-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9Gav+/P+GA5vDXz4U/G2WCAtkXwcMoJvGsrvfRrD71Beos5Tbe8lZ41gw7zrX2H D70Rzwm6ZpSdPAuQHfmrhw== 0000892569-00-000387.txt : 20000515 0000892569-00-000387.hdr.sgml : 20000515 ACCESSION NUMBER: 0000892569-00-000387 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAINBOW TECHNOLOGIES INC CENTRAL INDEX KEY: 0000819706 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 953745398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16641 FILM NUMBER: 630206 BUSINESS ADDRESS: STREET 1: 50 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7144542100 MAIL ADDRESS: STREET 1: 50 TECHNOLOGY DRIVE CITY: IRVINE STATE: CA ZIP: 92718 10-Q 1 FORM 10-Q QUARTER ENDED MARCH 31,2000 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended MARCH 31, 2000 Commission file number: 0-16641 RAINBOW TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 95-3745398 (State of incorporation) (I.R.S. Employer Identification No.) 50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618 (Address of principal executive offices) (Zip Code) Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of common stock, $.001 par value, outstanding as of May 10, 2000 was 12,398,886 2 RAINBOW TECHNOLOGIES, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999 4 Condensed Consolidated Statements of Income for the three months ended March 31, 2000 and 1999 (unaudited) 5 Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2000 and 1999 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (unaudited) 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION Item 1 to 5 - Not applicable Item 6. Exhibits and reports on Form 8K 14 SIGNATURES 14 2 3 INTRODUCTORY NOTE The Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include (i) the existence and development of the Company's technical and manufacturing capabilities, (ii) anticipated competition, (iii) potential future growth in revenues and income, (iv) potential future decreases in costs, and (v) the need for, and availability of additional financing. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on the assumption that the Company will not lose a significant customer or customers or experience increased fluctuations of demand or rescheduling of purchase orders, that the Company's markets will continue to grow, that the Company's products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within the Company's markets will not change materially or adversely, that the Company will retain key technical and management personnel, that the Company's forecasts will accurately anticipate market demand, that there will be no material adverse change in the Company's operations or business and that the Company will not experience significant supply shortages with respect to purchased components, sub-systems or raw materials. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. 3 4 RAINBOW TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (unaudited) A S S E T S Current assets: Cash and cash equivalents .................................... $ 17,979,000 $ 26,709,000 Marketable securities available-for-sale ..................... 990,000 1,173,000 Accounts receivable, net of allowance for doubtful accounts of $537,000 and $579,000 in 2000 and 1999, respectively ..... 31,271,000 28,671,000 Inventories .................................................. 15,112,000 12,033,000 Unbilled costs and fees ...................................... 3,030,000 2,916,000 Prepaid expenses and other current assets .................... 14,264,000 7,155,000 ------------- ------------- Total current assets .................................... 82,646,000 78,657,000 Property, plant and equipment, at cost: Buildings .................................................... 7,154,000 7,497,000 Furniture .................................................... 1,717,000 1,703,000 Equipment .................................................... 17,793,000 17,060,000 Leasehold improvements ....................................... 1,738,000 1,641,000 ------------- ------------- 28,402,000 27,901,000 Less accumulated depreciation and amortization ............... 11,914,000 11,145,000 ------------- ------------- Net property, plant and equipment ....................... 16,488,000 16,756,000 Goodwill, net of accumulated amortization of $13,122,000 and $12,764,000 in 2000 and 1999, respectively .............. 22,151,000 21,498,000 Product licenses, net of accumulated amortization of $1,850,000 and $1,749,000 in 2000 and 1999, respectively ............... 5,540,000 5,567,000 Other assets, net of accumulated amortization of $3,098,000 and $2,790,000 in 2000 and 1999, respectively ............... 8,800,000 8,060,000 ------------- ------------- $ 135,625,000 $ 130,538,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................. $ 7,078,000 $ 8,900,000 Accrued payroll and related expenses ......................... 4,160,000 6,155,000 Other accrued liabilities .................................... 9,061,000 6,927,000 Long-term debt, due within one year .......................... 227,000 239,000 Line of credit ............................................... -- 6,000,000 Payable to shareholders ...................................... -- 1,500,000 ------------- ------------- Total current liabilities ............................... 20,526,000 29,721,000 Long-term debt, net of current portion ........................ 906,000 1,014,000 Other liabilities ............................................. 1,774,000 1,913,000 Commitments and contingencies ................................. -- -- Shareholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 12,387,707 and 11,683,979 shares issued and outstanding in 2000 and 1999, respectively ............................. 12,000 12,000 Additional paid-in capital ................................... 40,392,000 28,613,000 Accumulated other comprehensive loss ......................... (1,554,000) (1,173,000) Retained earnings ............................................ 73,569,000 70,438,000 ------------- ------------- Total shareholders' equity .............................. 112,419,000 97,890,000 ------------- ------------- $ 135,625,000 $ 130,538,000 ============= =============
See accompanying notes. 4 5 RAINBOW TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended March 31, 2000 March 31, 1999 -------------- -------------- Revenues: Secure Software Distribution ..................... $ 14,782,000 $ 14,302,000 Secure Communications ............................ 11,532,000 11,049,000 Internet Performance and Security ................ 5,295,000 735,000 Spectria ......................................... 4,836,000 -- ------------ ------------ Total revenues .............................. 36,445,000 26,086,000 Operating expenses: Cost of Secure Software Distribution Revenues .... 4,242,000 4,020,000 Cost of Secure Communications Revenues ........... 9,371,000 10,270,000 Cost of Internet Performance and Security Revenues 1,639,000 442,000 Cost of Spectria Revenues ........................ 2,506,000 -- Selling, general and administrative .............. 10,755,000 6,553,000 Research and development ......................... 2,814,000 2,629,000 Goodwill amortization ............................ 726,000 620,000 ------------ ------------ Total operating expenses .................... 32,053,000 24,534,000 ------------ ------------ Operating income ................................... 4,392,000 1,552,000 Interest income .................................... 191,000 302,000 Interest expense ................................... (37,000) (50,000) Other income, net .................................. 510,000 272,000 ------------ ------------ Income before provision for income taxes ........... 5,056,000 2,076,000 Provision for income taxes ......................... 1,925,000 791,000 ------------ ------------ Net income ......................................... $ 3,131,000 $ 1,285,000 ============ ============ Net income per share: Basic ............................................ $ 0.26 $ 0.11 ============ ============ Diluted .......................................... $ 0.23 $ 0.10 ============ ============ Shares used in computing net income per share: Basic ............................................ 12,037,000 11,804,000 ============ ============ Diluted .......................................... 13,656,000 12,628,000 ============ ============
See accompanying notes. 5 6 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended March 31, 2000 March 31, 1999 -------------- -------------- Net income .................................... $ 3,131,000 $ 1,285,000 Other comprehensive loss: Foreign currency translation adjustment ... (319,000) (1,466,000) Unrealized loss on securities ............. (295,000) (45,000) ----------- ----------- Other comprehensive loss, before income taxes ..................... (614,000) (1,511,000) Provision for income taxes related to other comprehensive loss ...................... 233,000 574,000 ----------- ----------- Other comprehensive loss, net of taxes .... (381,000) (937,000) ----------- ----------- Comprehensive income ......................... $ 2,750,000 $ 348,000 =========== ===========
See accompanying notes. 6 7 RAINBOW TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31, 2000 March 31, 1999 -------------- -------------- Cash flows from operating activities: Net income .......................................................... $ 3,131,000 $ 1,285,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization ....................................................... 1,244,000 1,198,000 Depreciation ....................................................... 953,000 864,000 Change in deferred income taxes .................................... (3,358,000) (740,000) Allowance for doubtful accounts .................................... (42,000) (6,000) Changes in operating assets and liabilities: Accounts receivable ............................................... (2,873,000) 1,783,000 Inventories ....................................................... (3,190,000) 419,000 Unbilled costs and fees ........................................... (112,000) 906,000 Prepaid expenses and other current assets ......................... (961,000) (1,117,000) Accounts payable .................................................. (1,730,000) (1,287,000) Accrued liabilities ............................................... (1,681,000) (2,688,000) Income taxes payable .............................................. 4,088,000 (320,000) Other ............................................................. (417,000) (286,000) ------------ ------------ Net cash (used in) provided by operating activities ............... (4,948,000) 11,000 Cash flows from investing activities: Sale of marketable securities ....................................... -- 1,536,000 Purchases of property, plant, and equipment ......................... (966,000) (1,478,000) Net cash paid for acquisition of Systematic Systems Integration, Inc. (1,763,000) -- Other non-current assets ............................................ (525,000) 245,000 Capitalized software development costs .............................. (852,000) (200,000) ------------ ------------ Net cash (used in) provided investing activities ................. (4,106,000) 103,000 Cash flows from financing activities: Exercise of Rainbow common stock options ............................ 6,239,000 647,000 Payment on line of credit ........................................... (6,000,000) -- Payment of long-term debt ........................................... (45,000) (76,000) Purchase of treasury stock .......................................... -- (6,070,000) Purchase and retirement of common stock ............................. -- (1,419,000) ------------ ------------ Net cash provided by (used in) financing activities ............... 194,000 (6,918,000) Effect of exchange rate changes on cash .............................. 130,000 (276,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents ................. (8,730,000) (7,080,000) Cash and cash equivalents at beginning of period ..................... 26,709,000 29,900,000 ------------ ------------ Cash and cash equivalents at end of period ........................... $ 17,979,000 $ 22,820,000 ============ ============ Supplemental disclosure of cash flow information: Income taxes paid ................................................... $ 314,000 $ 117,000 Interest paid ....................................................... 46,000 53,000
See accompanying notes. 7 8 RAINBOW TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (Unaudited) 1. Basis of presentation Rainbow Technologies, Inc. (the Company) develops, manufactures, programs and markets products which prevent the unauthorized use of intellectual property, including software programs; develops and manufactures information security products for satellite communications; develops and manufactures internet security products to provide privacy and security for network communications; and provide consulting services to assist clients in determining computer network and Internet security requirements, and in designing and implementing the appropriate network security solutions. The accompanying financial statements consolidate the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform with the 2000 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include the allowance for doubtful accounts, the reserve for inventory obsolescence, accrued warranty costs, the allowance for deferred tax assets, total estimated contract costs associated with billed and unbilled contract revenue and revenue projections used to estimate future cash flow projections to determine recoverability of the long-lived assets of Quantum Manufacturing Technologies, Inc. ("QMT"). At December 31, 1999, the Company performed a review for impairment of the long-lived assets of QMT. The aggregate undiscounted cash flows estimated to be generated by QMT during the life of its long-lived assets are greater than their $2,100,000 carrying value indicating no impairment exists at December 31, 1999. The Company believes there has been no change in the status of this assessment at March 31, 2000. However, there is uncertainty related to the estimates used to determine these undiscounted cash flows. The most significant and uncertain of these estimates is future revenues. A significant shortfall from these revenue projections could result in these assets becoming impaired as early as June 30, 2000. The Company anticipates performing impairment reviews related to the long-lived assets of QMT on a quarterly basis in order to monitor the achievement of its revenue projections. In the opinion of the Company's management, the accompanying condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at March 31, 2000 and results of operations for the three months ended March 31, 2000 and 1999. The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under generally accepted accounting principles and, therefore, should be read in conjunction with the Company's December 31, 1999 Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2000 are not necessarily indicative of results to be expected for the full year. The Company has subsidiaries in the United Kingdom, Germany, France, the Netherlands, India, Russia, Australia, China and Taiwan. The Company utilizes the currencies of the countries where its foreign subsidiaries operate as the functional currency. Balance sheet accounts denominated in foreign currency are translated at exchange rates as of the date of the balance sheet and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are accumulated as a separate component of Accumulated Other Comprehensive Loss within Shareholders' Equity. The Company has adopted local currencies as the functional currencies for its subsidiaries because their principal economic activities are most closely tied to the respective local currencies. 2. Earnings per share Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the assumed conversion of all diluted securities. 8 9 3. Government Contracts The Company is both a prime contractor and a subcontractor under fixed-price and cost-plus-fixed-fee contracts with the U.S. Government (Government). At the commencement of each contract or contract modification, the Company submits pricing proposals to the Government to establish indirect cost rates applicable to such contracts. These rates, after audit and approval by the Government, are used to settle costs on completed contracts. To facilitate interim billings during the performance of its contracts, the Company establishes provisional billing rates, which are used in recognizing contract revenue and contract accounts receivable amounts in these financial statements. These provisional billing rates are adjusted to actual at year-end and are subject to adjustment after Government audit. 4. Inventories Inventoried costs relating to long-term contracts are stated at actual production costs, including pro-rata allocations of factory overhead and general and administrative costs incurred to date, reduced by amounts identified with revenue recognized on units delivered. The costs attributed to units delivered under such long-term contracts are based on the estimated average cost of all units expected to be produced. Inventories, other than inventoried costs relating to long-term contracts, are stated at the lower of cost (first-in, first-out basis) or market. Inventories consist of the following:
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- Finished goods $ 5,711,000 $ 4,804,000 Raw materials 4,895,000 1,648,000 Inventoried costs relating to long-term contracts, net of amounts attributed to revenues recognized to date 3,308,000 4,535,000 Work in process 1,198,000 1,046,000 ----------- ----------- $15,112,000 $12,033,000 =========== ===========
5. Acquisitions On October 22, 1999, the Company completed the acquisition of InfoCal LLC (InfoCal). InfoCal creates collaborative intranet/extranet applications, knowledge portals and distance learning applications and specializes in messaging strategy migration and implementation. The total transaction value was $3,500,000, including $3,000,000 paid in cash and 36,530 shares of Rainbow common stock valued at $500,000. In addition to the initial consideration, there is contingent consideration of up to $500,000 in each of the 2000 and 2001 calendar years. The contingent payments are based upon achievement of certain financial, revenue and strategic goals. Any additional consideration will be recorded as goodwill. This acquisition has been accounted for using the purchase method of accounting. Approximately $3,500,000 was allocated to goodwill and is being amortized on a straight-line basis over ten years. Results of operations for InfoCal are included in the Company's consolidated results of operations beginning on October 22, 1999. On September 16, 1999, the Company completed the acquisition of InfoSec Labs, Incorporated (InfoSec). InfoSec has core competency in both enterprise and Internet security solutions and security assessment and education programs. The total transaction value was $3,100,000, including $1,600,000 paid in cash and 120,209 shares of Rainbow common stock valued at $1,500,000. This acquisition has been accounted for using the purchase method of accounting. Approximately $3,100,000 was allocated to goodwill and is being amortized on a straight-line basis over ten years. Results of operations for InfoSec are included in the Company's consolidated results of operations beginning on September 16, 1999. On May 12, 1999, the Company completed the acquisition of Systematic Systems Integration (Systematic) for an initial purchase price of $9,600,000 in cash with an additional $1,500,000 accrued for at December 31, 1999, and was paid in January 2000. In addition, the purchase agreement provides for contingent payments of up to 9 10 $1,700,000. These payments are based upon the attainment of certain revenue and gross margin goals for calendar year 2000. This acquisition has been accounted for using the purchase method of accounting. The entire purchase price has been allocated to goodwill and any additional consideration paid will also be recorded as goodwill. The goodwill is being amortized on a straight-line basis over ten years. Systematic is a California-based eCommerce integration services firm that enables companies to seamlessly integrate diverse software and hardware platforms, communication systems and Internet technologies. Results of operations for Systematic are included in the Company's consolidated results of operations beginning on May 12, 1999. 6. Other assets Included in other assets are certain investments in early-stage companies. The Company closely monitors the operations and cash flows of these companies to evaluate their status and ensure that amounts reported for these investments do not exceed net realizable value. If the Company determines that impairment in the investment of any such company exists, an adjustment would be made to reduce the investment amount to net realizable value. Also included in other assets are capitalized software development costs. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Amortization of capitalized software development costs commence when the products are available for general release to customers and are determined using the straight line method over the expected useful lives of the respective products. These amounts are written-off if it is determined that the projects can not be brought to market. 7. Industry segments The company operates in four industry segments. The first segment is the development and sale of devices which protect data and software from unauthorized use (Secure Software Distribution segment). The second segment is the development and sale of information security products to provide privacy and security for voice communication and data transmission (Secure Communications segment). The third segment is the development and sale of products which accelerate performance of security servers and network equipment and products that provide access control to computer networks, Internet Websites and virtual private networks (Internet Performance and Security segment). The fourth segment provides services that enable companies to integrate diverse software and hardware platforms (Spectria segment). The identifiable assets, after applicable eliminations, for each segment as of March 31, 2000 were $71,857,000, $28,430,000, $11,990,000 and $23,348,000, respectively, compared with $70,591,000, $31,452,000, $6,344,000 and $22,151,000 as of December 31, 1999. 10 11 RAINBOW TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the consolidated results of operations and the consolidated financial position of the Company during the periods included in the accompanying condensed consolidated financial statements. This discussion should be read in conjunction with the related condensed consolidated financial statements and associated notes. RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended March 31, ----------------------- 2000 1999 -------- -------- Revenues Secure Software Distribution $ 14,782 $ 14,302 Secure Communication 11,532 11,049 Internet Performance and Security 5,295 735 Spectria 4,836 -- -------- -------- Total revenues $ 36,455 $ 26,086 ======== ======== Operating Income Secure Software Distribution $ 3,899 $ 2,243 Secure Communication 2,061 571 Internet Performance and Security (903) (1,262) Spectria (665) -- -------- -------- Total operating income $ 4,392 $ 1,552 ======== ========
REVENUES Revenues from Secure Software Distribution for the three months ended March 31, 2000 increased by 3% to $14,782,000, when compared to the same period in 1999. Revenues from Europe and Asia-Pacific increased by 7% and 83%, respectively, while revenues from the U.S. decreased by 3%. The increase in Asia-Pacific revenues was due to additional sales generated primarily in China while the decrease in U.S. revenues was due to slower sales to U.S. customers who export their products to Asia. The average selling price per product in the quarter ended March 31, 2000 decreased approximately 3% when compared to the same period in 1999. Unit volume for the three months ended March 31, 2000 increased by 5% when compared to the corresponding period in 1999. The decrease in average selling prices and the increase in unit volume was primarily due to a change in customer mix. Secure Communications revenues for the three months ended March 31, 2000 increased 4% to $11,532,000 when compared to the same period in 1999. The revenue growth was primarily due to higher demand for network security products. Internet Performance and Security revenues for the three months ended March 31, 2000 increased 620% to $5,295,000 when compared to the same period in 1999. The revenue growth was primarily due to increased revenues in the Company's Cryptoswift product line. Spectria revenues for the three months ended March 31, 2000 were $4,836,000, or 13% of total revenues. GROSS PROFIT Gross profit from Secure Software Distribution for the three months ended March 31, 2000 was 71% of revenues, compared to 72% for the three months ended March 31, 1999. 11 12 Gross profit from Secure Communications for the three months ended March 31, 2000 increased to 19% of revenues compared to 7% for the three months ended March 31, 1999. The increase was due to the change in mix from less profitable research and development contracts to more profitable product contracts. Gross profit from Internet Performance and Security for the three months ended March 31, 2000 increased to 69% of revenues compared to 40% for the three months ended March 31, 1999. The increase in gross profit was due to a decrease in unit costs because of significantly higher unit shipments. Gross profit from Spectria for the three months ended March 31, 2000 was 48% of revenues. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for the three months ended March 31, 2000 increased to 30% of revenues compared to 25% of revenues for the three months ended March 31, 1999. This increase was primarily due to additional staff and higher marketing expenses for new product introductions in Internet Performance and Security products and additional selling expenses attributable to Spectria, which was acquired on May 12, 1999. RESEARCH AND DEVELOPMENT Research and development expenses for the three months ended March 31, 2000 decreased to 8% of revenues compared to 10% of revenues for the corresponding period in 1999. The decrease in research and development expenses was due primarily to higher costs incurred in developing new products which are capitalized during the development stage. OTHER INCOME Other income was $510,000 for the three months ended March 31, 2000 compared to $272,000 for the three months ended March 31, 1999. The increase in other income was primarily due to foreign currency transaction gains resulting from lower average exchange rates of the subsidiaries' functional currencies in relation to the U.S. currency. PROVISION FOR INCOME TAXES The effective tax rate was 38% for the three months ended March 31, 2000, which was consistent with the same period in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of operating funds have been from operations and proceeds from sales of the Company's equity securities. Net cash used in operations for the three months ended March 31, 2000 was $4,948,000 while net cash provided by operations for the three months ended March 31, 1999 was $11,000. Operating activities in 2000 included purchases of inventory totaling approximately $3,100,000 and an increase in accounts receivable balance of approximately $2,600,000. Net cash used in investing activities for the three months ended March 31, 2000 was $4,106,000 while net cash provided by investing activities for the three months ended March 31, 1999 was $103,000. Investing activities in 2000 included approximately $970,000 on purchases of fixed assets, approximately $850,000 on development of new products and approximately $1,763,000 for the acquisition of Systematic. Net cash provided by financing activities for the three months ended March 31, 2000 was $194,000 while net cash used in financing activities for the three months ended March 31, 1999 was $6,918,000. Financing activities in 2000 included a payment of $6,000,000 on a line of credit and approximately $6,240,000 received from common stock options exercised. Financing activities in 1999 included the purchase and retirement of approximately $7,500,000 of treasury stock. 12 13 The Company intends to use its capital resources to expand its product lines and for possible acquisitions of additional products and technologies. The Company has no significant capital commitments or requirements at this time. At March 31, 2000, the Company's subsidiaries in France, The United Kingdom and The Netherlands carried approximately $8,500,000, $2,400,000 and $3,400,000, respectively, in interest earning deposits which may result in foreign exchange gains or losses due to the fact that the functional currency in those subsidiaries is not the U.S. dollar. The Company believes that its current working capital of $62,120,000 and anticipated working capital to be generated by future operations will be sufficient to support the Company's working capital requirements for at least the next twelve months. Impact of Year 2000 Year 2000 problems are the result of computer programs being written using two digits rather than four to define the applicable year. If not corrected, many computer applications could fail or create erroneous results by not recognizing "00" to mean the year 2000. In 1999, the Company completed its testing of all critical software and hardware systems and determined that all are Year 2000 compliant. Vendor certifications were received from all critical vendors indicating that they were either currently compliant or that they would be compliant by December 31, 1999. The Company has not experienced and does not expect to experience any significant Year 2000 problems or interruptions. There can be no assurance that mission critical vendors and customers will not incur a Year 2000 problem or interruption, but the Company believes adequate computer file backup procedures and manual operating procedures will enable the continuance of the critical processes of its business. 13 14 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Dated: May 12, 2000 RAINBOW TECHNOLOGIES, INC. By: /s/ Patrick Fevery --------------------------------------- Patrick Fevery Chief Financial Officer 14 15 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 17,979 990 31,808 (537) 15,112 82,646 28,402 11,914 135,625 20,526 0 0 0 12 112,407 135,625 36,445 36,445 17,758 32,053 510 0 (37) 5,056 1,925 3,131 0 0 0 3,131 0.26 0.23
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