-----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, INdpXnRC5y508tfjRF9RVqeqcV6o0bP0dtmV3dARVzUlgsmmlNO8mJCkOvk0yFCj YrtThQwo9rzV/iot9OnASA== 0000892569-96-001523.txt : 19960814 0000892569-96-001523.hdr.sgml : 19960814 ACCESSION NUMBER: 0000892569-96-001523 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 000-16641 FILM NUMBER: 96609199 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 FOR THE QUARTER ENDED 6/30/96 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 JUNE 30, 1996 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 June 30, 1996 was 7,443,797. 2 RAINBOW TECHNOLOGIES, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 3 Condensed Consolidated Statements of Income for the three and six months ended June 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II - OTHER INFORMATION Item 1 to 6 - Not applicable SIGNATURES 11 2 3 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS A S S E T S
June 30, December 31, 1996 1995 (unaudited) ----------- ----------- Current assets Cash and cash equivalents ................................................ $30,119,000 $25,058,000 Marketable securities available-for-sale ................................. 10,800,000 11,799,000 Accounts receivable, net of allowance for doubtful accounts of $395,000 and $450,000 in 1996 and 1995, respectively .................. 12,647,000 12,725,000 Inventories .............................................................. 5,128,000 2,927,000 Unbilled costs and fees .................................................. 3,777,000 3,962,000 Prepaid expenses and other current assets ................................ 1,651,000 1,716,000 ----------- ----------- Total current assets ................................................ 64,122,000 58,187,000 ----------- ----------- Property, plant and equipment, at cost: Buildings ................................................................ 9,161,000 9,572,000 Furniture ................................................................ 1,076,000 797,000 Equipment ................................................................ 4,894,000 4,075,000 Leasehold improvements ................................................... 252,000 221,000 ----------- ----------- 15,383,000 14,665,000 Less accumulated depreciation and amortization ........................... 4,250,000 3,708,000 ----------- ----------- Net property, plant and equipment ................................... 11,133,000 10,957,000 Goodwill, net of accumulated amortization of $7,185,000 and $6,602,000 in 1996 and 1995, respectively ........................... 5,018,000 6,186,000 Other assets, net of accumulated amortization of $1,858,000 and $1,193,000 in 1996 and 1995, respectively ........................... 5,039,000 4,495,000 ----------- ----------- $85,312,000 $79,825,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ......................................................... $ 3,974,000 $ 3,476,000 Accrued payroll and related expenses ..................................... 2,393,000 2,077,000 Other accrued liabilities ................................................ 793,000 1,151,000 Income taxes payable ..................................................... 1,417,000 1,916,000 Billings in excess of costs and fees ..................................... 1,513,000 2,000 Long-term debt, due within one year ...................................... 302,000 316,000 ----------- ----------- Total current liabilities ........................................... 10,392,000 8,938,000 Long-term debt, net of current portion ....................................... 2,338,000 2,616,000 Deferred income taxes ........................................................ 1,062,000 1,768,000 Shareholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 7,443,797 and 7,311,267 shares issued and outstanding in 1996 and 1995, respectively .............................................. 8,000 7,000 Additional paid-in capital ............................................... 30,722,000 29,823,000 Cumulative translation adjustment ........................................ (211,000) 424,000 Cumulative difference between cost and market value of marketable securities .............................................. 79,000 52,000 Retained earnings ........................................................ 41,628,000 36,197,000 ----------- ----------- 72,226,000 66,503,000 Less cost of treasury stock (35,000 shares) .............................. 706,000 -- ----------- ----------- Total shareholders' equity .......................................... 71,520,000 66,503,000 ----------- ----------- $85,312,000 $79,825,000 =========== ===========
See accompanying notes 3 4 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three months ended Six months ended June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995 ------------- ------------- ------------- ------------- Revenues: Software protection products ......... $13,462,000 $10,570,000 $26,025,000 $21,232,000 Information security products ........ 5,997,000 6,091,000 12,124,000 11,182,000 ----------- ----------- ----------- ----------- Total revenues .................. 19,459,000 16,661,000 38,149,000 32,414,000 Operating expenses: Cost of software protection products . 4,056,000 3,095,000 7,841,000 6,042,000 Cost of information security products 5,097,000 4,650,000 10,265,000 8,520,000 Selling, general and administrative .. 3,972,000 3,569,000 7,847,000 7,087,000 Research and development ............. 1,518,000 1,289,000 2,742,000 2,651,000 Goodwill amortization ................ 443,000 464,000 895,000 904,000 ----------- ----------- ----------- ----------- Total operating expenses ........ 15,086,000 13,067,000 29,590,000 25,204,000 ----------- ----------- ----------- ----------- Operating income ......................... 4,373,000 3,594,000 8,559,000 7,210,000 Interest income .......................... 443,000 416,000 876,000 717,000 Interest expense ......................... (81,000) (104,000) (168,000) (204,000) Other income (expense) ................... (96,000) 7,000 (22,000) (239,000) ----------- ----------- ----------- ----------- Income before provision for income taxes .................... 4,639,000 3,913,000 9,245,000 7,484,000 Provision for income taxes ............... 1,902,000 1,656,000 3,814,000 3,073,000 ----------- ----------- ----------- ----------- Net income ............................... $ 2,737,000 $ 2,257,000 $ 5,431,000 $ 4,411,000 =========== =========== =========== =========== Net income per common and common equivalent share ..................... $ 0.35 $ 0.30 $ 0.70 $ 0.58 Weighted average common and common equivalent shares outstanding ........ 7,773,000 7,639,000 7,748,000 7,586,000
See accompanying notes 4 5 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended Six months ended June 30, 1996 June 30, 1995 ---------------- ---------------- Cash flows from operating activities: Net income .................................... $ 5,431,000 $ 4,411,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................. 631,000 630,000 Amortization .................................. 1,450,000 1,170,000 Change in deferred income taxes ............... (365,000) 764,000 Allowance for doubtful accounts ............... (51,000) (36,000) Loss from retirement of property, plant, and equipment ................................ 1,000 -- Write-down of long-term investment ............ 203,000 -- Share in investee's loss ...................... 120,000 -- Write-off of capitalized software ............. 273,000 -- Changes in operating assets and liabilities: Accounts receivable ........................ 28,000 481,000 Inventories ................................ (2,211,000) 945,000 Unbilled costs and fees .................... 185,000 (405,000) Prepaid expenses and other current assets .. 49,000 174,000 Accounts payable ........................... 541,000 (212,000) Accrued liabilities ........................ (21,000) (103,000) Billings in excess of costs and fees ....... 1,511,000 (11,000) Income taxes payable ....................... (488,000) 422,000 ----------- ----------- Net cash provided by operating activities ..... 7,287,000 8,230,000 Cash flows from investing activities: Purchase of marketable securities .......... (7,099,000) (4,373,000) Sale of marketable securities .............. 8,124,000 85,000 Purchases of property, plant, and equipment (1,158,000) (949,000) Other long-term assets ..................... (1,762,000) (203,000) ----------- ----------- Net cash used in investing activities ......... (1,895,000) (5,440,000) Cash flows from financing activities: Exercise of common stock options .............. 702,000 559,000 Payment of long-term debt ..................... (152,000) (201,000) Purchase of treasury stock .................... (706,000) -- Repayment of capital lease .................... -- (19,000) ----------- ----------- Net cash provided by financing activities ..... (156,000) 339,000 Effect of exchange rate changes on cash ........... (175,000) (174,000) ----------- ----------- Net increase in cash and cash equivalents ......... 5,061,000 2,955,000 Cash and cash equivalents at beginning of period .. 25,058,000 19,755,000 ----------- ----------- Cash and cash equivalents at end of period ........ $30,119,000 $22,710,000 =========== =========== Supplemental disclosure of cash flow information: Income taxes paid ............................. $ 3,881,000 $ 2,418,000 Interest paid ................................. 168,000 191,000
See accompanying notes 5 6 RAINBOW TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (Unaudited) 1. Basis of presentation The accompanying financial statements consolidate the accounts of Rainbow Technologies, Inc. (the Company) and its wholly-owned subsidiaries. Amounts for the three and six month periods ended June 30, 1995 have been restated to reflect the acquisition of Mykotronx, Inc. (Mykotronx) which has been accounted for using the pooling of interests method (Note 5). All significant inter-company accounts and transactions have been eliminated. 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 June 30, 1996 and results of operations for the three and six months ended June 30, 1996 and 1995, and cash flows for the six months ended June 30, 1996. 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, 1995 Annual Report on Form 10-K. Results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of results to be expected for the full year. The Company has subsidiaries in the United Kingdom, Germany, and France. The Company utilizes the currencies of the countries where its foreign subsidiaries operate as the functional currency. In accordance with Statement of Financial Accounting Standards No, 52, the balance sheets of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rates at the respective dates. The income statements of those subsidiaries are translated into U.S. dollars at the weighted average exchange rates for the respective periods presented. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121) in March 1995. On January 1, 1996, the Company adopted SFAS No. 121. The adoption had no material effect on the Company's consolidated results of operations or financial position. 2. Earnings per share Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during each period. Common equivalent shares include the potential dilution from the exercise of stock options. 3. Government Contracts The Company is both a prime contractor and subcontractor under fixed-price and cost-plus-fixed-fee contracts with the U.S. Government (Government). Such contracts represent over 90% of the Company's contract operations. 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 contracts completed during the previous fiscal year. 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. 6 7 The Company has unbilled costs and fees at June 30, 1996 of $3,777,000. Based on the Company's experience with similar contracts in recent years, the unbilled costs and fees are expected to be collected within one year. 4. Inventories Inventoried costs relating to long-term contracts are stated at the actual production costs, including pro rata allocations of 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 (principally determined on a first-in, first-out basis) or market. Inventories consist of the following:
June 30, 1996 December 31, 1995 ------------- ----------------- Raw materials $ 688,000 $1,083,000 Work in process 312,000 434,000 Finished goods 1,605,000 1,313,000 Inventoried costs relating to long-term contracts 2,523,000 97,000 ---------- ---------- $5,128,000 $2,927,000 ========== ==========
5. Acquisitions On March 6, 1996 the Company entered into an agreement to acquire up to 58% of Quantum Manufacturing Technologies, Inc. ("QMT") of Albuquerque, New Mexico, in exchange for $4.2 million, subject to certain technological and business milestones. QMT, a development stage company, has recently obtained the exclusive worldwide license from Sandia National Laboratories for the commercial use and exploitation of patented pulsed power ion beam surface treatment technology known as "IBEST". IBEST technology benefits and enhances the durability and utility of a large number of industrial and consumer products at relatively low cost and without creating any impact on the environment. On June 1, 1995, the Company acquired Mykotronx in a merger transaction resulting in Mykotronx becoming a wholly-owned subsidiary of Rainbow. Mykotronx, a California corporation with headquarters in Torrance, California, designs, develops and manufactures information security products to provide privacy and security for voice communication and data transmission. These products are sold to the U.S. Government and customers in the aerospace and telecommunications industries. Shareholders of Mykotronx received 2.64 shares of Company common stock for each share of issued and outstanding Mykotronx common stock. Accordingly, the Company issued 1,620,564 shares of its common stock to Mykotronx shareholders in exchange for all outstanding Mykotronx shares. In addition, 195,096 shares of Rainbow common stock were reserved for issuance upon the exercise of assumed Mykotronx options. The merger was accounted for as a pooling of interests. 6. Other assets Included in other assets are certain investments in early-stage companies including a minority interest investment in Vendor Systems International ("VSI"). The Company closely monitors the operations and cash flows of these companies to evaluate their status and ensures 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. 7 8 RAINBOW TECHNOLOGIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is management's discussion and analysis of certain significant factors which have affected earnings and the financial position of the Company during the periods included in the accompanying financial statements. This discussion should be read in conjunction with the related condensed consolidated financial statements and associated notes. Prior period financial statements have been restated to reflect the acquisition of Mykotronx, using the pooling of interest method. RESULTS OF OPERATIONS
Software Information Security Consolidated Protection ------------------------------------------------ Three months ended June 30, 1996 Revenues $13,462,000 $ 5,997,000 $19,459,000 Operating Income $ 3,492,000 $ 881,000 $ 4,373,000 Three months ended June 30, 1995 Revenues $10,570,000 $ 6,091,000 $16,661,000 Operating Income $ 2,421,000 $ 1,173,000 $ 3,594,000 Six months ended June 30, 1996 Revenues $26,025,000 $12,124,000 $38,149,000 Operating Income $ 6,756,000 $ 1,803,000 $ 8,559,000 Six months ended June 30, 1995 Revenues $21,232,000 $11,182,000 $32,414,000 Operating Income $ 5,002,000 $ 2,208,000 $ 7,210,000
REVENUES Revenues from software protection products for the three and six months ended June 30, 1996 increased 27% and 23%, respectively, when compared to the same periods in 1995. The sales growth was primarily due to increased unit sales in North America, Europe and Asia Pacific Rim markets. The average selling price per product decreased approximately 11% in the three months ended June 30 and decreased approximately 10% in the six months ended June 30, 1996 when compared to the same period in 1995. The decreases in average selling prices are primarily due to the growth in revenues from major accounts and distributors. Revenues from information security products for the three and six months ended June 30, 1996 decreased by 2% and increased by 8%, respectively, when compared to the same periods in 1995. The decrease was primarily due to the slower than anticipated deployment of network security products within the government. The increase was primarily due to the growth in satellite communication revenues over the six months ended June 30, 1995. 8 9 GROSS PROFIT Gross profit from software protection products for the three and six months ended June 30, 1996 was 70% of revenues compared with 71% and 72%, respectively over the corresponding periods in 1995. The decrease in gross margin was primarily due to lower average selling prices in Europe and Asia Pacific. Gross profit from information security products for both the three months and the six months ended June 30, 1996 was 15% of revenues compared with 24% for the corresponding periods in 1995. The decrease in gross margin was due to the change of mix from predominantly product contracts to mostly less profitable research and development contracts . SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for both the three months and the six months ended June 30, 1996 increased by 11% when compared to the corresponding 1995 periods. The increase was primarily due to increased staffing, and higher sales compensation due to increased revenues. RESEARCH AND DEVELOPMENT Total research and development expenses for the three and six months ended June 30, 1996 increased by 18% and 3%, respectively, when compared to the corresponding 1995 periods. The increase was primarily due to the write-off of capitalized software. OTHER INCOME (EXPENSE) Interest income for the three and six months ended June 30, 1996 increased by 6% and 22%, respectively, because of higher investment balances. During the six months ended June 30, 1996, the Company incurred predominantly unrealized foreign currency gains of $307,000, primarily due to dollar denominated deposit accounts maintained in Europe. During the three and six months ended June 30, 1995, the Company recognized foreign currency losses of $239,000, also primarily due to dollar denominated deposit accounts maintained in Europe. Such foreign currency gains and losses result from the movement of the value of the U.S. dollar against the functional currencies used by the Company's foreign subsidiaries. During the six months ended June 30, 1996, events and circumstances indicated that an investment in Personal Travel Technologies and Kidsoft, both with carrying values of $100,000, may be impaired and were written off. PROVISION FOR INCOME TAXES The provision for income taxes as a percentage of income before the provision for income taxes for the three and six months ended June 30, 1996 was 41% as compared to 42% and 41%, respectively, for the corresponding periods in 1995. The effective tax rate for the six months ended June 30, 1996 is somewhat lower than for the corresponding periods in 1995, primarily due to expected tax refunds for increases in research and development activities in prior years. 9 10 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. The Company's cash flow from operations for the six months ended June 30, 1996 and 1995 were $7,287,000 and $8,230,000, respectively. Management believes the Company's current working capital of $53,730,000 and anticipated working capital to be generated by future operations will be sufficient to support the Company's requirements for at least the next twelve months. The Company's use of cash include purchases of property, plant and equipment, repayment of long-term debt, repurchase of treasury stock and investment in long-term assets. The Company intends to use its capital resources to expand its product line and for the acquisition of additional products and technologies. The Company's subsidiaries in France carry $3.5 million 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. 10 11 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 by the undersigned thereto duly authorized. Date: August 13, 1996 RAINBOW TECHNOLOGIES, INC. By: /s/ Patrick Fevery ------------------------------- Patrick Fevery Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 30,119 10,800 13,042 (395) 5,128 64,122 15,383 4,250 85,312 10,392 0 0 0 8 71,512 71,520 26,025 38,149 18,105 11,485 (21) 0 (168) 9,245 3,814 5,431 0 0 0 5,431 0.70 0.70
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