-----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, Kmwum34OWavAvi7RSzNvvPPPTxq9NpP8+uaYgP3hgOUYnXuyN9Cn2zWUV5RC4HM8 VZLG7IeJYpz6Q6jyQqnvzw== 0000892569-99-000781.txt : 19990330 0000892569-99-000781.hdr.sgml : 19990330 ACCESSION NUMBER: 0000892569-99-000781 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990329 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/A SEC ACT: SEC FILE NUMBER: 000-16641 FILM NUMBER: 99575838 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/A 1 AMENDMENT TO THE FORM 10-Q DATED JUNE 30, 1998 1 FORM 10-Q/A 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, 1998 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, 1998 was 7,815,497. Item 1 of this Form 10-Q/A contains restated financial statements for the three and six month periods ended June 30, 1998 (see Note 2 of Notes to Restated Condensed Consolidated Financial Statements). Item 2 contains a revised Management's Discussion and Analysis of Financial Condition and Results of Operations that give effect to the restated financial statement amounts set forth in Item 1. 2 RAINBOW TECHNOLOGIES, INC. TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheet at June 30, 1998 (unaudited, restated) and December 31, 1997 4 Condensed Consolidated Statements of Operations (unaudited) for the Three and Six months ended June 30, 1998 (restated - Note 2) and 1997 5 Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Six months ended June 30, 1998 (restated - Note 2) and 1997 6 Condensed Consolidated Statements of Cash Flows (unaudited) for the Six months ended June 30, 1998 (restated - Note 2) and 1997 7 Notes to Restated Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II -- OTHER INFORMATION Item 1 to 5 - Not applicable Item 6. Exhibits and reports on Form 8K 16 SIGNATURES 16
2 3 INTRODUCTORY NOTE The Quarterly Report on Form 10-Q/A 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. CONDENSED CONSOLIDATED BALANCE SHEETS A S S E T S
December 31, June 30, 1998 1997 ------------- ------------- (unaudited, restated - Note 2) Current assets: Cash and cash equivalents .................................. $ 29,248,000 $ 29,556,000 Marketable securities available-for-sale .................... 4,236,000 6,841,000 Accounts receivable, net of allowance for doubtful accounts of $478,000 and $500,000 in 1998 and 1997, respectively .... 16,988,000 16,343,000 Inventories ................................................. 9,469,000 9,780,000 Unbilled costs and fees ..................................... 665,000 1,782,000 Prepaid expenses and other current assets ................... 4,493,000 4,803,000 ------------- ------------- Total current assets ................................... 65,099,000 69,105,000 Property, plant and equipment, at cost: Buildings ................................................... 8,010,000 8,058,000 Furniture ................................................... 1,237,000 1,191,000 Equipment ................................................... 14,791,000 12,963,000 Leasehold improvements ...................................... 699,000 636,000 ------------- ------------- 24,737,000 22,848,000 Less accumulated depreciation and amortization .............. 7,659,000 6,315,000 ------------- ------------- Net property, plant and equipment ...................... 17,078,000 16,533,000 Goodwill, net of accumulated amortization of $9,887,000 and $8,736,000 in 1998 and 1997, respectively .................. 9,540,000 5,543,000 Product licenses, net of accumulated amortization of $692,000 and $469,000 in 1998 and 1997, respectively ................. 6,323,000 6,481,000 Other assets, net of accumulated amortization of $3,129,000 and $2,763,000 in 1998 and 1997, respectively ............... 7,781,000 5,389,000 ------------- ------------- $ 105,821,000 $ 103,051,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 5,366,000 $ 4,937,000 Accrued payroll and related expenses ........................ 3,421,000 4,199,000 Other accrued liabilities ................................... 3,575,000 2,986,000 Income taxes payable ........................................ -- 861,000 Billings in excess of costs and fees ........................ 11,000 87,000 Long-term debt, due within one year ......................... 256,000 259,000 ------------- ------------- Total current liabilities .............................. 12,629,000 13,329,000 Long-term debt, net of current portion ......................... 1,470,000 1,616,000 Minority interest .............................................. 1,316,000 1,723,000 Other liabilities .............................................. 15,000 24,000 Shareholders' equity: Common stock, $.001 par value, 20,000,000 shares authorized, 7,815,497 and 7,817,836 shares issued and outstanding in 1998 and 1997, respectively ............................ 8,000 8,000 Additional paid-in capital .................................. 29,823,000 30,633,000 Accumulated other comprehensive loss ........................ (1,212,000) (1,906,000) Retained earnings ........................................... 62,062,000 59,811,000 ------------- ------------- 90,681,000 88,546,000 Less cost of treasury shares (12,500 and 88,868 shares in 1998 and 1997, respectively) ................... (290,000) (2,187,000) ------------- ------------- Total shareholders' equity ............................. 90,391,000 86,359,000 ------------- ------------- $ 105,821,000 $ 103,051,000 ============= =============
See accompanying notes. 4 5 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended Six months ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------------------------ ------------------------------ (restated (restated - Note 2) - Note 2) Revenues: Software Protection Products .................... $ 14,450,000 $ 15,974,000 $ 28,620,000 $ 29,947,000 Information Security Products ................... 12,302,000 6,859,000 23,152,000 13,669,000 Ion Beam Surface Treatment ...................... 8,000 11,000 18,000 11,000 ------------ ------------ ------------ ------------ Total revenues ............................. 26,760,000 22,844,000 51,790,000 43,627,000 ------------ ------------ ------------ ------------ Operating expenses: Cost of Software Protection Products ............ 3,859,000 4,594,000 7,414,000 8,774,000 Cost of Information Security Products ........... 9,414,000 5,243,000 18,019,000 10,955,000 Cost of Ion Beam Surface Treatment .............. -- 417,000 20,000 417,000 Selling, general and administrative ............. 6,411,000 5,451,000 12,008,000 10,716,000 Research and development ........................ 1,935,000 2,594,000 4,657,000 3,975,000 Goodwill amortization ........................... 747,000 447,000 1,304,000 860,000 Provision for reorganized operations ............ -- -- 370,000 -- Acquired research and development ............... -- -- 1,500,000 -- ------------ ------------ ------------ ------------ Total operating expenses ................... 22,366,000 18,746,000 45,292,000 35,697,000 ------------ ------------ ------------ ------------ Operating income .................................... 4,394,000 4,098,000 6,498,000 7,930,000 Interest income ..................................... 265,000 419,000 584,000 846,000 Interest expense .................................... (53,000) (70,000) (109,000) (140,000) Other income (expense) .............................. 145,000 492,000 (989,000) 348,000 ------------ ------------ ------------ ------------ Income before provision for taxes ................... 4,751,000 4,939,000 5,984,000 8,984,000 Provision for income taxes .......................... 1,882,000 2,125,000 3,733,000 3,738,000 ------------ ------------ ------------ ------------ Net income .......................................... $ 2,869,000 $ 2,814,000 $ 2,251,000 $ 5,246,000 ============ ============ ============ ============ Net income per share: Basic ........................................... $ 0.37 $ 0.36 $ 0.29 $ 0.67 ============ ============ ============ ============ Diluted ......................................... $ 0.35 $ 0.36 $ 0.28 $ 0.66 ============ ============ ============ ============ Shares used in computing net income per share: Basic ........................................... 7,795,000 7,773,000 7,781,000 7,784,000 ============ ============ ============ ============ Diluted ......................................... 8,243,000 7,856,000 8,005,000 7,905,000 ============ ============ ============ ============
See accompanying notes. 5 6 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Six Months Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ---------------------------------------------------------------- (restated (restated - Note 2) - Note 2) Net income .............................................. $ 2,869,000 $ 2,814,000 $ 2,251,000 $ 5,246,000 Other comprehensive income: Foreign currency translation adjustment .............. 343,000 (1,142,000) 1,148,000 (3,895,000) Unrealized loss on securities ........................ 3,000 (160,000) (4,000) (215,000) Reclassification adjustment .......................... -- -- (6,000) -- ----------- ----------- ----------- ----------- Other comprehensive (loss) income, before income taxes 346,000 (1,302,000) 1,138,000 (4,110,000) Provision for income taxes related to other comprehensive (loss) income ..................... (135,000) 521,000 (444,000) 1,644,000 ----------- ----------- ----------- ----------- Other comprehensive (loss) income, net of taxes ...... 211,000 (781,000) 694,000 (2,466,000) ----------- ----------- ----------- ----------- Comprehensive income .................................... $ 3,080,000 $ 2,033,000 $ 2,945,000 $ 2,780,000 =========== =========== =========== ===========
See accompanying notes. 6 7 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 1998 June 30, 1997 ------------------------------ (restated - Note 2) Cash flows from operating activities: Net income ....................................................... $ 2,251,000 $ 5,246,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization ................................................... 1,899,000 1,454,000 Depreciation ................................................... 1,405,000 1,002,000 Provision for loss in contract ................................. -- 400,000 Change in deferred income taxes ................................ (651,000) (106,000) Allowance for doubtful accounts ................................ (21,000) 35,000 Loss from retirement of property, plant, and equipment ......... (12,000) 34,000 Write-down of long-term investment ............................. 1,320,000 75,000 Share in investee's loss ....................................... -- 45,000 Minority interest in subsidiary's earnings ..................... (306,000) (401,000) Write-off of capitalized software .............................. 784,000 -- Provision for reorganized operations ........................... 370,000 -- Write-off of in-process research and development ............... 1,500,000 -- Changes in operating assets and liabilities: Accounts receivable ......................................... (812,000) 190,000 Inventories ................................................. 1,183,000 831,000 Unbilled costs and fees ..................................... 1,117,000 581,000 Prepaid expenses and other current assets ................... 188,000 (133,000) Accounts payable ............................................ (1,064,000) (1,268,000) Accrued liabilities ......................................... (1,067,000) 872,000 Billings in excess of costs and fees ........................ -- (227,000) Deferred revenues ........................................... (76,000) -- Income taxes payable ........................................ (228,000) 985,000 ------------ ------------ Net cash provided by operating activities ................ 7,780,000 9,615,000 Cash flows from investing activities: Purchase of marketable securities ................................ (1,636,000) (435,000) Sale of marketable securities .................................... 4,220,000 2,293,000 Purchases of property, plant, and equipment ...................... (1,983,000) (4,182,000) Net cash paid for acquisition of Wyatt River Software, Inc........ (7,662,000) -- Other non-current assets ......................................... (1,660,000) (570,000) Acquired cash from QM Technologies, Inc .......................... -- 556,000 Capitalized software development costs ........................... (584,000) (680,000) ------------ ------------ Net cash used in investing activities .................... (9,305,000) (3,018,000) Cash flows from financing activities: Exercise of Rainbow common stock options ......................... 1,231,000 322,000 Payment of long-term debt ........................................ (137,000) (145,000) Purchase of treasury stock ....................................... (149,000) -- Purchase and retirement of common stock .......................... (290,000) (2,767,000) ------------ ------------ Net cash provided by (used in) financing activities....... 655,000 (2,590,000) Effect of exchange rate changes on cash ............................. 562,000 (1,441,000) ------------ ------------ Net increase in cash and cash equivalents ........................... (308,000) 2,566,000 Cash and cash equivalents at beginning of period .................... 29,556,000 31,735,000 ------------ ------------ Cash and cash equivalents at end of period .......................... $ 29,248,000 $ 34,301,000 ============ ============ Supplemental disclosure of cash flow information: Income taxes paid ................................................ $ 4,064,000 $ 3,082,000 Interest paid .................................................... 108,000 140,000
See accompanying notes. 7 8 RAINBOW TECHNOLOGIES, INC. NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Unaudited) 1. Basis of presentation The accompanying financial statements consolidate the accounts of Rainbow Technologies, Inc. (the Company) and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform with the 1998 presentation. 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, 1998 and results of operations for the three and six months ended June 30, 1998 and 1997. 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, 1997 Annual Report on Form 10-K. Results of operations for the three and six months ended June 30, 1998 are not necessarily indicative of results to be expected for the full year. The Company has subsidiaries in the United Kingdom, Germany, France, Belarus, the Netherlands and India. 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. As of January 1, 1998, the Company adopted Statement 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. During the three and six months ended June 30, 1998 total comprehensive income amounted to $3,080,000 and $2,945,000, respectively. The total comprehensive income for the three and six months ended June 30, 1997 amounted to $2,033,000 and $2,780,000, respectively. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, "Disclosures about Segment of an Enterprise and Related Information," (SFAS No. 131), which requires publicly-held companies to report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The statement also requires additional disclosures with respect to products and services, geographical areas of operations, and major customers. The Company will adopt SFAS No. 130 effective December 31, 1998 and will restate all periods presented. 8 9 2. Restatement Items 1 And 2 of the accompanying Form 10-Q/A have been restated and amended. In September 1998, the Securities and Exchange Commission issued a letter to the American Institute of Certified Public Accountants wherein a new valuation method for in-process R&D was given. The new valuation method was to be retro-actively applied to all acquisitions in 1998. During February 1999 the Company performed a new valuation analysis related to the acquisition of Wyatt River Software, Inc. in February 1998 (see Note 6 to the Notes to Consolidated Financial Statements). Initial calculations of value of the purchased in-process R&D in connection with the Company's 1998 acquisition of Wyatt River Software, Inc. were based on the after-tax cash flows attributable to each project, the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of each project. Revised calculations of the value of the purchased in-process R&D are based on adjusted after-tax cash flows taking into account the stage of completion of the purchased R&D at the date of the acquisition, the contributions of the company's own distinct and unique proprietary advantages, and the estimated total project costs of the purchased in-process R&D in arriving at the valuation amount. As a result of the modification, the Company increased goodwill by $1.3 million, developed technology by $200 thousand and reduced in the in-process R&D write-off by $2.5 million. The restatement resulted in the following impact on the Company's previously reported results of operations for the three and six month period ended June 30, 1998.
Three months ended Six months ended June 30, 1998 June 30, 1998 Net income (loss): As previously reported ...................... $ 2,943,000 $ (150,000) Adjustment related to acquired in-process R&D -- 2,500,000 Adjustment related to additional amortization of intangible assets ........ (74,000) (99,000) ------------- ------------- As restated ................................. $ 2,869,000 $ 2,251,000 ============= ============= Net loss per share - basic: As previously reported ...................... $ 0.38 $ (0.02) Adjustment related to acquired in-process R&D -- 0.32 Adjustment related to additional amortization of intangible assets ........ (0.01) (0.01) ------------- ------------- As restated ................................. $ 0.37 $ 0.29 ============= ============= Net loss per share - diluted: As previously reported ...................... $ 0.36 $ (0.02) Adjustment related to acquired in-process R&D -- 0.32 Adjustment related to additional amortization of intangible assets ........ (0.01) (0.01) Effect of dilutive securities ............... -- (0.01) ------------- ------------- As restated ................................. $ 0.35 $ 0.28 ============= =============
3. Earnings per share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128) effective December 31, 1997. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted 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 9 10 earnings per share reflects the assumed conversion of all diluted securities. Earnings per share amounts for all periods presented have been calculated in accordance with the requirements of SFAS No. 128. 4. 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 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. The Company has unbilled costs and fees at June 30, 1998 of $665,000. 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. 5. Inventories Inventoried costs relating to long-term contracts are stated at the 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:
June 30, 1998 December 31, 1997 ------------- ----------------- Raw materials ........... $ 584,000 $ 271,000 Work in process ......... 393,000 761,000 Finished goods .......... 4,045,000 4,257,000 Inventoried costs related to long-term contracts 4,447,000 4,491,000 ---------- ---------- $9,469,000 $9,780,000 ========== ==========
10 11 6. Acquisitions In March 1998, the Company purchased certain assets from Elan Computer Group, Inc. ("Elan") in a cash transaction. The assets included Elan's license manager software technology, which the Company had previously licensed from Elan, and Elan's end-user maintenance and support relationships. In February 1998, the Company acquired Wyatt River Software, Inc. ("Wyatt River"), including its "LicenseServe" and "LicenseTrack" technology in a cash transaction. The final consideration is subject to a determination based upon a balance sheet audit of Wyatt River as of the closing. The Company will also pay the Wyatt River shareholders an additional sum based upon sales of Wyatt River technology through June 30, 1999. 7. 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. 8. Stock split On March 17, 1998 the Company announced that its Board of Directors approved a 3-for-2 split of its common stock. The effective date is July 1, 1998 and the payout date is July 15, 1998. These financial statements have not been adjusted to reflect the impact of the proposed stock split. 11 12 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. The accompanying Form 10-Q/A has been restated and amended to incorporate the results of a new valuation analysis related to the acquisition of Wyatt River Software, Inc. The new calculations were based on the after-tax cash flows attributable to each project, the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of each project. Revised calculations of the value of the purchased in-process R&D are based on adjusted after-tax cash flows taking into account the stage of completion of the purchased R&D at the date of the acquisition, the contributions of the company's own distinct and unique proprietary advantages, and the estimated total project costs of the purchased in-process R&D in arriving at the valuation amount. As a result of the modification, the Company increased goodwill by $1.3 million, developed technology by $200 thousand and reduced in the in-process R&D write-off by $2.5 million. RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended June 30, --------------------------- 1998 1997 -------- -------- Revenues Software Protection Products ..... $ 14,450 $ 15,974 Information Security Products .... 12,302 6,859 IBEST ............................ 8 11 -------- -------- Consolidated ..................... $ 26,760 $ 22,844 ======== ======== Operating Income (restated) Software Protection Products ..... $ 2,604 $ 6,467 Information Security Products .... 1,977 607 IBEST ............................ (187) (976) -------- -------- Consolidated ..................... $ 4,394 $ 4,098 ======== ========
Six Months Ended June 30, --------------------------- 1997 1996 -------- -------- Revenues Software Protection Products..... $ 28,620 $ 29,947 Information Security Products.... 23,152 13,669 IBEST ........................... 18 11 -------- -------- Consolidated .................... $ 51,790 $ 43,627 ======== ======== Operating Income (restated) Software Protection Products..... $ 4,418 $ 7,490 Information Security Products.... 2,554 1,416 IBEST ........................... (474) (976) -------- -------- Consolidated ..................... $ 6,498 $ 7,930 ======== ========
12 13 REVENUES Revenues from software protection products for the three and six months ended June 30, 1998 decreased by 10% and 4%, respectively, when compared to the same period in 1997. The overall business has been impacted by the economic problems in Asia and other emerging markets as well as by the erosion of the average selling prices. Revenues from Europe increased by 5% while revenues from the US decreased by 9% for the six months ended June 30, 1998 compared with the same period in 1997. The decrease in US revenues is due to slower sales to US customers who export their products to Asia as well as lower direct sales to Asian distributors. The average selling price per product in the quarter ended June 30, 1998 decreased approximately 8% when compared to the same period in 1997. Unit volume for the three months ended June 30, 1998 decreased by 3% while unit volume for the six months ended June 30, 1998 increased by 8% when compared to the corresponding 1997 periods. The decrease in average selling prices and the increase in unit volume is primarily due to a change in customer mix. Revenues from information security products for the three and six months ended June 30, 1998 increased by 79% and 69%, respectively, when compared to the same period in 1997. The revenue growth was primarily due to strong demand for network security products. GROSS PROFIT Gross profit from software protection products for the three and six months ended June 30, 1998 increased to 73% and 74% of revenues compared to 71% of revenues for the corresponding periods in 1997. The increase in gross profit is due to the absence of royalty expenses on the revenues generated from sales of Elan software as well as benefits from manufacturing efficiencies. Gross profit from information security products for the three months ended June 30, 1998 decreased to 23% of revenues compared to 24% for the three months ended June 30, 1997. Gross profit from information security products for the six months ended June 30, 1998 increased to 22% of revenues compared to 20% for the six months ended June 30, 1997. The increase for the six month period is due to the change in mix from predominantly contract revenues to predominantly product revenues. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for the three and six months ended June 30, 1998 increased by 18% and 12%, respectively, when compared to the corresponding 1997 period. The increase was due to increased staffing and professional expenses, new product introductions in software protection and information security products, and higher marketing expenses. RESEARCH AND DEVELOPMENT Total research and development expenses for the three months ended June 30, 1998 decreased by 25% when compared to the corresponding 1997 period. The decrease in research and development expenses was due to the restructuring of research and development operations. Total research and development expenses for the six months ended June 30, 1998 increased by 18% when compared to the corresponding 1997 period. The increase was primarily due to the write-off of previously capitalized computer software development costs of $784,000 in the first quarter of 1998. PROVISION FOR REORGANIZED OPERATIONS The sum of $370,000 represents the Company's estimate of the costs of reorganizing certain operations. 13 14 ACQUIRED RESEARCH AND DEVELOPMENT Based on the results of third-party appraisals, the Company recorded charges of $1,500,000 in the three months ended March 31, 1998 to expense in-process research and development costs related to the acquisition of Wyatt River. In the opinion of management and the appraiser, the acquired in-process research and development has not yet reached technological feasibility and had no alternative future use. OTHER INCOME (EXPENSE) Interest income for the quarter ended June 30, 1998 decreased by 37% compared to $265,000 for the quarter ended June 30, 1997 because of lower balances of cash and cash equivalents. The minority interest share in QMT's operating losses in the three months ended June 30, 1998 was $118,000 compared to $401,000 in the corresponding period in 1997. With the purchase of certain Elan assets in March 1998 the original investment in Elan was written off. PROVISION FOR INCOME TAXES The effective tax rate was 40% for the three months ended June 30, 1998 compared to 43% for the corresponding period in 1997. The effective tax rate for the first six months of 1998 was negatively affected due to the non-deductibility of the charges related to the acquired in-process research and development. Excluding the effect of these charges, the effective tax rate was 39% for the six months ended June 30, 1998 and 42% for the six months ended June 30, 1997. The lower tax rate is due to the benefits of the international restructuring of foreign operations. 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, 1998 and 1997 were $7,780,000 and $9,615,000, respectively. The decrease in cash flow from operations is attributable to the acquisitions of Wyatt River Software and certain assets of Elan Computer Group. The Company intends to use its capital resources to expand its product lines and for the acquisition of additional products and technologies. The Company has no significant capital commitments or requirements at this time. The Company's use of cash includes purchases of property, plant and equipment, repayment of long-term debt and investment in long-term assets. Management believes the Company's current working capital of $52,470,000 and anticipated working capital to be generated by future operations will be sufficient to support the Company's requirement for at least the next twelve months. 14 15 IMPACT OF YEAR 2000 The Company has completed a partial assessment and will have to modify portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at less than $100,000 which will be expensed as incurred. To date, the Company has not incurred nor expensed any of these amounts. The project is estimated to be completed no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived using assumptions of future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 15 16 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: March 29, 1999 RAINBOW TECHNOLOGIES, INC. By: /s/ Patrick Fevery Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 US DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUL-30-1998 1 29,248 4,236 17,467 (479) 9,469 65,099 24,737 7,659 105,821 12,629 0 0 0 8 90,383 105,821 51,790 51,790 25,453 45,292 (989) 0 (109) 5,984 3,733 2,251 0 0 0 2,251 0.29 0.28
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