-----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, Tnzgu7m7laVnQvmGLNURteGES4BF0Nc+6+JFzflgGc6b4ze/bJPxfY9tkP8jAQOT jG86iS9Ol+1RCUE3O7iKTQ== /in/edgar/work/0001095811-00-004783/0001095811-00-004783.txt : 20001115 0001095811-00-004783.hdr.sgml : 20001115 ACCESSION NUMBER: 0001095811-00-004783 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAINBOW TECHNOLOGIES INC CENTRAL INDEX KEY: 0000819706 STANDARD INDUSTRIAL CLASSIFICATION: [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: 766792 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 a67275e10-q.txt FORM 10-Q QUARTER ENDED SEPTEMBER 30, 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 ACTS OF 1934 For the Quarter ended SEPTEMBER 30, 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 November 10, 2000 was 25,557,761. 2 RAINBOW TECHNOLOGIES, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999 4 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2000 and 1999 (unaudited) 5 Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2000 and 1999 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 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 16 SIGNATURES 16
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 Company or any other person that the objectives or plans of the Company will be achieved should not regard the inclusion of such information as a representation. 3 4 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 December 31, 1999 ------------------ ----------------- (unaudited) A S S E T S Current assets: Cash and cash equivalents ...................................... $ 18,529,000 $ 26,709,000 Marketable securities available-for-sale ....................... 1,086,000 1,173,000 Marketable securities trading .................................. 5,092,000 -- Accounts receivable, net of allowance for doubtful accounts of $834,000 and $579,000 at September 30, 2000 and December 31, 1999, respectively .............................. 41,603,000 28,671,000 Inventories .................................................... 24,090,000 12,033,000 Unbilled costs and fees ........................................ 3,138,000 2,916,000 Prepaid expenses and other current assets ...................... 15,764,000 7,155,000 ------------- ------------- Total current assets ......................................... 109,302,000 78,657,000 Property, plant and equipment, at cost: Buildings ...................................................... 6,605,000 7,497,000 Furniture ...................................................... 1,754,000 1,703,000 Equipment ...................................................... 16,875,000 17,060,000 Leasehold improvements ......................................... 1,734,000 1,641,000 ------------- ------------- 26,968,000 27,901,000 Less accumulated depreciation and amortization ................. 12,181,000 11,145,000 ------------- ------------- Net property, plant and equipment ............................ 14,787,000 16,756,000 Long-term note receivable ...................................... 940,000 -- Goodwill, net of accumulated amortization of $14,162,000 and and $12,764,000 in 2000 and 1999, respectively ................. 21,200,000 21,498,000 Product licenses, net of accumulated amortization of $2,053,000 and $1,749,000 in 2000 and 1999, respectively .................. 5,066,000 5,567,000 Other assets, net of accumulated amortization of $3,848,000 and and $2,790,000 in 2000 and 1999, respectively .................. 11,351,000 8,060,000 ------------- ------------- $ 162,646,000 $ 130,538,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................... $ 11,491,000 $ 8,900,000 Accrued payroll and related expenses ........................... 6,578,000 6,155,000 Other accrued liabilities ...................................... 11,712,000 6,927,000 Long-term debt, due within one year ............................ 209,000 239,000 Line of credit ................................................. 4,000,000 6,000,000 Payable to shareholders ........................................ -- 1,500,000 ------------- ------------- Total current liabilities .................................... 33,990,000 29,721,000 Long-term debt, net of current portion ........................... 732,000 1,014,000 Other liabilities ................................................ 1,864,000 1,913,000 Commitments and contingencies .................................... -- -- Shareholders' equity: Common stock, $.001 par value, 55,000,000 shares authorized, 25,329,888 and 23,367,958 shares issued and outstanding in 2000 and 1999, respectively ............................... 25,000 23,000 Additional paid-in capital ..................................... 44,860,000 28,602,000 Accumulated other comprehensive loss ........................... (2,068,000) (1,173,000) Retained earnings .............................................. 83,243,000 70,438,000 ------------- ------------- Total shareholders' equity ..................................... 126,060,000 97,890,000 ------------- ------------- $ 162,646,000 $ 130,538,000 ============== =============
See accompanying notes 4 5 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three months ended Nine months ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Revenues: Secure Software Distribution ............... $ 13,160,000 $ 14,393,000 $ 41,487,000 $ 43,822,000 Secure Communications ...................... 14,396,000 9,910,000 37,581,000 31,988,000 Internet Performance and Security .......... 11,181,000 2,326,000 25,022,000 4,552,000 Spectria ................................... 5,033,000 3,536,000 15,017,000 5,313,000 ------------- ------------- ------------- ------------- Total revenues ........................... 43,770,000 30,165,000 119,107,000 85,675,000 Operating expenses: Cost of Secure Software Distribution Revenues 3,907,000 4,102,000 12,132,000 12,694,000 Cost of Secure Communications Revenues ..... 10,912,000 8,117,000 29,575,000 28,133,000 Cost of Internet Performance and Security Revenues ................................. 3,071,000 492,000 7,222,000 1,183,000 Cost of Spectria Revenues .................. 3,232,000 2,411,000 9,011,000 3,379,000 Selling, general and administrative ........ 11,484,000 8,508,000 32,622,000 23,013,000 Research and development ................... 3,141,000 3,029,000 8,602,000 8,488,000 Goodwill amortization ...................... 822,000 562,000 2,316,000 1,765,000 ------------- ------------- ------------- ------------- Total operating expenses ................. 36,569,000 27,221,000 101,480,000 78,655,000 ------------- ------------- ------------- ------------- Operating income ............................. 7,201,000 2,944,000 17,627,000 7,020,000 Gain on marketable securities ................ 67,000 -- 4,285,000 -- Asset impairment charge ...................... -- -- (2,173,000) -- Interest income .............................. 283,000 181,000 702,000 714,000 Interest expense ............................. (31,000) (46,000) (101,000) (143,000) Other income (expense), net .................. (22,000) 342,000 383,000 751,000 ------------- ------------- ------------- ------------- Income before provision for income taxes ..... 7,498,000 3,421,000 20,723,000 8,342,000 Provision for income taxes ................... 2,852,000 1,346,000 7,918,000 3,292,000 ------------- ------------- ------------- ------------- Net income ................................... $ 4,646,000 $ 2,075,000 $ 12,805,000 $ 5,050,000 ============= ============= ============= ============= Net income per share: Basic ..................................... $ 0.18 $ 0.09 $ 0.52 $ 0.22 ============= ============= ============= ============= Diluted ................................... $ 0.17 $ 0.09 $ 0.46 $ 0.21 ============= ============= ============= ============= Shares used in computing net income per share: Basic ..................................... 25,214,000 22,616,000 24,716,000 23,050,000 ============= ============= ============= ============= Diluted ................................... 28,148,000 23,268,000 27,770,000 23,890,000 ============= ============= ============= =============
See accompanying notes. 5 6 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Nine Months Ended Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999 -------------- -------------- -------------- -------------- Net income ...................................... $ 4,646,000 $ 2,075,000 $ 12,805,000 $ 5,050,000 Other comprehensive income (loss): Foreign currency translation adjustment ....... (1,793,000) 1,594,000 (1,067,000) (433,000) Unrealized gain (loss) on securities .......... (44,000) (45,000) (382,000) (88,000) ------------ ------------ ------------ ------------ Other comprehensive income (loss), before income taxes ......................... (1,837,000) 1,549,000 (1,449,000) (521,000) Provision for income taxes related to other comprehensive income (loss) ................. 699,000 (610,000) 554,000 206,000 ------------ ------------ ------------ ------------ Other comprehensive income (loss), net of taxes (1,138,000) 939,000 (895,000) (315,000) ------------ ------------ ------------ ------------ Comprehensive income .......................... $ 3,508,000 $ 3,014,000 $ 11,910,000 $ 4,735,000 ============ ============ ============ ============
See accompanying notes. 6 7 RAINBOW TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30, 2000 September 30, 1999 ------------------ ------------------ Cash flows from operating activities: Net income ......................................................... $ 12,805,000 $ 5,050,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization ....................................................... 4,014,000 3,374,000 Depreciation ....................................................... 2,505,000 2,363,000 Change in deferred income taxes .................................... (1,946,000) (1,340,000) Allowance for doubtful accounts .................................... 250,000 437,000 Changes in operating assets and liabilities: Accounts receivable ................................................ (12,962,000) (1,389,000) Inventories ........................................................ (12,206,000) (930,000) Unbilled costs and fees ............................................ (222,000) 511,000 Prepaid expenses and other current assets .......................... (164,000) (1,671,000) Note receivable .................................................... (940,000) -- Accounts payable ................................................... 3,024,000 522,000 Accrued liabilities ................................................ (570,000) 248,000 Income taxes payable ............................................... 6,976,000 2,042,000 Deferred revenues .................................................. (408,000) (59,000) Other .............................................................. (442,000) (535,000) ------------ ------------ Net cash (used in) provided by operating activities .............. (286,000) 8,623,000 Cash flows from investing activities: Sale of marketable securities ...................................... -- 5,412,000 Purchases of property, plant, and equipment ........................ (3,328,000) (3,941,000) Gain on marketable securities ...................................... (4,285,000) -- Asset impairment charge ............................................ 2,173,000 -- Net cash paid for acquisition of Systematic Systems Integration, Inc (1,765,000) (10,861,000) Other non-current assets ........................................... (2,159,000) (635,000) Capitalized software development costs ............................. (5,020,000) (826,000) ------------ ------------ Net cash used in investing activities ............................ (14,384,000) (10,851,000) Cash flows from financing activities: Exercise of Rainbow common stock options ........................... 8,672,000 998,000 Payment on line of credit .......................................... (2,000,000) -- Payment of long-term debt .......................................... (165,000) (206,000) Investment by new partners in QM Technologies, Inc. ................ -- 610,000 Purchase and retirement of common stock ............................ -- (7,974,000) ------------ ------------ Net cash (used in) provided by financing activities .............. 6,507,000 (6,572,000) Effect of exchange rate changes on cash .............................. (17,000) 528,000 ------------ ------------ Net decrease in cash and cash equivalents ............................ (8,180,000) (8,272,000) Cash and cash equivalents at beginning of period ..................... 26,709,000 29,900,000 ------------ ------------ Cash and cash equivalents at end of period ........................... $ 18,529,000 $ 21,628,000 ============ ============ Supplemental disclosure of cash flow information: Income taxes paid .................................................. $ 1,794,000 $ 470,000 Interest paid ...................................................... 125,000 140,000
See accompanying notes. 7 8 RAINBOW TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 provides 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 to 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 the fair value for marketable securities. At June 30, 2000, the Company performed a review for impairment of the long-lived assets related to QMT. Based on its evaluation, the Company determined that all of the long-lived assets related to QMT were fully impaired and as a result recorded an impairment charge of $2,200,000. Management determines the appropriate classification of its investments in marketable securities at the time of purchase. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and carried at fair value with the unrealized holding gains and losses included in earnings. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. During the second quarter and third quarter of fiscal 2000, the Company acquired securities and classified them as trading securities, as defined by SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Net unrealized gain recognized in earnings for the three months ended September 30, 2000 and June 20, 2000 were $67,000 and $4,200,000, respectively. 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 September 30, 2000 and results of operations for the three and nine months ended September 30, 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 and nine months ended September 30, 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. 8 9 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 reflect the assumed conversion of all diluted securities. 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:
Inventories (in thousands) September 30, 2000 December 31, 1999 ------------------ ----------------- Finished goods $ 7,822 $ 4,804 Raw materials 10,864 1,648 Inventoried costs relating to long-term contracts, net of amounts attributed to revenues recognized to date 3,672 4,535 Work in process 1,732 1,046 -------- -------- $ 24,090 $ 12,033 ======== ========
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 9 10 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 paid in January 2000. In addition, the purchase agreement provides for contingent payments of up to $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 commences 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 cannot 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 September 30, 2000 were $77,156,000, $31,924,000, $28,535,000 and $25,031,000, respectively, compared with $70,591,000, $31,452,000, $6,344,000 and $22,151,000 as of December 31, 1999. 8. Stock split On September 19, 2000 the Company announced that its Board of Directors approved a 2-for-1 split of its common stock. The effective date was October 9, 2000 and the payout date was October 23, 2000. These financial statements have been adjusted to reflect the impact of the stock split. 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 September 30, ------------------------------- 2000 1999 ---- ---- Revenues Secure Software Distribution $ 13,160 $ 14,393 Secure Communications 14,396 9,910 Internet Performance and Security 11,181 2,326 Spectria 5,033 3,536 -------- -------- Total revenues $ 43,770 $ 30,165 ======== ======== Operating Income Secure Software Distribution $ 3,220 $ 2,139 Secure Communications 3,275 1,558 Internet Performance and Security 1,476 (970) Spectria (770) 217 -------- -------- Total operating income $ 7,201 $ 2,944 ======== ========
Nine months ended September 30, ------------------------------- 2000 1999 ---- ---- Revenues Secure Software Distribution $ 41,487 $ 43,822 Secure Communications 37,581 31,988 Internet Performance and Security 25,022 4,552 Spectria 15,017 5,313 --------- --------- Total revenues $ 119,107 $ 85,675 ========= ========= Operating Income Secure Software Distribution $ 10,811 $ 6,799 Secure Communications 7,460 3,196 Internet Performance and Security 1,603 (3,766) Spectria (2,247) 791 --------- ---------- Total operating income $ 17,627 $ 7,020 ========= =========
11 12 REVENUES Revenues from Secure Software Distribution for the three and nine months ended September 30, 2000 decreased by 9% to $13,160,000 and 5% to $41,487,000, respectively, when compared to the same periods in 1999. Revenues from U.S. and Europe decreased by 17% and 5%, respectively, while revenues from Asia-Pacific increased by 130% for the three months ended September 30, 2000 when compared to the same period in 1999. The decrease in revenues was primarily due to decreased demand in North America and Europe for business software applications. The increase in Asia-Pacific revenues was due to additional sales generated primarily in China. The average selling price per product for the three months ended September 30, 2000 increased 2% as compared to the same period in 1999. The average selling price per product for the nine months ended September 30, 2000 was consistent with the average selling price per product for the nine months ended September 30, 1999. Unit volume for the three and nine months ended September 30, 2000 decreased 10% and 6%, respectively, when compared to the corresponding periods in 1999. Secure Communications revenues for the three and nine months ended September 30, 2000 increased 45% to $14,396,000 and 17% to $37,581,000, respectively, when compared to the same periods in 1999. The revenue growth was primarily due to higher demand for network security products. Internet Performance and Security revenues for the three and nine months ended September 30, 2000 increased 381% to $11,181,000 and 450% $25,022,000, respectively, when compared to the same periods in 1999. The revenue growth was primarily due to increased demand for performance enhancement products in the server and network appliance markets. Revenues from Europe and Asia-Pacific were 20% and 5%, respectively, of total Internet Performance and Security revenues for the three months ended September 30, 2000. Spectria revenues for the three and nine months ended September 30, 2000 increased 42% to $5,033,000 and 183% to $15,017,000, respectively, when compared to the same periods in 1999. Revenues in 1999 reflect sales generated from the date of acquisition, May 12, 1999. GROSS PROFIT Gross profit from Secure Software Distribution for the three months ended September 30, 2000 decreased to 70% of revenues compared to 72% of revenues for the corresponding period in 1999. Gross profit for the nine months ended September 30, 2000 and 1999 was 71% of revenues. Gross profit from Secure Communications for the three months ended September 30, 2000 increased to 24% of revenues compared to 18% of revenues for the three months ended September 30, 1999. Gross profit for the nine months ended September 30, 2000 increased to 21% of revenues compared to 12% of revenues for the nine months ended September 30, 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 September 30, 2000 decreased to 73% of revenues compared to 79% of revenues for the corresponding period in 1999. Gross profit for the nine months ended September 30, 2000 decreased to 71% of revenues compared to 74% of revenues for the nine months ended September 30, 1999. The decrease was due to higher sales to several large customers at lower prices, resulting in lower gross profit. Gross profit from Spectria for the three months ended September 30, 2000 increased to 36% of revenues compared to 32% of revenues for the corresponding period in 1999. Gross profit for the nine months ended September 30, 2000 increased to 40% of revenues compared to 36% of revenues for the same period in 1999. The increase in gross profit was due to improvements in matching employees' skills to customer requirements resulting in an increase in productivity. 12 13 SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses consist primarily of personnel-related expenses , sales commission, promotional activities, and professional fees. Selling, general and administrative expenses for the three months ended September 30, 2000 were $11,484,000 or 26% of revenues as compared to $8,508,000 or 28% of revenues for the three months ended September 30, 1999. Selling, general and administrative expenses for the nine months ended September 30, 2000 were $32,622,000 or 27% of revenues as compared to $23,013,000 or 27% of revenues for the nine months ended September 30, 1999. The increase in absolute dollars reflected higher personnel related costs resulting from the hiring of sales, marketing, management and administrative personnel, and higher legal and other professional fees. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of salaries and other personnel-related expenses, costs related to engineering development tools, and subcontracting costs. Research and development expenses for the three months ended September 30, 2000 were $3,141,000 or 7% of revenues, as compared with research and development expense of $3,029,000 or 10% or revenues for the three months ended September 30, 1999. Research and development expenses for the nine months ended September 30, 2000 were $8,602,000 or 7% of revenues, as compared with research and development expenses of $8,488,000 or 10% of revenues for the nine months ended September 30, 1999. The decrease in research and development expenses as a percentage of revenues reflected the significant increase in revenues in the three and nine months ended September 30, 2000 as compared to the respective prior year period. OTHER INCOME AND EXPENSE Other expense for the three months ended September 30, 2000 was $22,000 compared to other income of $342,000 for the three months ended September 30, 1999. Other income for the nine months ended September 30, 2000 and 1999 was $383,000 and $751,000, respectively. The decrease in other income was primarily due to minority owners' share of QMT's losses which were included in other income for the three and nine months ended September 30, 1999. As of March 31, 2000, QMT is no longer consolidated in the Company's financial statements. At June 30, 2000, the Company performed a review for impairment of the long-lived assets related to QMT. Based on its evaluation, the Company determined that all of the long-lived assets related to QMT were fully impaired and as a result recorded an impairment charge of $2,200,000. During the second quarter and third quarter of fiscal 2000, the Company acquired securities and classified them as trading securities, as defined by SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." At September 30, 2000, the difference between the estimated fair value and the cost of the securities acquired resulted in a gain of $67,000, which was recognized in earnings for the three months ended September 30, 2000. At June 30, 2000, the difference between the estimated fair value and the cost of the securities acquired resulted in a gain of $4,200,000, which was recognized in earnings for the three months ended June 30, 2000. PROVISION FOR INCOME TAXES The effective tax rate was 38% for the three months ended September 30, 2000 compared to 39% for the three months ended September 30, 1999. The effective tax rate for the nine months ended September 30, 2000 was 38% compared to 39% for the nine months ended September 30, 1999. 13 14 ACCOUNTS RECEIVABLE Accounts receivable at September 30, 2000 increased by approximately $12,932,000 to $41,603,000 as compared with $28,671,000 at December 31, 1999. The major reason for this increase was due to the fact that approximately $27,000,000 of product was invoiced during the month of September 2000. This was primarily due to strong demand for Secure Communications and Internet Performance and Security products in September 2000. Over 67% of receivables were due by October 31, 2000. The days sales outstanding at September 31, 2000 was 80 days compared with 74 days at December 31, 1999. The increase was due to higher sales to the US government and Other Equipment Manufacturers (OEM), and distributors with longer payment terms. INVENTORIES Finished goods increased approximately $3,018,000 to $7,822,000 at September 30, 2000 as compared with $4,804,000 at December 31, 1999. The increase was largely due to the Company's need to maintain adequate inventories on hand for a growing number of OEM customers and other customers for whom the Company offers shorter lead times. Raw materials increased approximately $9,216,000 to $10,864,000 at September 30, 2000 as compared with $1,648,000 at December 31, 1999. The increase was due primarily to the Company's need to meet the growing demand for the Company's products which has been much stronger than expected. In addition, an acute component shortage in the market has required the Company to acquire extra raw materials in order to meet anticipated strong demand for its products. PREPAID EXPENSES Prepaid expenses at September 30, 2000 increased by approximately $8,609,000 as compared with December 31, 1999. The increase was mainly due to approximately $6,588,000 in tax benefit related to the exercises of stock options under the Company's stock options plans. OTHER ASSETS Other assets represent primarily certain investments in early-stage companies, capitalized software development costs, acquired software costs, and software developed for internal use. Other assets, net of amortization, was $11,351,000 at September 30, 2000, compared with $8,060,000 at December 31, 1999, an increase of $3,291,000. This increase was primarily due to $1,800,000 incurred in developing an Enterprise Resources Planning (ERP) software package for internal use and approximately $3,000,000 of software costs capitalized during the development stage of technologically feasible products as defined by Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" (FAS No. 86). 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 nine months ended September 30, 2000 was $286,000 while net cash provided by operations for the nine months ended September 30, 1999 was $8,623,000. Operating activities in 2000 included an increase in inventory totaling $12,206,000 and an increase in accounts receivable balance of $12,962,000 partially offset by $3,024,000 increase in accounts payable and $6,976,000 additional accrued income tax expense. Net cash used in investing activities for the nine months ended September 30, 2000 and 1999 was $14,384,000 and $10,851,000, respectively. Investing activities in 2000 included $5,020,000 on development of new products and $1,765,000 for the acquisition of Systematic. Investing activities in 1999 included $10,861,000 for the acquisition of Systematic. 14 15 Net cash provided by financing activities for the nine months ended September 30, 2000 was $6,507,000 while net cash used in financing activities for the nine months ended September 30, 1999 was $6,572,000. Financing activities in 2000 included a payment of $2,000,000 on a line of credit and approximately $8,672,000 received from common stock options exercised. Financing activities in 1999 included the purchase and retirement of $7,794,000 of treasury stock. 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 September 30, 2000, the Company's subsidiaries in France, The United Kingdom, Germany and The Netherlands carried approximately $8,673,000, $2,475,000, $1,149,000 and $5,049,000, 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 $75,312,000 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. 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: November 13, 2000 RAINBOW TECHNOLOGIES, INC. By: /s/ Patrick Fevery -------------------------------- Chief Financial Officer 16 EX-27 2 a67275ex27.txt FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1 18,529 6,178 42,437 (834) 24,090 109,302 26,968 12,181 162,646 33,990 0 0 0 25 126,035 162,646 119,107 119,107 57,940 101,480 383 0 (101) 20,723 7,918 12,805 0 0 0 12,805 0.52 0.46
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