Revenues for the first quarter of 2001 were $45.1 million, up 41% from revenues of $32.1 million in the first quarter of 2000. These revenues reflect continued strong sales of our digital television conditional access modules in Europe and sales performance of our smart card and digital media reader products to expectations, offset by lower than expected sales of our Dazzle branded digital editing products. Increasing price pressure on our Dazzle branded retail products contributed to gross margins that were lower than expected. These factors, combined with greater than expected expenses in sales and marketing programs to support our Dazzle branded products, contributed to a loss from operations for the quarter.

Reported net loss for the first quarter was $18.4 million, or $1.20 per share, and includes amortization of goodwill of $3.7 million as well as charges the Company is taking to increase reserves in light of a weakening global economic environment. These charges include an increase in inventory reserves of $10.0 million, an increase in reserves for accounts receivable of $2.5 million and the write down of investments of $5.7 million. We are disappointed with the overall results of our first quarter, which, despite continued strong momentum from our core Digital Television and PC Security business, was marred by poor performance in our retail Digital Video retail operations, said Robert Schneider, chief executive officer of SCM Microsystems. We are committed to take the necessary actions to drive our retail operations to profitability as quickly as possible. We are also implementing measures to strengthen the Company’s ability to operate cost effectively across all divisions and regions. In addition, we believe it is prudent at this time to increase reserves against certain risks caused by weaker demand we are experiencing in some of our markets.

A $10.0 million increase in inventory reserves for our PC satellite receiver and for our digital media reader products and related components. Recently, we determined that our PC satellite receiver product is not technically feasible in its present form and have begun to rearchitect the product to address market requirements. In addition, we have experienced cancellations of orders and have reduced our sales expectations for our digital media readers. These recent events have prompted us to increase our inventory reserves for these products. As a result of the inventory charge, gross margin for the first quarter was 9% compared with 32% for the fourth quarter of 2000. Excluding the inventory charge, gross margin for the first quarter would have been 32%.

A $2.5 million increase in reserves for accounts receivable, which is included in general and administrative expenses. For the second consecutive quarter, we are increasing reserves for receivables due to delays and non-payment by some of our customers, coupled with a generally weaker economic climate since the beginning of the year.

A charge for unrealized losses of $5.7 million from the decline in fair market value of our investments in Spyrus, Inc., a private security products company, and SmartDisk Corporation, a public consumer electronics company. Due to increasing weakness in the global economic climate since the beginning of the year, we believe the decline in fair market value of our investments will not be temporary, and have recorded these unrealized losses as required by generally accepted accounting principles.

SCM has taken steps to immediately begin to reduce our underlying expense base and expects to begin seeing the benefits of these measures in our second quarter, with additional expense reductions in the second half of the year. As a result of these measures, we expect to decrease underlying operating expenses (excluding goodwill amortization) to between $14 million and $15 million in the second quarter, well below our underlying first quarter expenses of $16 million. Specific actions SCM is taking include:

Targeted headcount reductions and the re-deployment of headcount-intensive functions from high cost to lower cost geographic areas;

Consolidation of redundant operations;

Acceleration of internal programs to reduce the cost of high volume products;

Reduction of capital spending; and

Focused attention on identifying areas for significant revenue and expense improvement in our retail operations.

SCM expects to take a restructuring charge related to these actions in the second quarter of between $2 million and $4 million.

Cash and short term investments stood at $52 million at the end of March 2001, which we believe is sufficient to meet our working capital needs.

SCM expects that revenues for our second quarter will be in the same range as the first quarter, and that continued pricing pressure on our retail products will result in an overall gross margin that is again in the range of 32%. With operating expenses in the range of $14 million to $15 million, excluding goodwill amortization, we expect to break even on an operational basis in the second quarter. The Company is unable to provide guidance beyond the second quarter at this time due to limited visibility caused by a weak economic environment and uncertainty in our markets.

We continue to believe that our long term growth and profitability is best supported by a business model that includes a direct retail presence, continued Schneider. This led to our acquisitions in 2000 of Microtech International and Dazzle Multimedia, and we remain committed to our strategy of balancing sales though our OEM and retail channels. This balance allowed us to maintain revenue momentum in the first quarter, despite weakness in our digital video business. While current market and economic conditions make it difficult to predict future revenues, we believe that our focus on reducing our expense base and streamlining our operations will yield significant benefits in our operations. We believe that we can leverage our strong retail brands and resources to strengthen SCM’s overall business, beginning with a return to profitability in our retail Digital Video operations by year end.

SOURCE: COMPANY PRESS RELEASE