch
do not undertake any obligation to publicly update any
forward-looking statement to reflect events or circumstances
after the date on which any statement is made or to reflect the
occurrence of unanticipated events.
45
SELECTED
HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following tables present selected historical financial
data for SCM and Hirsch and comparative historical and unaudited
pro forma per share data for SCM and Hirsch.
Selected
Historical Financial Data of SCM
The selected consolidated financial data set forth below for SCM
is derived in part from and should be read in conjunction with
SCMs consolidated financial statements, the related notes
and the section of this joint proxy statement/information
statement and prospectus entitled SCM Microsystems
Managements Discussion and Analysis of Financial
Conditions and Results of Operation. The consolidated
statement of operations data for each of the years ended
December 31, 2003, 2004, 2005, 2006 and 2007 and the
consolidated balance sheet data as of December 31, 2003,
2004, 2005, 2006 and 2007 were derived from SCMs audited
consolidated financial statements included in this joint proxy
statement/information statement and prospectus. The consolidated
statement of operations data for the nine-month periods ended
September 30, 2007 and 2008 and the consolidated balance
sheet data as of September 30, 2008 were derived from
SCMs unaudited consolidated financial statements included
in this proxy joint proxy statement/information statement and
prospectus. The consolidated financial statements were prepared
in conformity with accounting principles generally accepted in
the United States of America (US GAAP). This selected financial
information is unaudited but, in SCM managements opinion,
has been prepared on the same basis as the audited consolidated
financial statements and related notes included throughout this
joint proxy statement/information statement and prospectus and
includes all adjustments, consisting only of normal recurring
adjustments, that SCMs management considers necessary for
a fair presentation of the information for the periods
presented. Historical results are not necessarily indicative of
results to be expected for future periods.
46
SCM
MICROSYSTEMS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
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|
|
|
|
|
|
|
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|
|
Three Months
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|
Nine Months
|
|
|
|
|
|
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|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
Years Ended December 31,
|
|
(In thousands, except per share data)
|
|
2008
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Net revenue
|
|
$
|
6,393
|
|
|
$
|
19,377
|
|
|
|
$
|
30,435
|
|
|
$
|
33,613
|
|
|
$
|
27,936
|
|
|
$
|
30,030
|
|
|
$
|
31,147
|
|
Cost of revenue
|
|
|
3,483
|
|
|
|
10,961
|
|
|
|
|
17,781
|
|
|
|
21,756
|
|
|
|
17,106
|
|
|
|
17,724
|
|
|
|
18,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,910
|
|
|
|
8,416
|
|
|
|
|
12,654
|
|
|
|
11,857
|
|
|
|
10,830
|
|
|
|
12,306
|
|
|
|
12,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Research and development
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|
|
980
|
|
|
|
3,058
|
|
|
|
|
3,123
|
|
|
|
3,767
|
|
|
|
4,081
|
|
|
|
4,807
|
|
|
|
3,958
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|
Selling and marketing
|
|
|
2,280
|
|
|
|
7,010
|
|
|
|
|
6,603
|
|
|
|
7,498
|
|
|
|
7,040
|
|
|
|
8,560
|
|
|
|
7,943
|
|
General and administrative
|
|
|
1,697
|
|
|
|
4,718
|
|
|
|
|
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
|
|
|
4,957
|
|
|
|
14,786
|
|
|
|
|
17,126
|
|
|
|
20,599
|
|
|
|
21,311
|
|
|
|
24,461
|
|
|
|
27,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,047
|
)
|
|
|
(6,370
|
)
|
|
|
|
(4,472
|
)
|
|
|
(8,742
|
)
|
|
|
(10,481
|
)
|
|
|
(12,155
|
)
|
|
|
(14,827
|
)
|
Loss from investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
Interest income
|
|
|
173
|
|
|
|
642
|
|
|
|
|
1,639
|
|
|
|
1,350
|
|
|
|
745
|
|
|
|
806
|
|
|
|
813
|
|
Foreign currency gains (losses) and other income (expense)
|
|
|
(1,290
|
)
|
|
|
(935
|
)
|
|
|
|
(346
|
)
|
|
|
(225
|
)
|
|
|
1,731
|
|
|
|
(1,675
|
)
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(3,164
|
)
|
|
|
(6,663
|
)
|
|
|
|
(3,179
|
)
|
|
|
(7,617
|
)
|
|
|
(8,005
|
)
|
|
|
(13,024
|
)
|
|
|
(11,611
|
)
|
Benefit (provision) for income taxes
|
|
|
(103
|
)
|
|
|
(151
|
)
|
|
|
|
(113
|
)
|
|
|
(73
|
)
|
|
|
(150
|
)
|
|
|
173
|
|
|
|
2,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,267
|
)
|
|
|
(6,814
|
)
|
|
|
|
(3,292
|
)
|
|
|
(7,690
|
)
|
|
|
(8,155
|
)
|
|
|
(12,851
|
)
|
|
|
(9,598
|
)
|
Gain (loss) from discontinued operations, net of income taxes
|
|
|
424
|
|
|
|
273
|
|
|
|
|
(215
|
)
|
|
|
3,508
|
|
|
|
(2,109
|
)
|
|
|
(6,242
|
)
|
|
|
(13,476
|
)
|
Gain (loss) on sale of discontinued operations, net of income
taxes
|
|
|
44
|
|
|
|
553
|
|
|
|
|
1,586
|
|
|
|
5,224
|
|
|
|
(2,171
|
)
|
|
|
430
|
|
|
|
(15,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,799
|
)
|
|
$
|
(5,988
|
)
|
|
|
$
|
(1,921
|
)
|
|
$
|
1,042
|
|
|
$
|
(12,435
|
)
|
|
$
|
(18,663
|
)
|
|
$
|
(38,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations
|
|
$
|
(0.21
|
)
|
|
$
|
(0.43
|
)
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
(0.83
|
)
|
|
$
|
(0.63
|
)
|
Basic and diluted income (loss) per share from discontinued
operations
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
|
$
|
0.09
|
|
|
$
|
0.56
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(1.86
|
)
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.38
|
)
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.80
|
)
|
|
$
|
(1.21
|
)
|
|
$
|
(2.49
|
)
|
Shares used to compute basic and diluted income (loss) per share
|
|
|
15,744
|
|
|
|
15,743
|
|
|
|
|
15,725
|
|
|
|
15,638
|
|
|
|
15,532
|
|
|
|
15,402
|
|
|
|
15,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
(unaudited)
|
|
$
|
25,020
|
|
|
|
$
|
32,444
|
|
|
$
|
36,902
|
|
|
$
|
32,440
|
|
|
$
|
46,153
|
|
|
$
|
55,038
|
|
Working capital(1) (unaudited)
|
|
|
27,772
|
|
|
|
|
34,027
|
|
|
|
31,967
|
|
|
|
27,371
|
|
|
|
39,161
|
|
|
|
50,700
|
|
Total assets
|
|
|
40,600
|
|
|
|
|
48,564
|
|
|
|
51,355
|
|
|
|
52,734
|
|
|
|
73,307
|
|
|
|
96,442
|
|
Total stockholders equity
|
|
|
31,137
|
|
|
|
|
37,039
|
|
|
|
35,318
|
|
|
|
32,617
|
|
|
|
46,829
|
|
|
|
63,424
|
|
|
|
|
(1)
|
|
Working capital is defined as
current assets less current liabilities
|
47
Selected
Historical Financial Data of Hirsch
The selected financial data set forth below for Hirsch is
derived in part from and should be read in conjunction with
Hirschs financial statements, the related notes and
Managements Discussion and Analysis of Financial Condition
and Results of Operation included in this joint proxy
statement/information statement and prospectus. The statement of
income data for each of the years ended November 30, 2004,
2005, 2006, 2007 and 2008 and the balance sheet data as of
November 30, 2004, 2005, 2006, 2007 and 2008 were derived
from Hirschs audited financial statements included in this
joint proxy statement/information statement and prospectus.
HIRSCH
ELECTRONICS CORPORATION
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended November 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
23,042
|
|
|
$
|
21,990
|
|
|
$
|
20,883
|
|
|
$
|
20,026
|
|
|
$
|
15,899
|
|
Cost of revenues
|
|
|
9,988
|
|
|
|
9,370
|
|
|
|
8,747
|
|
|
|
8,214
|
|
|
|
6,353
|
|
Royalties to related parties
|
|
|
1,028
|
|
|
|
993
|
|
|
|
938
|
|
|
|
915
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,026
|
|
|
|
11,627
|
|
|
|
11,198
|
|
|
|
10,897
|
|
|
|
8,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,310
|
|
|
|
780
|
|
|
|
729
|
|
|
|
704
|
|
|
|
679
|
|
Selling, General and administrative
|
|
|
9,576
|
|
|
|
8,055
|
|
|
|
7,416
|
|
|
|
7,312
|
|
|
|
7,397
|
|
Depreciation and amortization
|
|
|
100
|
|
|
|
159
|
|
|
|
138
|
|
|
|
163
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,986
|
|
|
|
8,994
|
|
|
|
8,283
|
|
|
|
8,179
|
|
|
|
8,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(960
|
)
|
|
|
2,633
|
|
|
|
2,915
|
|
|
|
2,718
|
|
|
|
534
|
|
Other income (loss)
|
|
|
(742
|
)
|
|
|
215
|
|
|
|
139
|
|
|
|
66
|
|
|
|
20
|
|
Income (loss) before provision for income taxes
|
|
|
(1,702
|
)
|
|
|
2,848
|
|
|
|
3,054
|
|
|
|
2,784
|
|
|
|
554
|
|
Benefit (provision) for income taxes
|
|
|
664
|
|
|
|
(1,148
|
)
|
|
|
(1,091
|
)
|
|
|
(1,211
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,038
|
)
|
|
$
|
1,700
|
|
|
$
|
1,963
|
|
|
$
|
1,573
|
|
|
$
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,932
|
|
|
$
|
5,014
|
|
|
$
|
4,031
|
|
|
$
|
3,057
|
|
|
$
|
1,253
|
|
Working capital(1) (unaudited)
|
|
|
8,779
|
|
|
|
9,288
|
|
|
|
7,470
|
|
|
|
5,767
|
|
|
|
3,927
|
|
Total assets
|
|
|
12,065
|
|
|
|
11,758
|
|
|
|
9,499
|
|
|
|
8,375
|
|
|
|
5,848
|
|
Total stockholders equity
|
|
|
9,356
|
|
|
|
10,066
|
|
|
|
8,240
|
|
|
|
6,241
|
|
|
|
4,532
|
|
|
|
|
(1) |
|
Working capital is defined as current assets less current
liabilities |
48
Comparative
Historical and Unaudited Pro Forma Per Share Data
The following tables set forth the SCM historical net income
(loss) per share for the nine months ended September 30,
2008, on an unaudited basis, and year ended December 31,
2007, and the historical book value per share as of
September 30, 2008 and December 31, 2007, on an
unaudited basis, and net income (loss) per share for SCM on an
unaudited pro forma combined basis, for the nine months ended
September 30, 2008 and year ended December 31, 2007,
and unaudited pro forma book value per share as of
September 30, 2008.
The pro forma combined data were derived from and should be read
together with the unaudited pro forma condensed combined
financial statements and accompanying notes included in this
joint proxy statement/information statement and prospectus. This
information is based on the historical balance sheets and
related historical statements of operations of SCM and Hirsch
included in this joint proxy statement/information statement and
prospectus. The pro forma combined data give effect to the
transaction using the purchase method of accounting for business
combinations.
The unaudited pro forma combined per share data is presented for
informational purposes only and is not intended to represent or
be indicative of the per share data that would have been
achieved if the Merger had been completed as of the dates
indicated, and should not be taken as representative of future
consolidated per share data of SCM. SCMs historical data
were derived from and should be read together with the
consolidated financial statements and accompanying notes
included elsewhere in this joint proxy statement/information
statement and prospectus. Hirsch is a privately-held company,
and accordingly, per share historical data for Hirsch are
omitted.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
SCMs Historical Data:
|
|
|
|
|
|
|
|
|
Net income (loss) per share(1):
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations
|
|
$
|
(0.43
|
)
|
|
$
|
(0.21
|
)
|
Basic and diluted income per share from discontinued Operations
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.38
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008:
|
|
|
|
|
|
|
|
|
Consolidated book value per share(2)
|
|
$
|
1.98
|
|
|
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
Consolidated book value per share (unaudited) (2)
|
|
|
|
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year-Ended
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Pro Forma Combined Data:
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share(3):
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations
|
|
$
|
(0.31
|
)
|
|
$
|
(0.13
|
)
|
Basic and diluted income per share from discontinued Operations
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008:
|
|
|
|
|
|
|
|
|
Pro forma book value per share(4)
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
(1) |
|
Historical net income (loss) per share was derived from the
historical periodic SEC filings
Form 10-Q
for the quarterly period ended September 30, 2008 and
Form 10-K
for the fiscal year ended December 31, 2007. |
49
|
|
|
(2) |
|
Consolidated book value per share as of September 30, 2008
and December 31, 2007 are calculated by dividing total
shareholders equity by the weighted average common shares
outstanding as of respective dates. |
|
(3) |
|
Pro forma net income (loss) per share was calculated by dividing
pro forma net income by the pro forma weighted average common
shares outstanding as if the transaction had occurred on
January 1, 2007. |
|
(4) |
|
Pro forma book value per share is computed by dividing pro forma
total shareholders equity by the pro forma weighted
average common shares outstanding as if the transaction had
occurred on September 30, 2008. |
50
MARKET
PRICE AND DIVIDEND INFORMATION
SCM
Microsystems
SCMs 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. The following table sets forth the
high and low closing prices of SCMs common stock for the
periods indicated.
SCM
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ
|
|
|
Prime Standard
|
|
|
|
National Market
|
|
|
(Quoted in Euros)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter (up to February 11, 2009)
|
|
$
|
2.70
|
|
|
$
|
1.97
|
|
|
|
2.01
|
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.78
|
|
|
$
|
2.59
|
|
|
|
2.56
|
|
|
|
1.71
|
|
Second Quarter
|
|
$
|
3.19
|
|
|
$
|
2.71
|
|
|
|
1.99
|
|
|
|
1.68
|
|
Third Quarter
|
|
$
|
3.17
|
|
|
$
|
2.08
|
|
|
|
2.03
|
|
|
|
1.52
|
|
Fourth Quarter
|
|
$
|
2.34
|
|
|
$
|
1.27
|
|
|
|
1.62
|
|
|
|
1.02
|
|
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
|
|
On December 10, 2008, the last full trading day prior to
the public announcement of entry into the Merger Agreement, the
closing price per share of SCMs common stock as reported
on the NASDAQ Stock Market was $1.27 per share.
On February 11, 2009, the last practicable trading date
before the filing of this joint proxy statement/information
statement and prospectus, the closing price per share of
SCMs common stock as reported on the NASDAQ Stock Market
was $2.67.
As of February 11, 2009, SCMs record date, SCM had
approximately 55 stockholders of record stockholders. Not
represented in this figure are individual stockholders in
Germany whose custodian banks do not release stockholder
information about their SCM holdings.
Because the market price of SCMs common stock is subject
to fluctuation, the market value of the shares of SCMs
common stock that holders of Hirsch common stock will be
entitled to receive in the Merger may increase or decrease. The
market prices above may not be indicative of the future value of
the SCM common stock.
Following the consummation of the Merger, SCMs common
stock, including the shares issued in connection with the
Merger, are expected to continue to trade on the NASDAQ Stock
Market under the symbol SCMM and on the Prime
Standard of the Frankfurt Stock Exchange under the symbol
SMY.
51
SCM has never declared or paid cash dividends on its capital
stock. SCM currently intends to retain earnings, if any, to
finance the growth and development of its business, and does not
expect to pay any cash dividends to its stockholders in the
foreseeable future. Payment of future dividends, if any, will be
at the discretion of SCMs board of directors.
Hirsch
Electronics
There has never been, nor is there expected to be in the future,
a public market for Hirschs ordinary shares.
As of February 10, 2009 Hirschs record date, Hirsch had
approximately 315 shareholders of record.
Hirsch has never declared or paid any cash dividends on its
capital stock nor does it intend to do so in the foreseeable
future.
52
THE
MERGER
This section and the section entitled The Merger
Agreement beginning on page 91 of this joint proxy
statement/information statement and prospectus describe the
material terms of the Merger, including the Merger Agreement.
While SCM and Hirsch believe that this description covers all of
the material terms of the Merger and the Merger Agreement, it
may not contain all of the information that is important to you.
You should read carefully this entire joint proxy
statement/information statement and prospectus, including the
Merger Agreement, which is attached as Annex A to this
joint proxy statement/information statement and prospectus, and
the other documents to which SCM and Hirsch have referred.
Background
of the Development of the Merger
During a period of approximately three years prior to entering
into the Merger Agreement, Hirsch had engaged in preliminary
discussions with other potential acquirers regarding the sale of
Hirsch. These discussions generally terminated due to
misalignment of valuation expectations between Hirsch and the
potential acquirers.
On May 23, 2006, SCM entered into an advisory services
agreement to engage Newton International Management LLC and
Mr. Ayman Ashour, a principal partner in Bluehill ID (a
significant stockholder of SCM, which was founded in March 2007)
and former director of Hirsch, as a consultant to develop a
growth and acquisition strategy for SCM. Over the course of the
next several months, SCM considered several potential strategic
transactions, including a transaction involving Hirsch, and
representatives of SCM and Hirsch held several meetings.
On June 12, 2006, Steven Humphreys, director of SCM and
Mr. Ashour met with Lawrence W. Midland, President of
Hirsch, at Hirschs offices in Santa Ana, California to
discuss mutual interest in a potential transaction. Over the
course of the next several months, SCM considered several
potential strategic transactions, including a transaction
involving Hirsch, and representatives of SCM and Hirsch held
several meetings.
In late 2006, SCM decided to suspend further consideration of a
strategic transaction and discussions between Hirsch and SCM
regarding a strategic transaction terminated, and SCM terminated
the advisory services agreement with Newton International and
Ayman Ashour.
In early January 2008, SCM engaged Acquarium Partners to prepare
an in-depth market analysis and identify potential acquisition
targets, which included Hirsch Electronics.
In March 2008, Hirsch and SCM began discussing the possibility
of an exclusive distribution agreement between the parties.
On April 7, 2008, Egis Capital, an investment fund that is
managed by a general partnership that certain principals of
Imperial Capital are members of, made a preliminary offer to
purchase the assets of Hirsch, which offer was rejected by
Hirsch due to both valuation and the proposed structure of the
transaction. Egis Capital offered to purchase substantially all
of the assets of Hirsch in exchange for cash and a promissory
note pursuant to, in part, an earnout structure.
Between late May and June 2008, representatives of SCM and
Hirsch met to discuss preliminarily a potential transaction
between the parties.
On July 3, 2008, the Chairman of the Board of SCM
instructed SCMs management to continue to explore a
potential transaction with Hirsch.
On July 7, 2008, Hirsch and SCM signed an exclusive
distributor agreement.
On July 8, 2008, Hirsch and SCM signed a non-disclosure
agreement related to the potential merger and began to exchange
non-public information on a confidential basis.
Between July 21 and 23, 2008, representatives of SCM and Hirsch
met to provide information concerning the respective
companies businesses and to continue discussions regarding
the possibility of a transaction. Also at this time, SCM
received an initial purchase price proposal from Hirsch for the
potential transaction.
53
On July 30, 2008, management of SCM made a presentation to
the SCM board of directors regarding a potential transaction
with Hirsch. After this presentation, the board of directors of
SCM instructed SCMs management to continue to explore a
potential transaction with Hirsch.
Between August 11 and 13, 2008, Mr. Midland met with
representatives of SCM at SCMs headquarters in Ismaning,
Germany, in order to further discuss a potential transaction
between the parties.
On August 19, 2008, Mr. Midland and Felix Marx, Chief
Executive Officer of SCM, had a conference call to discuss
certain proposed terms of a potential transaction. On
September 4, 2008, Mr. Marx and Dr. Mueller,
Executive Vice President, Strategic Sales and Business
Development of SCM, met with Mr. Midland to further discuss
such terms.
During the period of September 2008 through November 2008, SCM
and its advisors conducted legal, financial, technical and
accounting due diligence on Hirsch, based on information and
documentation provided to them by Hirsch. During this period,
Hirsch and its advisors also conducted due diligence on SCM.
Several meetings between representatives of SCM and Hirsch also
took place during this period at which proposed terms of a
potential transaction were discussed.
On September 15, 2008, SCM engaged Avondale Partners to
provide financial advisory services related to the proposed
transaction and to render an opinion evaluating the financial
fairness of any proposed transaction. SCM executed an engagement
letter with Avondale on October 9, 2008.
On September 30, 2008, the SCM board of directors met by
phone to discuss the potential transaction with Hirsch and
instructed SCMs management to continue to explore a
potential transaction with Hirsch.
On October 7, 2008, the SCM board of directors met by phone
with representatives of Gibson, Dunn & Crutcher LLP to
discuss certain matters in connection with potential business
combinations. Management of SCM also presented an update of the
status of the discussions with Hirsch regarding a potential
transaction.
Between October 14 and 17, 2008, representatives of SCM met with
Gibson Dunn & Crutcher LLP and Hirsch and
Hirschs outside counsel, Palmieri, Tyler, Wiener,
Wilhelm & Waldron LLP at Hirschs offices, to
discuss the proposed terms of a potential transaction. On
October 16, 2008, SCM and Hirsch entered into an
exclusivity agreement related to the proposed transaction.
On October 16, 2008, management of SCM presented an update
to the SCM board of directors of the status of the discussions
with Hirsch regarding a potential transaction, and on
October 23, 2008, the SCM board of directors met to discuss
the proposed terms of a transaction with Hirsch.
On October 27, 2008, Hirsch engaged Imperial Capital to
render an opinion evaluating the financial fairness of any
proposed transaction.
On October 30, 2008, Mr. Marx met with
Mr. Midland and representatives of Avondale in Santa Ana,
California to discuss Hirschs operations and financial
projections.
On October 30 and 31, 2008, Mr. Marx met with
Mr. Midland in Santa Ana, California to discuss the
proposed terms of the transaction.
In early November 2008, several meetings between representatives
of SCM and Hirsch also took place at which proposed terms of a
potential transaction were discussed. On November 4 and 5, 2008,
Mr. Midland attended the Cartes smart card trade show and
exhibition in Paris and met with the SCM management team to
continue discussions.
On November 8, 2008, Mr. Marx met with members of
Hirsch management to discuss the proposed transaction and
related matters.
On November 12 and 14, 2008, representatives from SCM and
Hirsch, legal advisors for the two parties, and a representative
from Avondale met in Santa Ana to continue to discuss the
potential transactions.
On November 14, 2008, Hirschs board of directors held
a meeting to discuss the proposed transaction between Hirsch and
SCM. Mr. Marx was present for a portion of the meeting at
which time he was introduced to the Hirsch
54
board. Following the departure of Mr. Marx, a
representative from Palmieri, Tyler, Wiener, Wilhelm &
Waldron LLP made a presentation to the board regarding certain
matters in connection with the proposed transaction.
On November 19, 2008, Mr. Marx met with members of the
SCM board of directors to discuss the status of the discussions
regarding the proposed transaction.
On November 21, 2008, Mr. Marx and Mr. Midland
had a conference call to discuss open issues regarding the
proposed transaction, including the terms of the Merger
Agreement.
On November 23, 2008, representatives from SCM and Hirsch
and legal advisors for the two parties had a conference call to
discuss the terms of the proposed transaction, including the
terms of the Merger Agreement.
On November 26, 2008, the Hirsch board of directors met to
further discuss the proposed transaction and the results of the
diligence conducted on SCM. Representatives from Palmieri,
Tyler, Wiener, Wilhelm & Waldron LLP were also in
attendance, and representatives of Imperial Capital were in
attendance for part of the meeting to deliver a draft of
Imperial Capitals fairness opinion. Imperial Capital did
not discuss any of the diligence conducted by Hirsch or its
representatives on SCM at such meeting.
On November 27, 2008, the SCM board of directors held a
special meeting at which the board obtained updates from
management and advisers regarding the status of negotiations
with Hirsch. At the meeting, the SCM board instructed SCMs
management to continue to pursue a potential transaction with
Hirsch. From that day through December 8, 2008,
representatives of SCM and Hirsch, together with their
respective legal counsel, participated in several conference
calls to try to finalize the terms of the potential transaction
and the Merger Agreement.
On December 5, 2008, the Hirsch board of directors held a
meeting to further discuss the proposed merger. A representative
from Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP
was also in attendance at this meeting.
On December 9, 2008, the SCM board of directors held a
special meeting at which the proposed transaction with Hirsch
was further discussed and considered. At the meeting, members of
SCMs senior management team made a presentation to the
board of directors regarding the terms of the proposed Merger
and representatives of Avondale made a financial presentation to
the SCM board of directors and rendered Avondales oral
opinion, subsequently confirmed in writing, to the effect that,
as of December 9, 2008, the date of the opinion, and based
upon and subject to the various considerations and limitations
set forth in such opinion, the merger consideration to be paid
by SCM is fair to SCM from a financial point of view. SCMs
legal counsel outlined the principal legal terms and conditions
of the proposed Merger Agreement, and other legal issues
associated with the proposed business combination. Following the
financial and legal presentations and the oral fairness opinion,
and after further discussion, the SCM board unanimously approved
the Merger Agreement and determined that the Merger and the
terms of the Merger Agreement were advisable, fair to and in the
best interests of the SCM stockholders.
On December 10, 2008, the Hirsch board of directors held a
meeting at which the proposed transaction with SCM was further
discussed and considered. Representatives of Imperial Capital
telephonically rendered an opinion to the Hirsch board of
directors that, as of that date, and subject to various
assumptions, qualifications and limitations, the aggregate
consideration to be paid by SCM in the Merger to the holders of
Hirsch common stock, other than Lawrence W. Midland, was fair
from a financial point of view to the Hirsch shareholders, other
than to Mr. Midland, which opinion with such assumptions,
qualifications and limitations, was subsequently confirmed in
writing. A representative from Palmieri, Tyler, Wiener,
Wilhelm & Waldron LLP summarized the key terms and
conditions of the Merger Agreement and certain potential legal
risks and issues associated with the proposed merger. Following
the presentations and further discussion, the board of directors
of Hirsch unanimously approved the Merger Agreement and
determined that the proposed merger and the terms of the Merger
Agreement were advisable, fair to and in the best interests of
the Hirsch shareholders.
On December 10, 2008 counsel for SCM and Hirsch finalized
the Merger Agreement and related documents and the Merger
Agreement was executed by the parties. SCM and Hirsch publicly
announced the proposed merger on December 10, 2008, Pacific
Standard Time, which was prior to the opening of trading on the
Prime Standard Exchange on the morning of December 11,
2008, Central European Time.
55
The SCM
Reasons for the Merger
The SCM board of directors believes that the terms of the Merger
Agreement and the transactions contemplated thereby are
advisable, and in the best interests of, SCM and its
stockholders, and has unanimously approved the Merger Agreement
and the Merger. The SCM board of directors has concluded that
the Merger with Hirsch presents a compelling strategic
opportunity for SCM to strengthen its position in the security
industry, expand its product offerings and customer base, and
increase its operational scale. The SCM board of directors
recommends that SCM stockholders vote in favor of the SCM
proposals described in this joint proxy statement/information
statement and prospectus.
In reaching its decision to approve the Merger, the SCM board of
directors consulted with SCMs management, financial and
legal advisors, and considered a number of factors, including
the following factors, which the SCM board of directors viewed
as supporting its recommendation:
|
|
|
|
|
the belief of the SCM board of directors that after the Merger
SCM will be better positioned to pursue and implement a strategy
focused on the concept of convergence, the much anticipated
industry trend which combines both the logical and physical
methodologies of access for security systems;
|
|
|
|
the fact that both SCM and Hirsch are strong in the
U.S. government sector, but have complementary areas of
concentration (i.e., Hirsch is focused on physical access
and SCM is focused on PC and network (logical)
access), and that Hirsch is strongly positioned in the
U.S. commercial market, which provides a strong complement
to SCMs activities in the enterprise and financial markets
in Europe and Asia;
|
|
|
|
the expected synergies that will result from the Merger as a
result of leveraging the existing channels and sales forces of
both companies to reach more customers and to jointly develop
new integrated products;
|
|
|
|
the results of SCMs due diligence review of Hirschs
business, finances and operations and its evaluation of
Hirschs management, competitive positions and prospects;
|
|
|
|
the opinion of SCMs financial advisor that, as of
December 9, 2008, and based upon and subject to the
considerations described in its written opinion, the merger
consideration to be paid by SCM pursuant to the Merger Agreement
was fair to SCM from a financial point of view;
|
|
|
|
the likelihood in the judgment of the board of directors of SCM
that the conditions to be satisfied prior to consummation of the
Merger will be satisfied or waived;
|
|
|
|
the cash position of each of SCM and Hirsch and the absence of
any material debt of either of them;
|
|
|
|
the belief that the Merger would increase the overall level of
resources available for sales, marketing, customer support,
engineering and production across target markets and regions,
provide access to Hirschs distribution channels and allow
SCM to leverage Hirschs well-respected brand,
systems-level selling model and the Hirsch Professional Services
Group for development of customer-specific applications; and
|
|
|
|
the belief that the Merger would significantly increase
SCMs revenues, net income and internal resources and
provide greater operational scale and financial solidity.
|
During the course of its deliberations concerning the Merger,
the SCM board of directors also identified and considered a
variety of risks relating to the Merger, including the following:
|
|
|
|
|
the risk that the potential benefits sought in the Merger might
not be realized;
|
|
|
|
the challenges, costs and diversion of management time
associated with successfully integrating the products,
technologies, marketing strategies and organizations of each
company;
|
|
|
|
the risk of management and employee disruption associated with
the Merger, including the risk that despite the efforts SCM
after the Merger, key personnel might not remain employed by SCM;
|
|
|
|
the possibility that the Merger may not be completed and the
potential adverse effect of the public announcement to that
effect on the reputation of SCM; and
|
|
|
|
the other risks described in the section of this joint proxy
statement/information statement and prospectus entitled
Risk Factors.
|
56
This discussion of information and factors considered by the SCM
board of directors is not intended to be exhaustive, but is
intended to summarize the material factors considered by the SCM
board of directors. In view of the wide variety of factors
considered, the SCM board of directors did not find it
practicable to quantify or otherwise assign relative weights to
the specific factors considered. However, after taking into
account all of the factors set forth above, the SCM board of
directors unanimously agreed that the Merger Agreement and the
transactions contemplated thereby were fair to, and in the best
interests of, SCM and the SCM stockholders, and that SCM should
enter into the Merger Agreement.
The
Hirsch Reasons for the Merger
The Hirsch board of directors has determined that the Merger is
advisable, and fair to, and in the best interests of, Hirsch and
its shareholders. The Hirsch board of directors recommends that
Hirsch shareholders vote in favor of the Hirsch proposals
described in this joint proxy statement/information statement
and prospectus. In reaching its decision to approve the Merger,
Hirschs board of directors considered a number of factors,
including the following, which Hirschs board of directors
viewed as supporting its recommendation:
|
|
|
|
|
the Merger will allow the Hirsch shareholders to gain an equity
interest in SCM, thus providing a vehicle for continued
participation by the Hirsch shareholders in the future
performance not only of the business of Hirsch, but also of SCM;
|
|
|
|
SCM after the Merger will be well positioned to pursue and
implement a strategy focused on the concept of convergence, the
much anticipated industry trend which combines both the logical
and physical methodologies of access for security systems;
|
|
|
|
the increased liquidity available to Hirsch shareholders through
receipt of the cash portion of the consideration and the
acquisition of registered shares of SCM;
|
|
|
|
the opinion of Imperial Capital, attached hereto as
Annex F, a well respected investment banking firm
with specific expertise in the area of security, that, as of
December 10, 2008, and based on and subject to various
assumptions, qualifications and limitations set forth in its
opinion, the Aggregate Consideration to Non-Insiders (as defined
in its opinion) in the transaction was fair, from a financial
point of view, to the holders of Hirsch common stock, no par
value, other than Lawrence W. Midland;
|
|
|
|
the fact that the proposal regarding the possible Merger was
superior to contemplated transactions considered in connection
with discussions with several other prospective acquirers over
an extended period of time;
|
|
|
|
the conclusion of the board of directors of Hirsch that the
Merger proposal offered a better alternative for the Hirsch
shareholders than the possibility of implementing Hirschs
business plan on a stand-alone basis and deferring consideration
of a business combination pending (i) a more favorable
financial climate or (ii) possible realization of long
anticipated government contracts for Hirsch products;
|
|
|
|
the expectation that the Merger will be treated as a
reorganization for U.S. federal income tax purposes with
the result that the Hirsch shareholders will generally not
recognize taxable gain or loss for U.S. federal income tax
purposes by reason of the receipt of shares of SCM common stock
and the warrants to purchase shares of SCM common stock;
|
|
|
|
the likelihood in the judgment of the board of directors of
Hirsch that the conditions to be satisfied prior to consummation
of the Merger will be satisfied or waived;
|
|
|
|
under the terms of the Merger Agreement, another party could
make a superior acquisition proposal which could be accepted by
the board of directors of Hirsch, and that the termination fee;
payable to SCM in such situation would not be a significant
impediment to the making of such proposal;
|
|
|
|
the cash position of each of Hirsch and SCM and the absence of
any material debt of either of them; and
|
|
|
|
|
|
the relatively senior age of Lawrence W. Midland, the President
of Hirsch.
|
In the course of its deliberations, Hirschs board of
directors also considered a variety of risks and other
countervailing factors related to entering into the Merger
Agreement, including, without limitation, the following:
|
|
|
|
|
the fact that the number of shares of SCM common stock to be
received by Hirsch shareholders does not change, regardless of
any increase or decrease in the price of SCM shares prior to the
closing of the Merger;
|
57
|
|
|
|
|
the fact that Lawrence W. Midland is anticipated to be the only
Hirsch representative on the SCM board of directors, without any
voting agreement guarantying his election to the board, and that
the current SCM board of directors and officers will have
complete ultimate authority with respect to implementation of
the Hirsch business plan;
|
|
|
|
the fact that the Hirsch shareholders will be unable to sell for
a period of six months from the closing of the Merger 100% of
the shares of SCM common stock received in the Merger and that
they will be unable to sell 50% of the shares of SCM common
stock received in the Merger for a period of nine months from
the closing of the Merger;
|
|
|
|
the small daily volume of shares of SCM common stock presently
traded on the NASDAQ Stock Market, which, as a practical matter,
limits the liquidity of the shares of SCM common stock which
will be received by the Hirsch shareholders;
|
|
|
|
the possibility that the Merger might not be completed and the
potential adverse effect of the public announcement to that
effect on the reputation of Hirsch;
|
|
|
|
the expected significant length of time (6-7 months)
between signing the Merger Agreement and completing the Merger
or terminating the Merger Agreement, and the restrictions on
Hirschs conduct of its business in the meantime;
|
|
|
|
the fact that following announcement of the Merger Agreement,
Hirschs relationship with employees, agents and customers
might be negatively affected because of uncertainties
surrounding Hirschs future status and direction;
|
|
|
|
the amount (up to $1.5 million plus the reimbursement of
SCMs transaction expenses) and circumstances under which
Hirsch may become liable to pay a termination fee to SCM and the
potential effect of such termination fee in deterring other
potential acquirers;
|
|
|
|
the fact that information contained in the
S-4
registration statement regarding Hirsch, including without
limitation, its operations, financial results, significant
shareholders and related party transactions will be made
publicly available to Hirschs competitors, customers,
employees and others (even if the Merger is not consummated for
any reason); and
|
|
|
|
|
|
various other risks associated with SCM and the Merger,
including the risks described in the section entitled Risk
Factors in this joint proxy statement/information
statement and prospectus.
|
The above discussion of information and factors considered by
the Hirsch board of directors is not intended to be exhaustive,
but is indicative of the material factors considered by the
board. In view of the wide variety of factors they considered,
the Hirsch board of directors did not find it practicable to
quantify or otherwise assign relative weight to the specific
factors considered. In addition, the Hirsch board of directors
did not reach any specific conclusion on each factor considered,
or any aspect of any particular factor, but conducted an overall
analysis of these factors. Individual members of the Hirsch
board of directors may have given different weight to different
factors. After taking into account all of the factors described
above, however, the Hirsch board of directors unanimously
determined that the Merger Agreement and the related
transactions were advisable and fair to, and in the best
interests of, Hirsch and its shareholders.
SCM
Financial Projections
SCM provided financial projections for its business to Avondale
SCMs financial advisor, for use in connection with its
fairness analysis, summarized in the section of this joint proxy
statement/information statement and prospectus entitled
The Merger Opinion of the Financial Advisor of
SCM, and to Imperial Capital for use in connection with
Imperial Capitals fairness analysis, summarized in the
section of the joint proxy statement/information statement and
prospectus entitled The Merger Opinion of
Imperial Capital, LLC to the Board of Directors of Hirsch.
Please note, however, that even though such projections were
provided to Avondale and Imperial Capital, in rendering their
respective fairness opinions, Avondale and Imperial Capital
assumed that the value of SCM common stock would be equal to the
market price for such shares, as further described in the case
of Avondale, in the section entitled The
Merger Opinion of the Financial Advisor of SCM
and in the case of Imperial Capital, in the section entitled
The Merger Opinion of Imperial Capital, LLC to
the Board of Directors of Hirsch.
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending December 31,
|
|
(Dollars, in millions)
|
|
2008A
|
|
|
2008B
|
|
|
2009A
|
|
|
2009B
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Net Revenue
|
|
$
|
27.9
|
|
|
$
|
29.9
|
|
|
$
|
40.0
|
|
|
$
|
45.0
|
|
|
$
|
48.8
|
|
|
$
|
55.0
|
|
|
$
|
61.0
|
|
% Growth
|
|
|
(8.4
|
)%
|
|
|
(1.8
|
)%
|
|
|
43.5
|
%(1)
|
|
|
50.6
|
%(2)
|
|
|
8.5
|
%(3)
|
|
|
12.6
|
%
|
|
|
10.9
|
%
|
Cost of Revenue
|
|
|
15.4
|
|
|
|
16.3
|
|
|
|
21.3
|
|
|
|
23.7
|
|
|
|
25.8
|
|
|
|
30.7
|
|
|
|
33.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
12.5
|
|
|
|
13.6
|
|
|
|
18.7
|
|
|
|
21.3
|
|
|
|
23.0
|
|
|
|
24.3
|
|
|
|
27.1
|
|
% Margin
|
|
|
44.9
|
%
|
|
|
45.5
|
%
|
|
|
46.6
|
%
|
|
|
47.3
|
%
|
|
|
47.1
|
%
|
|
|
44.1
|
%
|
|
|
44.4
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & Development
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
2.2
|
|
|
|
2.6
|
|
|
|
2.8
|
|
|
|
2.9
|
|
|
|
3.0
|
|
Selling & Marketing
|
|
|
7.9
|
|
|
|
7.9
|
|
|
|
7.3
|
|
|
|
7.8
|
|
|
|
7.9
|
|
|
|
8.2
|
|
|
|
8.7
|
|
General & Administrative
|
|
|
9.2
|
|
|
|
9.3
|
|
|
|
9.1
|
|
|
|
9.2
|
|
|
|
9.9
|
|
|
|
10.1
|
|
|
|
10.4
|
|
Amortization of Intangibles
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Restructuring and Other Charges
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
20.2
|
|
|
|
20.3
|
|
|
|
18.6
|
|
|
|
19.6
|
|
|
|
20.5
|
|
|
|
21.2
|
|
|
|
22.1
|
|
% of Net Revenue
|
|
|
72.3
|
%
|
|
|
67.8
|
%
|
|
|
46.4
|
%
|
|
|
43.5
|
%
|
|
|
41.9
|
%
|
|
|
38.6
|
%
|
|
|
36.2
|
%
|
EBIT
|
|
|
(7.6
|
)
|
|
|
(6.7
|
)
|
|
|
0.1
|
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
3.0
|
|
|
|
5.0
|
|
Depreciation & Amortization
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
EBITDA
|
|
|
(7.4
|
)
|
|
|
(6.4
|
)
|
|
|
0.3
|
|
|
|
2.0
|
|
|
|
2.8
|
|
|
|
3.3
|
|
|
|
5.3
|
|
% Margin
|
|
|
(26.4
|
)%
|
|
|
(21.4
|
)%
|
|
|
0.8
|
%
|
|
|
4.4
|
%
|
|
|
5.7
|
%
|
|
|
6.0
|
%
|
|
|
8.7
|
%
|
|
|
|
(1) |
|
Percentage growth rate based on the net revenue figure provided
in column 2008A. |
|
(2) |
|
Percentage growth rate based on the net revenue figure provided
in column 2008B. |
|
(3) |
|
Percentage growth rate based on the net revenue figure provided
in column 2009B. |
SCMs management provided the above income statement
projections for the years 2008 through 2012. For the years 2008
and 2009, SCM management provided two income statement
projections (columns
2008-A and
2008-B, and columns
2009-A and
2009-B in the table above). The 2008 and 2009 projections were
provided to appropriately reflect a possible range of potential
growth of SCMs business in 2008 and 2009 in light of
general economic conditions and the potential consequences of
short-term trends to SCMs business. Such projections
differ with respect to, among other items, the projections of
net revenue, cost of revenue and certain operating expenses.
Since the SCM income statement projections cover multiple years,
such information by its nature becomes less certain with each
successive year. At the time the SCM income statement
projections were presented, SCM management believed that the
revised income statement projections appropriately reflected the
potential growth of SCMs business in light of the general
economic conditions.
These SCM financial projections rely on numerous assumptions
that included, among others, the assumptions listed below. SCM
did not find it practicable to quantify or otherwise assign
relative weights to the specific assumptions made in connection
with the SCM financial projections:
|
|
|
|
|
SCMs business is government-driven, and the business will
be less affected by the current global economic situation in
2009;
|
|
|
|
the security sector would outperform the overall economy;
|
|
|
|
the market would increasingly demand higher-security products,
such as smart cards, biometrics and multi-factor authentication;
|
|
|
|
demand from security products from U.S. federal government
agencies due to Federal Information Processing Standards (FIPS)
201 would increase in 2009, and in each year thereafter through
2012;
|
59
|
|
|
|
|
the rate of growth in revenue for SCMs products is driven
by major government related roll-outs, in particular the German
eHealth initiatives will significantly contribute in the
upcoming years;
|
|
|
|
gross margins would represent approximately the same percentages
of revenue for each year as represented in the SCM financial
projections for 2009;
|
|
|
|
SCM would successfully develop and sell new products and
services including, but not limited to, its new family of
contact and contactless smart card reader product line;
|
|
|
|
SCM would continue to regionally expand its global distribution
network as well as its cooperation with new OEMs; and
|
|
|
|
no provision for the potential material effects of extraordinary
business events, such as adverse regulatory developments, major
unplanned new product launches or natural disasters.
|
There can be no guarantee that the assumptions on which the SCM
financial projections are based are correct or will be realized.
In addition, there can be no assurance that the SCM financial
projections will be realized or that actual results will not be
significantly higher or lower than projected.
The SCM financial projections set forth above are included in
this joint proxy statement/information statement and prospectus
only because this information was made available to Avondale for
use in its fairness analysis provided to the SCM board of
directors and to Imperial Capital for use in its fairness
analysis provided to the Hirsch board of directors. The SCM
financial projections were not prepared with a view to public
disclosure or compliance with the published guidelines of the
SEC or the guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts.
The SCM financial projections do not purport to present
operations in accordance with U.S. generally accepted
accounting principles, or GAAP.
No independent accountants have compiled, examined or performed
any procedures with respect to the SCM financial projections
contained herein, nor have any independent accountants expressed
any opinion or any other form of assurance on such information
or its achievability or the assumptions on which they are based.
You are urged to read carefully these SCM financial projections
together with the SCM financial statements, the Risk Factors,
the summaries of the opinions of the financial advisor to SCM
and Imperial Capital contained in the sections of this joint
proxy statement/information statement and prospectus entitled
The Merger Opinion of the Financial Advisor of
SCM and The Merger Opinion of Imperial
Capital, LLC to the Board of Directors of Hirsch,
respectively, the Written Opinion of Avondale Partners, LLC
attached hereto as Annex E and the Written Opinion
of Imperial Capital, LLC attached hereto as Annex F.
Hirsch
Financial Projections
Hirsch provided preliminary income statement projections for its
business in early November to SCM, Avondale Partners, SCMs
financial advisor, for use in connection with Avondales
financial analysis, summarized in the section of this joint
proxy statement/information statement and prospectus entitled
The Merger Opinion of the Financial Advisor of
SCM, and to Imperial Capital, for use in connection with
Imperial Capitals rendering of its fairness opinion,
summarized in the section of the joint proxy
statement/information statement and prospectus entitled
The Merger Opinion of Imperial Capital, LLC to
the Board of Directors of Hirsch. These preliminary income
statement projections provided by Hirsch included a projection
of annual revenue growth for Hirschs
60
business, as a stand-alone entity, in the years of 2009 to 2012
of 22% (2009), 18% (2010), 15% (2011) and 10% (2012). The
preliminary Hirsch income statement projections are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending November 30,
|
|
(Dollars, in thousands)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
23,000
|
|
|
$
|
28,000
|
|
|
$
|
33,000
|
|
|
$
|
38,000
|
|
|
$
|
41,800
|
|
Growth Rate
|
|
|
|
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
15
|
%
|
|
|
10
|
%
|
Direct Product Costs
|
|
|
7,590
|
|
|
|
9,240
|
|
|
|
10,890
|
|
|
|
12,540
|
|
|
|
13,794
|
|
% of Revenue
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Margin
|
|
|
15,410
|
|
|
|
18,760
|
|
|
|
22,110
|
|
|
|
25,460
|
|
|
|
28,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Margin
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
Operations
|
|
|
988
|
|
|
|
1,037
|
|
|
|
1,089
|
|
|
|
1,144
|
|
|
|
1,201
|
|
Growth Rate
|
|
|
|
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
Royalty / License
|
|
|
1,028
|
|
|
|
1,244
|
|
|
|
1,457
|
|
|
|
1,668
|
|
|
|
1,777
|
|
% of Revenue
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
|
|
4.3
|
%
|
Total Other COGS
|
|
|
2,037
|
|
|
|
2,139
|
|
|
|
2,246
|
|
|
|
2,358
|
|
|
|
2,476
|
|
Growth Rate
|
|
|
|
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
4,053
|
|
|
|
4,420
|
|
|
|
4,792
|
|
|
|
5,170
|
|
|
|
5,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Revenue
|
|
|
18
|
%
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
11,357
|
|
|
|
14,340
|
|
|
|
17,318
|
|
|
|
20,290
|
|
|
|
22,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin %
|
|
|
49
|
%
|
|
|
51
|
%
|
|
|
52
|
%
|
|
|
53
|
%
|
|
|
54
|
%
|
Sales & Marketing
|
|
|
4,853
|
|
|
|
5,290
|
|
|
|
5,554
|
|
|
|
5,832
|
|
|
|
6,123
|
|
Growth Rate
|
|
|
|
|
|
|
9
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
R&D
|
|
|
3,328
|
|
|
|
1,120
|
|
|
|
1,320
|
|
|
|
1,520
|
|
|
|
1,672
|
|
% of Revenue
|
|
|
14.5
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
G&A
|
|
|
2,947
|
|
|
|
3,095
|
|
|
|
3,250
|
|
|
|
3,412
|
|
|
|
3,583
|
|
Growth Rate
|
|
|
|
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
11,128
|
|
|
|
9,504
|
|
|
|
10,124
|
|
|
|
10,764
|
|
|
|
11,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income/EBITDA
|
|
|
229
|
|
|
|
4,836
|
|
|
|
7,194
|
|
|
|
9,526
|
|
|
|
11,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Subsequently, after careful review and consideration,
Hirschs management determined that its preliminary income
statement projections would require revision to account for the
impact of slowing U.S. and worldwide economic growth,
disruption in the global financial markets, declining consumer
and business confidence and other significant challenges
affecting the economy negatively at that time. Hirsch also
increased the expected net revenue figure for 2008 by $400,000,
to reflect more up-to-date information for the year.
Accordingly, Hirsch revised its preliminary income statement
projections to reflect these considerations and provided the
revised income statement projections to SCM, Avondale Partners
and Imperial Capital in mid-November. At the time the revised
Hirsch income statement projections were presented, Hirsch
management believed the revised income statement projections
more appropriately reflected the potential growth of
Hirschs business in light of the general economic
conditions. In the revised Hirsch income statement projections,
the annual revenue growth rate of Hirschs business, as a
stand-alone entity, is stated as 6.4% in 2008 and projected to
be 10% in the years 2009 through 2012. The revised Hirsch income
statement projections are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ending November 30,
|
|
(Dollars, in millions)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
Net Revenue
|
|
$
|
23.4
|
|
|
$
|
25.7
|
|
|
$
|
28.3
|
|
|
$
|
31.1
|
|
|
$
|
34.3
|
|
% Growth
|
|
|
6.4
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Cost of Revenue
|
|
|
7.7
|
|
|
|
8.5
|
|
|
|
9.3
|
|
|
|
10.3
|
|
|
|
11.3
|
|
Royalties to Related Parties
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
8.8
|
|
|
|
9.6
|
|
|
|
10.6
|
|
|
|
11.6
|
|
|
|
12.8
|
|
Gross Profit
|
|
|
14.6
|
|
|
|
16.1
|
|
|
|
17.7
|
|
|
|
19.5
|
|
|
|
21.5
|
|
% Margin
|
|
|
62.5
|
%
|
|
|
62.6
|
%
|
|
|
62.6
|
%
|
|
|
62.6
|
%
|
|
|
62.8
|
%
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Administrative
|
|
|
10.9
|
|
|
|
11.3
|
|
|
|
11.9
|
|
|
|
12.4
|
|
|
|
13.0
|
|
Research & Development
|
|
|
3.6
|
|
|
|
1.4
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Depreciation & Amortization
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
14.6
|
|
|
|
12.8
|
|
|
|
13.2
|
|
|
|
13.8
|
|
|
|
14.4
|
|
% of Net Revenue
|
|
|
62.3
|
%
|
|
|
49.8
|
%
|
|
|
46.6
|
%
|
|
|
44.3
|
%
|
|
|
42.1
|
%
|
EBIT
|
|
|
0.1
|
|
|
|
3.3
|
|
|
|
4.5
|
|
|
|
5.7
|
|
|
|
7.1
|
|
Depreciation & Amortization
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
EBITDA
|
|
|
0.2
|
|
|
|
3.4
|
|
|
|
4.6
|
|
|
|
5.8
|
|
|
|
7.2
|
|
% Margin
|
|
|
0.7
|
%
|
|
|
13.2
|
%
|
|
|
16.4
|
%
|
|
|
18.7
|
%
|
|
|
21.0
|
%
|
The preliminary Hirsch income statement projections and the
revised income statement projections rely on numerous
assumptions that included, among others, the assumptions listed
below. Hirsch did not find it practicable to quantify or
otherwise assign relative weights to the specific assumptions
made in connection with the Hirsch income statement projections:
|
|
|
|
|
the U.S. economy would begin recovering from the current
state of economic recession in 2009;
|
|
|
|
the security sector would outperform the overall economy;
|
|
|
|
the rate of growth in revenue for Hirschs products and
services would continue at the same rates, respectively, as
represented in the Projections for 2009;
|
|
|
|
gross margins would represent approximately the same percentages
of revenue for each year as represented in the Projections for
2009;
|
|
|
|
operating expenses as a percentage of revenue would decrease
substantially in 2009 due to lower research and development
costs as major next generation product development projects wind
down, then decrease moderately thereafter due to increased
productivity and operating efficiency;
|
|
|
|
the market would increasingly demand higher-security products,
such as smart cards, biometrics and multi-factor authentication;
|
62
|
|
|
|
|
demand from security products from U.S. federal government
agencies due to Federal Information Processing Standards (FIPS)
201 would increase in 2009 and each year thereafter through 2012;
|
|
|
|
Hirsch in 2009 would successfully develop and sell new products
and services including but not limited to a next generation
access controller and card reader product line, Hirsch-sourced
cards and identity management solutions; and
|
|
|
|
no provision for the potential material effects of extraordinary
business events, such as adverse regulatory developments, major
unplanned new product launches or natural disasters.
|
There can be no guarantee that the preliminary Hirsch income
statement projections and the revised Hirsch income statement
projections will be realized, or that the assumptions on which
they are based will prove to be correct.
As a private company, Hirsch has not previously made available
to the public any projections as to its future financial
performance. The preliminary Hirsch income statement projections
and the revised Hirsch income statement projections set forth
above are included in this joint proxy statement/information
statement and prospectus only because this information was
provided to Imperial Capital for use in its fairness analysis
provided to the Hirsch board of directors and to Avondale for
use in its fairness analysis provided to the SCM board of
directors. The preliminary Hirsch income statement projections
and the revised Hirsch income statement projections were not
prepared with a view to public disclosure or compliance with the
published guidelines of the SEC or the guidelines established by
the American Institute of Certified Public Accountants regarding
projections or forecasts. The preliminary Hirsch income
statement projections and the revised Hirsch income statement
projections do not purport to present operations in accordance
with U.S. generally accepted accounting principles, or GAAP.
No independent accountants have compiled, examined or performed
any procedures with respect to the preliminary Hirsch income
statement projections and the revised Hirsch income statement
projections contained herein, nor have any independent
accountants expressed any opinion or any other form of assurance
on such information or its achievability or the assumptions on
which they are based.
As Imperial Capital was informed by Hirsch management that the
revised Hirsch income statement projections represented the most
likely future results of Hirsch given the market conditions at
that time, Imperial Capital reviewed and relied upon the revised
Hirsch income statement projections (but not the preliminary
Hirsch income statement projections) in rendering its opinion of
fairness, as summarized in the section of this joint proxy
statement/information statement and prospectus entitled
The Merger Opinion of Imperial Capital, LLC to
the Board of Directors of Hirsch and the Written Opinion
of Imperial Capital, LLC attached hereto as Annex F.
Avondale reviewed and relied upon both the preliminary Hirsch
income statement projections and the revised Hirsch income
statement projections in rending its opinion of fairness, as
summarized in the section of this joint proxy
statement/information statement and prospectus entitled
The Merger Opinion of the Financial Advisor of
SCM and attached hereto as Annex E. For
purposes of its financial analysis, however, Avondale made
certain adjustments to the preliminary Hirsch income statement
projections and the revised Hirsch income statement projections.
In the preliminary Hirsch income statement projections, Avondale
adjusted the projected amount of R&D expenses incurred by
Hirsch to reflect what was believed to be a more normalized
level of R&D expense (based on a
5-year
development cycle and historic trends), among other adjustments.
Projected R&D spending for 2008 was decreased by
$2.0 million and increased by $500,000 in each of the four
subsequent years. The resulting set of adjusted
preliminary Hirsch income statement projections is called the
Hirsch Case in the section of this joint proxy
statement/information statement and prospectus entitled
The Merger Opinion of the Financial Advisor of
SCM and in the Written Opinion of Avondale Partners, LLC,
attached hereto as Annex E. In the revised Hirsch
income statement projections, among other adjustments, Avondale
(i) again adjusted the projected amount of R&D
expenses in the manner discussed above, (ii) adjusted the
revenue figures to reflect the acquisition by Hirsch of Hirsch
EMEA, Inc., which was not reflected in the revised Hirsch income
statement projections (projected revenue was increased $0 in
2008, $2 million in 2009, $3 million in 2010,
$4 million in 2011 and $4 million in 2012) and
(iii) set the 2008 net revenue figure at $23,000,000
to match the 2008 revenue figure in the preliminary Hirsch
income statement projections. The resulting set of
adjusted revised Hirsch income statement projections
is called the SCM Case in the section of this joint
proxy statement/information statement and
63
prospectus entitled The Merger Opinion of the
Financial Advisor of SCM and in the Written Opinion of
Avondale Partners, LLC, attached hereto as Annex E.
You are urged to read carefully these Hirsch income statement
projections together with the Hirsch financial statements, the
Risk Factors, the summaries of the opinions of the financial
advisor to SCM and Imperial Capital contained in the sections of
this joint proxy statement/information statement and prospectus
entitled The Merger Opinion of the Financial
Advisor of SCM and The Merger Opinion of
Imperial Capital, LLC to the Board of Directors of
Hirsch, the Written Opinion of Avondale Partners, LLC
attached hereto as Annex E and the Written Opinion
of Imperial Capital, LLC attached hereto as Annex F.
Opinion
of the Financial Advisor of SCM
At the December 9, 2008 meeting of SCMs board of
directors, Avondale Partners (Avondale) rendered its
oral opinion to the board of directors, subsequently confirmed
in writing, to the effect that, as of December 9, 2008, and
based upon and subject to certain matters stated therein, the
consideration to be to be paid by the SCM in the Merger is fair,
from a financial point of view, to SCM.
The full text of Avondales written opinion, dated
December 9, 2008, delivered to the SCM board of directors,
which sets forth the assumptions made, matters considered and
limitations in the review undertaken, is attached as
Annex E to this joint proxy statement/information
statement and prospectus, and the written opinion is
incorporated herein by reference. The opinion was reviewed and
approved by Avondales Fairness Opinion Committee in
conformity with policies and procedures established under the
requirements of Rule 2290 of the NASD Rules of the
Financial Institutions Regulatory Authority. You should read the
opinion carefully and in its entirety. The following summary of
the Avondale opinion is qualified in its entirety by reference
to the full text of the opinion.
Avondale, as part of its investment banking services, is
regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions,
corporate restructurings, strategic alliances, negotiated
underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and
other purposes. In the past three years, Avondale has provided
investment banking, financial advisory and other financial
services to SCM, for which Avondale received compensation,
including, among other things, having acted as exclusive
sell-side advisor for SCM in the divestiture of one of its
divisions and the corresponding fairness opinion, for which
Avondale received compensation. Avondale has acted as financial
advisor to the SCM board of directors in connection with the
Merger and will receive a fee for its services, a significant
portion of which is contingent upon consummation of the Merger,
and received a fee for its services upon delivery of this
opinion, which fee was not contingent upon consummation of the
Merger.
The SCM board of directors, and not Avondale, determined the
amount of consideration to be paid by SCM in the Merger and
Avondales opinion does not constitute a recommendation to
the SCM stockholders or any other stockholders as to how such
stockholders or any other stockholder should vote with respect
to the Merger. The opinion addresses only the fairness, from a
financial point of view, the consideration to be paid by SCM in
the Merger. It does not address the relative merits of the
Merger as compared to alternative transactions or strategies
that may be available to SCM, nor does it address SCMs
underlying decision to engage in the Merger.
The SCM board of directors did not impose any limitations on
Avondale with respect to the investigations made or procedures
followed in rendering its opinion. Further, SCM did not request
the advice of Avondale with respect to alternatives to the
Merger, and Avondale did not advise SCM with respect to
alternatives to the Merger or SCMs underlying decision to
proceed with or effect the Merger.
Avondales opinion and its related presentation were among
the many factors that the SCM board of directors took into
consideration in making its determination to approve, and to
recommend that SCMs stockholders approve, the Merger.
The following description of Avondales opinion is only a
summary of the analyses and examinations that Avondale deems
material to its opinion. It is not a comprehensive description
of all analyses and examinations actually conducted by Avondale.
The preparation of a fairness opinion necessarily is not
susceptible to partial analysis or summary description. Avondale
believes that its analyses and the summary set forth below must
be
64
considered as a whole, and that selecting portions of its
analyses and of the factors considered, without considering all
analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to
the SCM board of directors. In addition, Avondale may have given
various analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than
other assumptions. The fact that any specific analysis has been
referred to in the summary below is not meant to indicate that
this analysis was given greater weight than any other analysis
described below and should not be taken to be the complete view
of Avondale, with respect to the actual value of Hirsch.
In performing its analyses, Avondale made numerous assumptions
with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond
the control of SCM. The analyses performed by Avondale are not
necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than
those suggested by these analyses. These analyses were prepared
solely as part of the analysis performed by Avondale with
respect to whether the consideration to be paid by SCM in the
Merger is fair, from a financial point of view, to SCM and were
provided to the SCM board of directors in connection with the
delivery of Avondales opinion. The analyses do not purport
to be appraisals or to reflect the prices at which a company
might actually be sold or the prices at which any securities may
trade at any time in the future.
No company or transaction used in the comparable company or
comparable transaction analyses described below is identical to
Hirsch or the Merger. Accordingly, an analysis of the results of
such analyses is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial
and operating characteristics of the companies and other factors
that could affect the public trading value of the companies to
which Hirsch, and the Merger are being compared.
Procedures
Followed
In connection with its opinion, Avondale:
|
|
|
|
|
reviewed certain financial statements of Hirsch for recent years
and certain other relevant financial and operating data of
Hirsch made available to it by senior management of Hirsch;
|
|
|
|
reviewed a draft of the Merger Agreement, such draft dated
December 7, 2008;
|
|
|
|
compared Hirsch from a financial point of view with certain
publicly traded companies in the information technology security
and access control industries that Avondale deemed relevant;
|
|
|
|
considered the financial terms, to the extent publicly
available, of selected recent business combinations in the
information technology security and access control industries
that Avondale deemed to be comparable, in whole or in part, to
the Merger;
|
|
|
|
reviewed the financial terms, to the extent publicly available,
of certain other transactions Avondale believed to be reasonably
comparable to the Merger;
|
|
|
|
reviewed financial forecasts relating to the business and
prospects of Hirsch and the combined company prepared by the
respective managements of SCM and Hirsch;
|
|
|
|
held discussions with senior management of SCM and Hirsch
regarding Hirschs operating history, products and
services, sales and marketing and the prospects of Hirsch and
the combined company;
|
|
|
|
took into account Avondales assessment of general
economic, market and financial and other conditions and its
experience in other transactions, as well as its expertise in
securities valuation and its knowledge of the industry in which
Hirsch operates; and
|
|
|
|
performed other such analyses and examinations and considered
such other information and financial criteria as Avondale has
deemed appropriate.
|
65
In preparing its opinion, Avondale did not assume any
responsibility to independently verify the information referred
to above. Instead, with SCMs consent, Avondale relied on
the information being accurate and complete. Avondale also made
the following assumptions, in each case with SCMs consent,
that:
|
|
|
|
|
the internal operating data and financial analyses and forecasts
supplied to Avondale were reasonably prepared on bases
reflecting the best currently available estimates and judgments
of Hirschs senior management as to Hirschs recent
and likely future performance;
|
|
|
|
the Merger will be consummated on the terms and subject to the
conditions described in the Merger Agreement;
|
|
|
|
all necessary governmental and regulatory approvals and third
party consents will be obtained on terms and conditions that
will not have a material adverse effect on Hirsch; and
|
|
|
|
the final Merger Agreement does not differ materially from the
draft of the Merger Agreement Avondale reviewed.
|
In addition, for purposes of its opinion, Avondale relied on
independent accountants as to financial reporting matters with
respect to SCM, the Merger and the Merger Agreement; and did not
assume responsibility for making an independent physical
inspection or appraisal of any of the assets, properties or
facilities of Hirsch. Avondale did not assume responsibility for
any legal matters relating to SCM, the Merger or the Merger
Agreement.
Avondales opinion was necessarily based upon market,
economic, financial and other conditions as they existed on, and
can be evaluated as of, the date of its opinion. Any change in
such conditions would require a reevaluation of Avondales
opinion. Accordingly, although subsequent developments may
affect its opinion, Avondale has not assumed any obligation to
update or revise its opinion.
Summary
of Financial and Other Analyses
As part of the financial analyses, Avondale calculated a low and
high range for the implied merger enterprise value (which
Avondale defined as equity value plus debt less cash and cash
equivalents) of Hirsch implied by the transaction. As of
November 30, 2008, Hirsch had approximately $5,700,000 in
cash and no debt.
The low range for the enterprise value of Hirsch is $24,029,190
and is based on the following merger consideration: $14,117,205
in cash, 9,411,470 shares of SCMs common stock valued
at $13,646,632, 4,705,735 in newly issued warrants to purchase
SCM common stock valued at $1,810,254, and 62,000 currently
outstanding Hirsch warrants to be converted to warrants to
purchase SCM common stock valued at $155,099.
The high range for the enterprise value of Hirsch is $27,361,597
and is based on the following value of the merger consideration:
$14,117,205 in cash, 9,411,470 shares of SCMs common
stock valued at $15,114,821, 4,705,735 in newly issued warrants
for SCM common stock valued at $3,588,692, and 62,000 currently
outstanding Hirsch warrants to be converted to warrants for SCM
common stock valued at $240,879.
|
|
|
|
|
|
|
|
|
Merger Consideration
|
|
Low Range
|
|
|
High Range
|
|
|
Cash
|
|
$
|
14,117,205
|
|
|
$
|
14,117,205
|
|
Common Stock
|
|
|
13,646,632
|
|
|
|
15,114,821
|
|
Warrants
|
|
|
1,810,254
|
|
|
|
3,588,692
|
|
Converted Warrants
|
|
|
155,099
|
|
|
|
240,879
|
|
|
|
|
|
|
|
|
|
|
Equity Value
|
|
$
|
29,729,190
|
|
|
$
|
33,061,597
|
|
Cash
|
|
|
5,700,000
|
|
|
|
5,700,000
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value
|
|
$
|
24,029,190
|
|
|
$
|
27,361,597
|
|
The low value of the SCM common stock to be issued is valued at
$13,646,632, based on a closing price of $1.45 per share as of
December 5, 2008. The high value of the SCM common stock to
be issued is valued at $15,114,821, based on the
30-day
volume weighted average closing price of $1.61 per share as of
December 5, 2008.
66
The 4,705,375 newly issued warrants to purchase SCM common stock
were valued using the Black-Scholes model. The low range of the
warrants value was calculated utilizing a $3.00 strike price,
five-year term, and underlying SCM common stock price of $1.45
(based on the closing stock price as of December 5, 2008),
and historical volatility of 50.429%. This represented a measure
of volatility, which was based on a
365-day
period from July 31, 2007 to July 31, 2008, prior to
the volatility during the recent economic downturn. The high
range of the warrants value was calculated utilizing a $3.00
strike price, five-year term, an underlying SCM common stock
price of $1.45 as of December 5, 2008, and historical
volatility of 81.615%. This represented a current measure of
volatility, which was based on a
365-day
period from December 4, 2007 to December 4, 2008. The
62,000 currently outstanding Hirsch warrants are to be converted
into newly issued warrants to purchase SCM common stock
utilizing the conversation ratio as stated in the draft Merger
Agreement, dated December 7, 2008. After conversion, the
warrants were valued using the Black-Scholes model. The value of
each warrant to be converted varied based on the term and
exercise price of each warrant. The low range was calculated
using a historical volatility of 50.429%. The high range was
calculated using a historical volatility 81.615%.
The table below lists the relevant enterprise value multiples
based on the latest twelve months (LTM), the Hirsch
case and the SCM case of revenue and earnings before interest,
taxes, depreciation and amortization before taxes
(EBITDA) of the proposed Merger.
Proposed
Merger Multiples
|
|
|
|
|
|
|
|
|
Enterprise Value to:
|
|
Low Range
|
|
|
High Range
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
LTM Revenue
|
|
|
1.0
|
x
|
|
|
1.2
|
x
|
2008E Hirsch Case
|
|
|
1.0
|
x
|
|
|
1.2
|
x
|
2008E SCM Case
|
|
|
1.0
|
x
|
|
|
1.2
|
x
|
2009E Hirsch Case
|
|
|
0.9
|
x
|
|
|
1.0
|
x
|
2009E SCM Case
|
|
|
0.9
|
x
|
|
|
1.0
|
x
|
EBITDA
|
|
|
|
|
|
|
|
|
LTM EBITDA
|
|
|
8.2
|
x
|
|
|
9.3
|
x
|
2008E Hirsch Case
|
|
|
10.8
|
x
|
|
|
12.3
|
x
|
2008E SCM Case
|
|
|
10.8
|
x
|
|
|
12.3
|
x
|
2009E Hirsch Case
|
|
|
5.5
|
x
|
|
|
6.3
|
x
|
2009E SCM Case
|
|
|
6.1
|
x
|
|
|
7.0
|
x
|
The following represents a summary of the material financial
analyses performed by Avondale in connection with providing its
opinion to the SCM board of directors. Some of the summaries of
financial analyses performed by Avondale include information
presented in tabular format. In order to fully understand the
financial analyses performed by Avondale, you should read the
tables together with the text of each summary. The tables alone
do not constitute a complete description of the financial
analyses. Considering the data set forth in the tables without
considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of
the financial analyses performed by Avondale.
67
Precedent
Transactions Analysis
Based on public and other available information, Avondale
calculated the multiples of enterprise value (which Avondale
defined as equity value plus debt less cash and cash
equivalents) to the LTM revenues and LTM earnings before
interest, taxes, depreciation and amortization (EBITDA) implied
in the following acquisitions of companies in the electronic
access control industry that have been announced since
May 22, 2006:
|
|
|
|
|
Date Announced
|
|
Name of Acquirer
|
|
Name of Target
|
|
9/22/2008
|
|
Francois-Charles Oberthur
|
|
Oberthur Technologies
|
9/20/2008
|
|
Vector Capital
|
|
Aladdin Knowledge Systems Ltd.
|
7/10/2008
|
|
Aladdin Knowledge Systems
|
|
Secure Computing Corp., Secure Safeword
|
6/25/2008
|
|
Aladdin Knowledge Systems
|
|
Eutronsec S.p.A
|
3/23/2008
|
|
L-1 Identity Solutions, Inc.
|
|
Digimarc Corp.
|
2/13/2008
|
|
Thoma Cressey Bravo
|
|
Macrovision Corp., Software Business
|
1/7/2008
|
|
L-1 Identity Solutions, Inc.
|
|
Bioscrypt Inc.
|
10/12/2007
|
|
Endace
|
|
Applied Watch Technologies
|
6/12/2007
|
|
SonicWALL, Inc
|
|
Aventail Corp.
|
3/5/2007
|
|
Vector Capital
|
|
SafeNet, Inc.
|
10/10/2006
|
|
Oberthur Technologies
|
|
IM Technologies Ltd.
|
7/14/2006
|
|
L-1 Identity Solutions, Inc.
|
|
Irdian Technologies, Inc.
|
5/22/2006
|
|
HID
|
|
Fargo Electronics
|
The following table sets forth the implied revenue and EBITDA
transaction multiples indicated by the precedent transaction
analysis, multiples implied by the proposed Merger, and the
respective implied enterprise values:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Low
|
|
|
High
|
|
|
Enterprise Value/Revenue:
|
|
|
|
|
|
|
|
|
Precedent Transaction Comparables Multiple
|
|
|
0.7
|
x
|
|
|
8.0
|
x
|
Implied Enterprise Value
|
|
$
|
16.1
|
|
|
$
|
189.3
|
|
Proposed Merger Multiple
|
|
|
1.0
|
x
|
|
|
1.2
|
x
|
Implied Enterprise Value
|
|
$
|
24.0
|
|
|
$
|
27.4
|
|
Enterprise Value/EBITDA:
|
|
|
|
|
|
|
|
|
Precedent Transaction Comparables Multiple
|
|
|
8.5
|
x
|
|
|
29.1
|
x
|
Implied Enterprise Value
|
|
$
|
24.8
|
|
|
$
|
85.5
|
|
Proposed Merger Multiple
|
|
|
8.2
|
x
|
|
|
9.3
|
x
|
Implied Enterprise Value
|
|
$
|
24.0
|
|
|
$
|
27.4
|
|
Avondale calculated the implied enterprise value based on the
range of revenue and EBITDA valuation multiples based on the
precedent transactions analysis. This analysis resulted in an
implied enterprise value range of $16.1 million to
$189.3 million based on LTM revenue multiples and an
implied enterprise value range of $24.8 million to
$85.5 million based on LTM EBITDA multiples, which compares
to the implied merger enterprise value of $24.0 million to
$27.4 million.
Comparable
Company Analysis
Based on public and other available information, Avondale
calculated the multiples of enterprise value (which Avondale
defined as equity value, plus debt, less cash and cash
equivalents) to the latest twelve months (LTM), estimated
calendar year 2008 (2008E), and estimated calendar year 2009
(2009E) revenues and earnings before interest, taxes,
depreciation and amortization (EBITDA) for companies
in the electronic access control industry. The estimated
financial data for the comparable companies was based on
consensus estimates from Bloomberg.
68
Avondale believes that the companies listed below have some
operations similar to some of the operations of Hirsch, but
noted that none of these companies have the same management,
composition, size, or combination of businesses as Hirsch:
|
|
|
|
|
G4S plc.;
|
|
|
|
L-1 Identity Solutions, Inc.;
|
|
|
|
Cogent Systems;
|
|
|
|
Vasco Data Security International, Inc.;
|
|
|
|
Entrust, Inc.;
|
|
|
|
Aladdin Knowledge Systems;
|
|
|
|
Actividentity Corp.;
|
|
|
|
Gemalto N.V.; and
|
|
|
|
On Track Innovations Ltd.
|
The following table sets forth the multiples indicated by this
analysis:
Comparable
Company Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars, in millions)
|
|
Multiple
|
|
|
Implied Enterprise Value
|
|
Enterprise Value to:
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
LTM Revenue
|
|
|
0.5
|
x
|
|
|
8.2
|
x
|
|
$
|
11.1
|
|
|
$
|
192.2
|
|
2008E Revenue (Hirsch Case)
|
|
|
0.5
|
x
|
|
|
6.9
|
x
|
|
$
|
11.0
|
|
|
$
|
159.4
|
|
2008E Revenue (SCM Case)
|
|
|
0.5
|
x
|
|
|
6.9
|
x
|
|
$
|
11.0
|
|
|
$
|
159.4
|
|
2009E Revenue (Hirsch Case)
|
|
|
0.5
|
x
|
|
|
5.7
|
x
|
|
$
|
13.0
|
|
|
$
|
159.3
|
|
2009E Revenue (SCM Case)
|
|
|
0.5
|
x
|
|
|
5.7
|
x
|
|
$
|
12.6
|
|
|
$
|
155.3
|
|
LTM EBITDA
|
|
|
4.9
|
x
|
|
|
19.9
|
x
|
|
$
|
14.4
|
|
|
$
|
58.4
|
|
2008E EBITDA (Hirsch Case)
|
|
|
4.9
|
x
|
|
|
15.8
|
x
|
|
$
|
11.0
|
|
|
$
|
35.2
|
|
2008E EBITDA (SCM Case)
|
|
|
4.9
|
x
|
|
|
15.8
|
x
|
|
$
|
11.0
|
|
|
$
|
35.2
|
|
2009E EBITDA (Hirsch Case)
|
|
|
4.5
|
x
|
|
|
13.1
|
x
|
|
$
|
19.7
|
|
|
$
|
56.9
|
|
2009E EBITDA (SCM Case)
|
|
|
4.5
|
x
|
|
|
13.1
|
x
|
|
$
|
17.8
|
|
|
$
|
51.6
|
|
Proposed Merger Enterprise Value
|
|
|
|
|
|
|
|
|
|
$
|
24.0
|
|
|
$
|
27.4
|
|
The comparable company analysis resulted in an implied
enterprise value range of $11.0 million to
$192.9 million based on LTM, 2008E, and 2009E revenues.
Based on LTM, 2008E, and 2009E EBITDA, the comparable company
analysis resulted in an implied enterprise value range of
$11.0 million to $58.4 million. This compares to the
implied merger enterprise value of $24.0 million to
$27.4 million.
Discounted
Cash Flow Analysis
Avondale performed discounted cash flow analyses for the
projected cash flows of Hirsch for the fiscal years ending
December 31, 2009 through December 31, 2012. Avondale
performed these discounted cash flow analyses on the Hirsch case
and SCM case. For both of the cases, Avondale used a range of
discount rates (14.0% to 22.0%) and terminal multiples (4.0x to
12.0x) based on forecasted EBITDA for the fiscal year ending
December 31, 2012 to
69
calculate a range of implied enterprise values. The following
table sets forth the implied values indicated by the analyses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hirsch Case
|
|
|
SCM Case
|
|
(In millions)
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Implied Enterprise Value
|
|
$
|
48.6
|
|
|
$
|
64.0
|
|
|
$
|
38.0
|
|
|
$
|
49.8
|
|
Proposed Merger Enterprise Value
|
|
$
|
24.0
|
|
|
$
|
27.4
|
|
|
$
|
24.0
|
|
|
$
|
27.4
|
|
The discounted cash flow analysis based on the Hirsch case
resulted in an implied enterprise value range of
$48.6 million to $64.0 million. The discounted cash
flow analysis based on the SCM case resulted in an implied
enterprise value range of $38.0 million to
$49.8 million. These cases compare to the implied merger
enterprise value of $24.0 million to $27.4 million.
General
Avondale became entitled to a fixed fee of $150,000 upon its
completion of the work necessary to render an opinion,
regardless of the conclusion reached therein, which is not
contingent upon consummation of the Merger. Avondale is entitled
to additional fees contingent upon consummation of the Merger,
including a payment based upon a calculation of a percentage of
the certain consideration paid by SCM to Hirsch shareholders in
connection with the Merger. Further, SCM has agreed to reimburse
Avondale for its reasonable out-of-pocket expenses incurred in
connection with the engagement, including reasonable
attorneys fees and expenses, and to indemnify Avondale,
its affiliates, and their respective partners, directors,
officers, agents, consultants, employees and controlling persons
against specific liabilities, including liabilities under
applicable securities laws.
In the ordinary course of its business, Avondale may trade in
the equity securities of SCM for its own account and for the
accounts of customers and, accordingly, may at any time hold a
long or short position in these securities.
Opinion
of Imperial Capital, LLC to the Board of Directors of
Hirsch
Pursuant to an engagement letter dated October 27, 2008,
Hirsch retained Imperial Capital, LLC (Imperial
Capital) to render an opinion to the board of directors of
Hirsch as to the fairness, from a financial point of view, of
the merger consideration to be received by the holders of Hirsch
common stock, pursuant to the Merger. Hirsch selected Imperial
Capital to render an opinion because Hirsch considers Imperial
Capital to be a well-respected investment banking firm with
extensive experience in dealing with companies in the security
industry.
Imperial Capital rendered a written opinion to the board of
directors of Hirsch, on December 10, 2008, that, as of that
date, and based on and subject to various assumptions,
qualifications and limitations set forth in the opinion, the
Aggregate Consideration to Non-Insiders (as defined in the
opinion) was fair, from a financial point of view, to the
holders of Hirsch common stock, no par value, other than
Lawrence W. Midland (as used in this section, such holders of
Hirsch common stock excluding Lawrence W. Midland, the
Non-Insider Shareholders).
The full text of the written opinion of Imperial Capital, dated
December 10, 2008, which sets forth, among other things,
assumptions made, matters considered, and limitations on the
review undertaken in connection with the opinion, is attached as
Annex F to this joint proxy statement/information
statement and prospectus. The following summary of Imperial
Capitals opinion is qualified in its entirety by reference
to the full text of the opinion. The opinion expressed by
Imperial Capital was provided solely for the benefit and use of
the board of directors of Hirsch (and was not rendered or
directed to Hirschs shareholders, SCM, or SCMs board
of directors or shareholders or any other person or persons) in
connection with its consideration of the Merger, and such
opinion only addresses whether, as of the date of such opinion,
the Aggregate Consideration to Non-Insiders was fair, from a
financial point of view, to the Non-Insider Shareholders, and
does not address (a) whether the Merger was fair, from a
financial point of view, to the SCM stockholders, or
(b) any other aspect of the proposed Merger.
Imperial Capitals opinion does not constitute a
recommendation as to any action the board of directors of Hirsch
or any shareholder of Hirsch (or the board of directors of SCM
or any stockholder of SCM) should take in connection with the
Merger or any aspect thereof and is not a recommendation as to
whether or not any holder of shares of Hirsch common stock (or
any holder of shares of SCM common stock) should tender their
shares in connection with the Merger or how any holder of Hirsch
common stock (or any holder of SCM common stock)
70
should vote with respect to the Merger. Nor does such opinion
indicate that the consideration received by the holders of
Hirsch common stock is the best possible attainable under any
circumstances. The opinion is solely intended for the benefit
and use of Hirschs board of directors and as such is not
to be relied upon by any other person or used for any other
purpose or reproduced, disseminated, summarized, quoted from or
referred to at any time, in whole or in part, without Imperial
Capitals prior written consent, which shall not be
unreasonably withheld. Imperial Capital has, however, consented
to the disclosure of its opinion in this joint proxy
statement/information statement and prospectus as provided in
its written consent attached hereto as Exhibit 23.1 hereto.
You are urged to read the opinion carefully and in its entirety.
The following is a summary of the material financial analyses
performed by Imperial Capital in connection with rendering its
opinion. The summary of the financial analyses is not a complete
description of all of the analyses performed by Imperial
Capital. THE IMPERIAL CAPITAL OPINION IS BASED ON THE
TOTALITY OF THE VARIOUS ANALYSES THAT IT PERFORMED, AND NO
PARTICULAR PORTION OF THE ANALYSIS HAS ANY MERIT STANDING
ALONE.
While this summary describes the analysis and factors that
Imperial Capital deemed material in rendering the opinion, it is
not a comprehensive description of all analyses and factors
considered by Imperial Capital. The preparation of a fairness
opinion is a complex process that involves various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to
the particular circumstances. Therefore, a fairness opinion is
not readily susceptible to partial analysis or a summary
description. In arriving at its opinion, Imperial Capital did
not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor.
Accordingly, Imperial Capital believes that its analyses must be
considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading
or incomplete view of the evaluation process underlying its
opinion. Several analytical methodologies were employed and no
one method of analysis should be regarded as critical to the
overall conclusion reached by Imperial Capital. Each analytical
technique has inherent strengths and weaknesses, and the nature
of the available information may further affect the value of
particular techniques. The conclusion reached by Imperial
Capital is based on all analyses and factors taken, as a whole,
and also on application of Imperial Capitals own
experience and judgment. This conclusion may involve significant
elements of subjective judgment and qualitative analysis.
Imperial Capital gives no opinion as to the value or merit
standing alone of any one or more parts of the analysis it
performed. In performing its analyses, Imperial Capital made
numerous assumptions with respect to Hirschs performance,
the industry outlook, general business and other conditions and
matters many of which are beyond the control of Hirsch or
Imperial Capital. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or
less favorable than those suggested by these analyses.
Accordingly, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which these
businesses actually may be sold in the future, and these
estimates are inherently subject to uncertainty.
In connection with this opinion, Imperial Capital made such
reviews, analyses and inquiries as they deemed necessary and
appropriate under the circumstances. No limits were placed on
Imperial Capital by Hirsch or its board of directors in terms of
the information to which they had access or the matters they
could consider. Imperial Capitals due diligence with
regards to the proposed Merger included only the items
summarized below:
|
|
|
|
|
Hirschs audited financial statements for its fiscal years
ended 2005, 2006 and 2007 prepared and approved by Hirschs
management;
|
|
|
|
Hirschs unaudited financial statements for its
year-to-date ended September 30, 2007 and
September 30, 2008 prepared and approved by Hirschs
management;
|
|
|
|
|
|
SCMs audited financial statements for its fiscal years
ended 2005, 2006 and 2007, as contained in SCMs Annual
Reports on Form
10-K, filed
with the U.S. Securities and Exchange Commission on
March 18, 2008, respectively;
|
71
|
|
|
|
|
SCMs unaudited financial statements for its fiscal quarter
ended March 31, 2007 and 2008, June 30, 2007 and 2008,
September 30, 2007 and 2008, as contained in SCMs
Quarterly Report on
Form 10-Q,
filed with the SEC on May 14, 2008, August 12, 2008
and November 10, 2008, respectively;
|
|
|
|
income statement projections for SCM for calendar years
2008 2012 prepared and approved by SCMs
management;
|
|
|
|
income statement projections for Hirsch for calendar years
2008 2012 prepared and approved by Hirschs
management;
|
|
|
|
Hirsch balance sheet dated as of October 31, 2008 prepared
and approved by Hirschs management;
|
|
|
|
an unexecuted merger agreement draft dated November 18,
2008, by and among Hirsch, Merger Sub and SCM, excluding the
schedules and exhibits thereto;
|
|
|
|
certain other publicly available financial data for certain
companies that Imperial Capital deemed comparable or otherwise
relevant to Hirsch or SCM and the terms of recent transactions
that Imperial Capital considered comparable or otherwise
relevant to the Merger, including, without limitation, publicly
available prices; and
|
|
|
|
the reported price and trading activities for the shares of
common stock of SCM.
|
For the purposes of rendering its opinion Imperial Capital
assumed that (a) there were and will be no dissenting
shares in connection with the Merger,
(b) 4,705,735 shares of Hirsch common stock, no par
value, will be outstanding and held by its shareholders as of
immediately prior to the consummation of the Merger, of which
633,000 will be held by Lawrence W. Midland, as of immediately
prior to the effective time of the Merger, and (c) the
Maximum Number of Company Shares as defined in the
merger agreement draft equaled 4,705,735 shares of common
stock. Please note that references in this section entitled
Opinion of Imperial Capital, LLC to the Board of Directors
of Hirsch of this joint proxy statement/information
statement and prospectus to the merger agreement are
references to the draft of the merger agreement described above
dated November 18, 2008 (that did not contained exhibits or
schedules there) that was provided by Hirsch to Imperial Capital
for due diligence purposes in rendering its opinion.
Other than with respect to the Egis Indication (described
below), Imperial Capital was not requested to, and did not,
(i) initiate or participate in any discussions or
negotiations with, or solicit any indications of interest from,
third parties with respect to the Merger, the assets, businesses
or operations of Hirsch, or any alternatives to the Merger,
(ii) negotiate the terms of the Merger, (iii) advise
the board of directors of Hirsch, SCM, or any other party with
respect to alternatives to the Merger, (iv) assist the
Hirsch board of directors in determining the amount of the
consideration to be paid in connection with the Merger, or
(v) recommend to the Hirsch board of directors the amount
of consideration to be paid in connection with the Merger.
Certain principals of Imperial Capital are members of the
general partnership that manages an investment fund named Egis
Capital (Egis). Egis made a preliminary offer to
purchase Hirsch in April 2008 (the Egis Indication),
which offer was rejected by Hirsch, and which is discussed in
the section entitled The Merger Background of
the Development of the Merger.
In connection with its opinion, Imperial Capital conducted such
analyses as it deemed appropriate, however, the information it
utilized in conducting such analyses was limited to solely the
information described above. With respect to financial estimates
and projections provided to Imperial Capital, it assumed without
independent verification that they had been reasonably prepared
on bases reflecting the best then available estimates and
judgments by management as to the future results of operations,
synergies and financial performance of Hirsch and SCM to which
such estimates and projections related and assumed that such
results of operations, synergies and financial performance would
be realized. Imperial Capital also assumed that there had been
no material change in the assets, financial condition or
business of Hirsch or SCM since the date of the most recent
Hirsch and SCM financial statements made available to Imperial
Capital. No facts actually came to Imperial Capitals
attention that would cause it to believe that such assumptions
were invalid as a whole. Imperial Capital further relied upon
the assurance of Hirschs management that they were unaware
of any facts that would make the information provided to
Imperial Capital incomplete or misleading in any material
respect.
72
Imperial Capital did not independently verify the accuracy and
completeness of the information supplied to it with respect to
Hirsch or SCM, relied on it being complete and accurate in all
material respects and did not assume any responsibility for
independent verification of such information. Imperial Capital
did not meet with or have any discussions with any
representatives of SCM or Hirsch (other than members of their
respective senior management) including SCMs and
Hirschs independent accounting firms. Imperial Capital did
not make any physical inspection or independent appraisal of any
of the properties or assets of Hirsch or SCM, did not make an
independent appraisal or evaluation of Hirschs or
SCMs assets or liabilities and was not provided with such
an evaluation or appraisal. Imperial Capital did not estimate,
and expressed no opinion regarding, the liquidation value of any
entity. With Hirschs board of directors consent,
Imperial Capital did not undertake an independent analysis of
any potential or actual litigation, regulatory action, possible
unasserted claims or other contingent liabilities to which
Hirsch or SCM was or may have been a party or was or may have
been subject, or of any governmental investigation of any
possible unasserted claims or other contingent liabilities to
which Hirsch or SCM was or may have been a party or was or may
have been subject.
The merger agreement draft that Imperial Capital was provided
did not contain exhibits or schedules. As such, Imperial Capital
assumed that the fairness to the Non-Insider Shareholders of the
Aggregate Consideration to Non-Insiders was not impacted by the
presence or omission of the schedules and exhibits to the merger
agreement draft. Imperial Capital did not review any ancillary
agreement or any other document, other than as explicitly listed
in the opinion, related to the Merger. Imperial Capital relied
upon and assumed, without independent verification, that
(i) the Merger would be consummated as described in the
form reviewed by Imperial Capital without any material
amendments or modifications thereto, (ii) that all
representations and warranties in the merger agreement draft of
the parties thereto were true and accurate in all respects,
(iii) the Merger would be consummated in a manner that
complied in all respects with all applicable federal and state
statutes, rules and regulations, and (iv) all governmental,
regulatory, and other consents and approvals necessary for the
consummation of the Merger would be obtained and that no delay,
limitations, restrictions or conditions would be imposed or
amendments, modifications or waivers made that would result in
the disposition of any material portion of the assets of Hirsch
or SCM, or otherwise have an adverse effect on Hirsch or SCM or
any expected benefits of the Merger.
Imperial Capital was not requested to opine as to, and its
opinion did not express an opinion as to or otherwise address:
|
|
|
|
|
the underlying business decision of Hirsch or any other party to
proceed with or effect the Merger;
|
|
|
|
the terms or impact of any arrangements, understandings,
agreements or documents related to, or the form or structure or
any other portion or aspect of, the Merger or otherwise (other
than the Aggregate Consideration to Non-Insiders to the extent
expressly specified in the opinion), including, without
limitation, (1) the form or structure of the Aggregate
Consideration to Non-Insiders or any component thereof,
(2) any voting agreement (including but not limited to the
Voting Agreement referenced in the merger agreement draft) or
shareholders agreement (including but not limited to the
Shareholders Agreement referenced in the merger agreement
draft), (3) any options or warrants to acquire Hirsch
securities, (4) the Secure Agreements (as defined in the
merger agreement draft), and (5) the Preferred Stock Rights
Agreement (as defined in the merger agreement draft) or any
waiver of rights thereunder;
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the impact of any transfer restrictions on the securities of
SCM, whether imposed by law or contract, including, without
limitation, those restrictions contained in the
lock-up
or similar provisions of the merger agreement draft;
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the fairness of any portion or aspect of the Merger to the
holders of any Hirsch options or warrants;
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the relative merits of the Merger as compared to any alternative
business strategies that might exist for Hirsch or the effect of
any other transaction in which Hirsch might engage;
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the fairness of any portion or aspect of the Merger to any one
class or group of Hirschs securityholders vis-à-vis
any other class or group of Hirschs securityholders
(including, without limitation, the allocation of any
consideration amongst or within such classes or groups of
securityholders);
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73
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the solvency, creditworthiness or fair value of Hirsch or SCM or
any other participant in the Merger under any applicable laws
relating to bankruptcy, insolvency, fraudulent conveyance or
similar matters;
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any legal, tax or accounting issues concerning the Merger or the
legal or tax consequences of the Merger to Hirsch or its
securityholders or any other party; or
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the amount or nature of any compensation to any officers,
directors or employees of Hirsch, or any class of such persons,
relative to the consideration to be received by the other
holders of Hirschs common stock in the Merger or with
respect to the fairness of any such compensation.
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Furthermore, no opinion, counsel or interpretation was intended
or given in matters that require legal, regulatory, accounting,
insurance, tax or other similar professional advice. Imperial
Capital assumed that such opinions, counsel or interpretations
were or would be obtained from appropriate professional sources.
In addition, and without in any way modifying or limiting any
other assumptions or limitations contained in Imperial
Capitals opinion, its opinion does not address or take
into account (i) any of Hirschs royalty agreements or
related party transactions, including but not limited to those
involving Secure Keyboards, Ltd. and Secure Networks, Ltd., or
(ii) whether Hirsch could carry a higher valuation if such
agreements and transactions were eliminated or restructured.
The basis and methodology for Imperial Capitals opinion
have been designed specifically for the express purposes of the
board of directors and may not translate to any other purposes.
To the extent that any of the foregoing assumptions or any of
the facts on which Imperial Capitals opinion is based
proves to be untrue in any material respect, its opinion cannot
and should not be relied upon.
Imperial Capital delivered its opinion effective as of
December 10, 2008, and such opinion was approved by
Imperial Capitals Fairness Opinion Committee as of such
date pursuant to its written procedures for approval of fairness
opinions. The opinion is necessarily based on business,
economic, market and other conditions as they existed and could
be evaluated as of such date. It should be understood that
subsequent developments may affect the opinion and that Imperial
Capital does not have any obligation to update, revise or
reaffirm the opinion or otherwise comment on or consider events
occurring after such date. For example, Imperial Capital did not
take into account the effect of the Hirsch EMEA purchase on its
opinion since such transaction occurred after the date that
Imperial Capital rendered its opinion.
The decision as to whether to proceed with the Merger or any
related transaction may depend on an assessment of factors
unrelated to the financial analysis on which Imperial
Capitals opinion is based. As a result, the opinion of
Imperial Capital was only one of many factors taken into
consideration by the Hirsch board of directors in making its
determination with respect to the Merger.
In preparing its opinion, Imperial Capital performed certain
financial and comparative analyses summarized in the following
paragraphs.
Valuation
of Merger Consideration
For purposes of rendering its opinion, Imperial Capital assumed
that each share of SCM common stock issued to Hirsch
shareholders in the Merger would have a value equal to the
closing market price of SCM common shares as of December 5,
2008 (which such value was $1.45 per share).
Imperial Capital utilized the Black-Scholes option pricing model
to estimate the value of the warrants to purchase SCM common
stock to be issued to the Hirsch shareholders in the Merger.
Because the warrants to be issued to the Hirsch shareholders in
the Merger are not exercisable for three years after
issuance, Imperial Capital arrived at the value of such warrants
by utilizing two estimated values for the warrants, one value
determined by assuming the estimated life of the warrants at
five years and the other determined by assuming the estimated
life of the warrants at three years, and then subtracted the
value of the three year warrants from the value of the five year
warrants.
Other than the estimated life of the warrants to purchase SCM
common stock, Imperial Capital utilized the same sets of
Black-Scholes option pricing assumptions in estimating the
values of both the three-year and five-year
74
warrants, as follows: volatility of 76.58%, a risk free interest
rate of 1.51%, stock price of $1.45 (based on the closing market
price of shares of SCM common stock as of December 5,
2008) and an exercise price of $3.00 per share. Utilizing
such assumptions Imperial Capital estimated the value of the
five-year warrants to be equal to approximately $0.69 per
warrant and estimated the value of the three-year warrants to be
equal to approximately $0.47 per warrant. As described above,
Imperial Capital then subtracted the estimated value of the
three-year warrants from the estimated value of the five year
warrants to arrive at an estimated value of the warrants of
$0.22 per warrant. Imperial Capital utilized such $0.22 value as
the value of the warrants to purchase SCM common stock to be
issued to the Hirsch shareholders in connection with the Merger.
It is important to note that option pricing models require the
use of highly subjective market assumptions, including expected
stock price volatility, which if changed can materially affect
fair value estimates.
Discounted
Cash Flow Analysis
Imperial Capital performed a discounted cash flow analysis on
Hirsch to take projected future free cash flow over the given
period along with the terminal value at the end of the period
and then discount these cash flows back to a present value by
using the weighted average cost of capital. Imperial Capital
based its discounted cash flow analysis on management estimates
for financial performance of the business over the analyzed
period (through fiscal year 2012).
In its analysis Imperial Capital used discount rates ranging
from 13.9% to 18.9% to reflect the overall risk associated with
Hirschs operations and projected financial performance.
Imperial Capital calculated a terminal value at the end of 2012
using (1) a terminal earnings before interest, taxes,
depreciation and amortization (EBITDA) multiple,
which incorporated an EBITDA multiple of 7.5x, and (2) a
revenue multiple, which incorporated a revenue multiple of 0.6x.
Based on its discounted cash flow analysis, Imperial Capital
estimated that Hirschs present value of enterprise ranged
from $22.4 million to $34.5 million.
Comparable
Company Analysis
Comparable company analysis seeks to use analogous publicly
traded company trading metrics as a proxy for the trading
metrics of the company. These trading metrics for the comparable
companies were then applied to Hirschs financial metrics
to develop valuation ranges. No company used in this analysis is
identical to Hirsch, and, accordingly, a comparable company
analysis involves complex and subjective considerations and
judgments concerning differences in financial and operating
characteristics of businesses and other factors, including, but
not limited to, profitability and the size of the company,
business mix, markets served operations and other
characteristics, that affect trading prices of the various
companies being compared.
Although no exactly analogous publicly traded companies exist,
Imperial Capital selected financial information and multiples
from the ten small cap publicly traded companies in the Access
Control sector listed below.
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Axis AB;
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Gunnebo AB;
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GVI Security Solutions Inc.;
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Kaba Holding AG;
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Magal Security Systems Ltd.;
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MDI Inc.;
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Napco Security Systems Inc.;
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Primion Technology AG;
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Vicon Industries Inc.; and
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Visonic Group.
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75
Based on percent of contribution by latest twelve-month
(LTM) Revenues and LTM EBITDA, a multiple range was
developed. Using a range of LTM Revenue multiples resulted in an
enterprise value of $10.4 million to $19.9 million.
Using a range of LTM EBITDA multiples resulted in an enterprise
value of $6.5 million to $7.4 million. Using a
industry range of calendar year 2009 revenue multiples resulted
in an enterprise value of $11.7 million to
$22.0 million. Using an industry range of calendar year
2009 EBITDA multiples resulted in an enterprise value of
$18.5 million to $21.9 million.
Comparable
Transaction Analysis
Comparable transaction analysis seeks to use publicly disclosed
transaction data of precedent merger and acquisition
transactions as a proxy for the transaction metrics of Hirsch.
Imperial Capital used available market data to select universes
of comparable mergers and acquisitions based on the following
selection criteria:
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comparable industry;
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comparable products and services; and/or
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recently closed transactions.
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No company or transaction utilized in the comparable transaction
analysis is identical to Hirsch or SCM or the Merger. In
evaluating the comparable transactions Imperial Capital made
judgments and assumptions with regard to general business,
market and financial conditions and other matters, which are
beyond the control of Hirsch and SCM, such as the impact of
competition on the business of Hirsch and SCM or the industry
generally, industry growth and the absence of any adverse
material change in the financial condition of Hirsch or SCM or
the industry or in the financial markets in general, which could
affect the public trading value of the companies and the equity
value of the transactions to which they are being compared.
76
Based on public and other available information, Imperial
Capital applied the financial metrics for the following
comparable transactions to Hirschs financial metrics to
develop valuation ranges.
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Date Closed
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Name of Acquirer
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Name of Target
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7/08/2008(1)
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BATM Advanced Communications Ltd.
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Vigilant Technology
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10/21/08
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ESML (EQT)
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Securitas Direct Oy
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10/01/08
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Stanley Works
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Générale de Protection
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08/28/08
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Vislink plc
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Pacific Microwave Research, Inc.
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07/18/08
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Stanley Works (NYSE:SWK)
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Sonitrol Corporation
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07/02/08
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ADT Security Services, Inc.
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Intercon Security and Security Services & Technologies
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06/04/08
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G4S plc
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Touchcom, Inc.
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03/05/08
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L-1 Identity Solutions Inc.
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Bioscrypt Inc.
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02/29/08
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Bosch Security Systems, Inc.
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Extreme CCTV Inc.
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11/12/07
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EQT Partners AB, Investment AB Latour, Melker Schorling AB and
Sak I AB
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Securitas Direct Oy
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09/05/07
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Hutton Collins & Company Ltd.
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Everest Ltd.
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08/01/07
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Schneider Electric SA
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Pelco, Inc.
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05/14/07
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Linear LLC
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International Electronics Inc.
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03/30/07
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United Technologies
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Initial Electronic Security Systems
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01/16/07
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Stanley Works (NYSE:SWK)
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HSM Electronic Protection Services, Inc.
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12/01/06
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Corel Corp.
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InterVideo, Inc.
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11/01/06
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Schneider Electric SA
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Get Group PLC
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10/08/06
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Danaher Corp.
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Vision Systems Ltd.
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10/01/06
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VASCO Data Security International, Inc.
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Able NV
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09/03/06
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Assa Abloy AB
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Fargo Electronics
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09/01/06
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Hitec Industries AS
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Salem Automation Ltd.
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08/01/06
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Kaba Holding AG
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Computerized Security Systems (Masco Corp.)
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07/01/06
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Schneider Electric SA
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Invensys Building Systems, Inc. (Invensys PLC)
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07/01/06
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L-3 Communications Holdings, Inc.
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TRL Electronics PLC
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07/01/06
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Extreme CCTV, Inc.
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Forward Vision CCTV Ltd.
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06/01/06
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Teleste Oyj
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Suomen Turvakamera Oy
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05/01/06
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UniVision Engineering Ltd.
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T-Com Tech. Co. Ltd.
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04/01/06
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Central Service Systems
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Toyo Media Links
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01/01/06
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Upper Point Manufacturing Ltd. (Private Group)
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Upperpoint Manufacturing Ltd.
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01/01/06
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Integrian, Inc.
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Innovonics Ltd.
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12/01/05
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Honeywell Industries
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First Technology
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11/01/05
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Securidev SA
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DOM Sicherheitstechnik (The Black & Decker Corp.)
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08/01/05
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Integrian, Inc.
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Digital Safety Technologies
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07/01/05
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CBORD Group
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Diebold Card Systems (Diebold)
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05/01/05
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Axsys Technologies
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Diversified Optical Products, Inc.
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04/01/05
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United Technologies
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Kidde plc
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03/01/05
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General Electric
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Edwards Systems Technology
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03/01/05
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United Technologies
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Lenel
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77
Based on LTM Revenues and LTM EBITDA, a multiple range was
developed. Using a range of LTM Revenue multiples resulted in an
enterprise value of $44.8 million to $54.3 million.
Using a range of LTM EBITDA multiples resulted in an enterprise
value of $11.7 million to $12.6 million.
Summary
Analysis
Based on the foregoing analysis, Imperial Capital concluded that
as of December 10, 2008, the Aggregate Consideration to
Non-Insiders was fair, from a financial point of view, to the
Non-Insider Shareholders.
The material analyses performed by Imperial Capital have been
summarized above. Nonetheless, the summary set forth above does
not purport to be a complete description of the analyses
performed by Imperial Capital. Imperial Capital did not form a
conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to
fairness. Rather, in reaching its conclusion, Imperial Capital
considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of all
analyses taken as a whole.
The analyses Imperial Capital conducted do not purport to be
appraisals or to reflect prices at which a company might
actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. Imperial
Capital relied on management-prepared projections of future
performance for Hirsch and SCM. The projections were based on
numerous variables and assumptions, which are inherently
unpredictable and must be considered not certain of occurrence
as projected. Accordingly, actual results could vary
significantly from those assumed in the projections and any
related analyses. Imperial Capitals opinion does not
address the relative merits of the Merger as compared to any
alternative business strategies that might exist for Hirsch or
the effect of any other business combination in which Hirsch
might engage.
Other
Imperial Capitals opinion should not be construed as
creating any fiduciary duty on its part to any party to the
Merger. Imperial Capital did not act as financial advisor to the
board of directors of Hirsch or SCM or to any other party to the
Merger. Imperial Capital will not receive any consideration or
other compensation that is contingent upon the successful
completion of the Merger. Imperial Capital received a fee for
providing its opinion, which was paid by Hirsch. Hirsch has also
agreed to reimburse Imperial Capitals expenses incurred in
rendering its opinion and to indemnify Imperial Capital against
certain liabilities arising out of Imperial Capitals
engagement in connection therewith. Imperial Capitals fee
was not contingent upon consummation of the Merger. Imperial
Capital does not actively trade the debt or equity securities of
SCM or Hirsch for its own accounts or for the accounts of
customers. There is no material relationship that existed during
the past two years or is mutually understood to be contemplated
in which any compensation was received or is intended to be
received by Imperial Capital as a result of the relationship
between Imperial Capital, SCM, Hirsch, or any other party to the
Merger. However, Imperial Capital is regularly engaged in a
broad range of investment banking and financial advisory
activities, including activities relating to corporate finance,
mergers and acquisitions, leveraged buyouts and private
placements, and thus may provide investment banking, financial
advisory and other financial services to the SCM, Hirsch, and
other participants in the Merger
and/or
certain of their respective affiliates in the future, for which
Imperial Capital may receive compensation.
As discussed above in this section, Egis Capital, an investment
fund that is managed by a general partnership that certain
principals of Imperial Capital are members of made a preliminary
offer to purchase the assets of Hirsch, which offer was rejected
by Hirsch in April 2008.
Interests
of SCM Directors and Executive Officers in the Merger
To the knowledge of SCM, no director or executive officer of
SCM, nor any of their affiliates, have any interests in the
Merger that differ from, or are in addition to, their interests
as SCM stockholders. As of the record date for the SCM special
meeting, the directors and executive officers of SCM, together
with their affiliates, owned in the aggregate approximately
1,683,452 shares of SCM common stock, entitling them to
exercise approximately 11% of the voting power of the SCM common
stock at the SCM special meeting. SCM cannot complete the Merger
unless the issuance of the shares of SCM common stock and
warrants to purchase shares of SCM common stock in
78
connection with the Merger is approved by the affirmative vote
of the holders of a majority of the shares of SCM common stock
voting at the SCM special meeting.
In addition, as of the record date for the SCM special meeting,
the directors and executive officers of SCM, together with their
affiliates, held in the aggregate options to purchase
approximately 404,096 shares of SCM common stock. These
options and any shares of SCM common stock issued upon the
exercise thereof will not be entitled to vote at the SCM special
meeting.
Interests
of Hirsch Directors and Executive Officers in the
Merger
In considering the recommendation of the Hirsch board of
directors with respect to adopting the Merger Agreement, Hirsch
shareholders should be aware that certain members of the Hirsch
Board of Directors and certain executive officers of Hirsch have
interests in the Merger that may be different from, or in
addition to, interests they may have as Hirsch shareholders. The
Hirsch board of directors was aware of these potential conflicts
of interest and considered them, among other matters, in
reaching their decision to approve the Merger Agreement and the
Merger, and to recommend that the Hirsch shareholders approve
the Hirsch proposals to be presented to the Hirsch shareholders
for consideration at the Hirsch special meeting as contemplated
by this joint proxy statement/information statement and
prospectus.
Ownership
Interests
As of the record date for the Hirsch special meeting, the
directors and executive officers of Hirsch, together with their
affiliates, owned in the aggregate approximately
1,021,456 of the shares of Hirsch common stock, entitling
them to exercise approximately 22% of the voting power of the
Hirsch common stock at the Hirsch special meeting. Hirsch cannot
complete the Merger unless the Merger is approved by the
affirmative vote of the holders of a majority of the outstanding
Hirsch common stock as of the record date for the Hirsch special
meeting. Each current Hirsch director and all of Hirschs
executive officers, and their affiliates, have entered into an
irrevocable proxy and voting agreement in connection with the
Merger and have granted irrevocable proxies appointing SCM their
lawful proxy and attorney-in-fact to vote at any meeting of
Hirsch shareholders called for purposes of considering whether
to approve the Merger and Merger Agreement. For a more detailed
discussion of the voting agreement see the section entitled
Certain Agreements Related to the Merger
Irrevocable Proxy and Voting Agreement in this joint proxy
statement/information statement and prospectus.
In addition, as of the record date for the Hirsch special
meeting, the directors and executive officers of Hirsch,
together with their affiliates, held in the aggregate options
and warrants to purchase approximately 57,000 shares of
Hirsch common stock. These options and warrants and any shares
of Hirsch common stock issued upon the exercise thereof will not
be entitled to vote at the Hirsch special meeting.
79
Hirsch has previously granted compensatory warrants to purchase
shares of Hirsch common stock to each of Eugene Mak, Maury
Polner and Doug Morgan (each, a director of Hirsch), and to an
affiliate of Ayman Ashour, a former director of Hirsch, for
their services as directors of Hirsch. As of the date of this
joint proxy statement/information statement and prospectus,
compensatory warrants to purchase 50,000 shares of Hirsch
common stock were outstanding. As listed on the following table,
holders of these warrants to purchase Hirsch common stock could
exercise these warrants to purchase shares of Hirsch common
stock prior to the closing of the Merger.
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Number of Hirsch
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Shares Subject to
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Exercise Price per
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Name
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Warrant
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Issue Date
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Hirsch Share
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Eugene Mak
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2,000
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5/6/1999
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$
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9.00
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Eugene Mak
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2,000
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5/3/2000
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$
|
9.50
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Eugene Mak
|
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2,000
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5/3/2001
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$
|
8.00
|
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Eugene Mak
|
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2,000
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5/2/2002
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$
|
8.00
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Eugene Mak
|
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2,000
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5/8/2003
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$
|
8.00
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Eugene Mak
|
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3,000
|
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5/5/2004
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$
|
8.00
|
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Eugene Mak
|
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3,000
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5/6/2005
|
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$
|
9.50
|
|
Eugene Mak
|
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3,000
|
|
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|
6/14/2006
|
|
|
$
|
9.50
|
|
Eugene Mak
|
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3,000
|
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6/13/2007
|
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$
|
10.00
|
|
Doug Morgan
|
|
|
3,000
|
|
|
|
6/13/2007
|
|
|
$
|
10.00
|
|
Newton International Management, LLC
|
|
|
3,000
|
|
|
|
6/13/2007
|
|
|
$
|
10.00
|
|
Maury Polner
|
|
|
2,000
|
|
|
|
5/6/1999
|
|
|
$
|
9.00
|
|
Maury Polner
|
|
|
2,000
|
|
|
|
5/3/2000
|
|
|
$
|
9.50
|
|
Maury Polner
|
|
|
2,000
|
|
|
|
5/3/2001
|
|
|
$
|
8.00
|
|
Maury Polner
|
|
|
2,000
|
|
|
|
5/2/2002
|
|
|
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