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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
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For the Quarter ended MARCH 31, 1995 Commission file number: 0-16641
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RAINBOW TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 95-3745398
(State of Incorporation) (I.R.S. Employer Identification No.)
9292 JERONIMO ROAD, IRVINE, CALIFORNIA 92718
(Address of principal executive offices) (Zip Code)
(714) 454-2100
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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 .
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The number of shares of common stock, $.001 par value, outstanding as of March
31, 1995 was 5,602,816.
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RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
March 31, 1995 and December 31, 1994. 3
Condensed Consolidated Statements of Income
for the Three Months ended March 31, 1995 and 1994. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months ended March 31, 1995 and 1994. 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 to 5 - Not applicable
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
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March 31, 1995 December 31,
(unaudited) 1994
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Current assets:
Cash and cash equivalents....................................... $20,440,000 $19,077,000
Marketable securities available for sale........................ 7,493,000 3,592,000
Accounts receivable (less allowance for doubtful accounts
of $347,000 and $368,000 in 1995 and 1994, respectively)...... 8,280,000 8,857,000
Note receivable................................................. 3,000,000 3,000,000
Inventories .................................................... 1,840,000 2,199,000
Prepaid expenses and other current assets....................... 1,552,000 1,553,000
----------- -----------
Total current assets....................................... 42,605,000 38,278,000
Property, plant and equipment, at cost:
Buildings....................................................... 9,816,000 8,889,000
Furniture....................................................... 805,000 750,000
Equipment....................................................... 2,791,000 2,642,000
Leasehold improvements.......................................... 494,000 494,000
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13,906,000 12,775,000
Less accumulated depreciation and amortization.................. 3,594,000 3,205,000
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Net property, plant and equipment......................... . 10,312,000 9,570,000
Goodwill, net of accumulated amortization of $5,324,000 and
$4,380,000 in 1995 and 1994, respectively....................... 7,745,000 7,425,000
Other assets, net of accumulated amortization of $890,000
and $627,000 in 1995 and 1994, respectively .................... 3,126,000 3,254,000
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$63,788,000 $58,527,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 1,164,000 $ 942,000
Accrued payroll and related expenses............................ 896,000 1,140,000
Other accrued liabilities....................................... 801,000 671,000
Income taxes payable............................................ 1,004,000 200,000
Long-term debt, due within one year............................ 324,000 333,000
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Total current liabilities.................................. 4,189,000 3,286,000
Long-term debt, net of current portion............................ 2,919,000 2,695,000
Deferred income taxes ............................................ 2,480,000 1,441,000
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
5,602,816 and 5,573,946 shares issued and outstanding
in 1995 and 1994, respectively................................ 6,000 6,000
Additional paid-in capital...................................... 26,577,000 26,348,000
Cumulative translation adjustment............................... 864,000 (465,000)
Retained earnings............................................. .. 26,753,000 25,216,000
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Total shareholders' equity................................. 54,200,000 51,105,000
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$63,788,000 $58,527,000
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See accompanying notes.
3
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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Three months ended Three months ended
March 31, 1995 March 31, 1994
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Net sales...................................................... $10,662,000 $9,023,000
Cost of sales.................................................. 2,947,000 2,403,000
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Gross profit................................................. 7,715,000 6,620,000
Operating expenses:
Selling, general and administrative.......................... 3,332,000 2,594,000
Research and development..................................... 1,362,000 1,289,000
Goodwill amortization........................................ 440,000 397,000
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Total operating expenses................................ 5,134,000 4,280,000
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Operating income............................................... 2,581,000 2,340,000
Interest income................................................ 300,000 126,000
Interest expense............................................... (94,000) (99,000)
Foreign currency losses........................................ (246,000) (41,000)
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Income before provision for income taxes....................... 2,541,000 2,326,000
Provision for income taxes .................................... 1,004,000 931,000
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Net income..................................................... $ 1,537,000 $1,395,000
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Net income per common and common
equivalent share ............................................ $0.27 $0.25
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Weighted average common and common
equivalent shares outstanding................................ 5,728,000 5,685,000
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See accompanying notes.
4
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three months ended Three months ended
March 31, 1995 March 31, 1994
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Cash flows from operating activities:
Net income......................................................... $ 1,537,000 $ 1,395,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................... 855,000 779,000
Change in deferred income taxes.................................. 892,000 36,000
Allowance for doubtful accounts.................................. (33,000) 5,000
Changes in operating assets and liabilities:
Accounts receivable............................................ 833,000 (337,000)
Inventories.................................................... 429,000 (278,000)
Prepaid expenses and other current assets...................... 42,000 157,000
Other assets................................................... (9,000) --
Accounts payable............................................... 159,000 590,000
Accrued liabilities............................................ (153,000) (365,000)
Taxes based on income.......................................... 852,000 305,000
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Net cash provided by operating activities.................... 5,404,000 2,287,000
Cash flows from investing activities:
Purchase of marketable securities.................................. (3,979,000) (4,079,000)
Sale of marketable securities...................................... 60,000 1,550,000
Purchases of property, plant, and equipment........................ (113,000) (115,000)
Acquisition of AND Group, Inc...................................... -- (1,533,000)
Other.............................................................. 2,000 1,000
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Net cash provided by (used in) investing activities.......... (4,030,000) (4,176,000)
Cash flows from financing activities:
Exercise of common stock options................................... 229,000 146,000
Payment of long-term debt.......................................... (116,000) (121,000)
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Net cash (used in) provided by financing activities.......... (3,968,000) (4,248,000)
Effect of exchange rate changes on cash.............................. (124,000) 168,000
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Net increase in cash and cash equivalents............................ (2,718,000) (5,969,000)
Cash and cash equivalents at beginning of year....................... 19,077,000 12,663,000
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Cash and cash equivalents at end of year............................. $16,359,000 $ 6,694,000
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Supplemental disclosure of cash flow information:
Income taxes paid.................................................. $ 199,000 $ 647,000
Interest paid...................................................... 98,000 99,000
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See accompanying notes
5
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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
1. BASIS OF 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 March 31, 1995 and results of operations for the three
months ended March 31, 1995 and 1994, and cash flows for the three months ended
March 31, 1995 and 1994. 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, 1994 Annual Report on
Form 10-K. Results of operations for the three months ended March 31, 1995 are
not necessarily indicative of results to be expected for the full year.
Software development costs incurred subsequent to the determination of
technical feasibility and marketability of a software product are capitalized.
Amortization of capitalized software costs commences when the products are
available for general release to customers. Amortization is computed on an
individual product basis and is based on the product's estimated economic life.
The Company has subsidiaries in the United Kingdom, Germany, France and Canada.
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 accompanying financial statements consolidate the accounts of the Company
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated.
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. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
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March 31, 1995 December 31, 1994
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Raw materials $ 500,000 $ 492,000
Work in process 285,000 318,000
Finished goods 1,055,000 1,389,000
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$1,840,000 $2,199,000
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4. ACQUISITIONS
On January 26, 1995, the Company and Mykotronx, Inc. announced an agreement to
merge the two companies. 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. The merger is subject to shareholder approval. The
agreement provides that, upon consummation of the merger, shareholders of
Mykotronx will receive 2.64 shares of Rainbow Technologies, Inc. common stock
for each share of issued and outstanding Mykotronx common stock, and Mykotronx
will become a wholly owned subsidiary of Rainbow Technologies, Inc. The
Company expects to issue approximately 1,800,000 shares of Rainbow
Technologies, Inc. common stock. The merger will be accounted for as a pooling
of interests. Expenses associated with the merger of approximately $180,000
were included in the results of operation for the quarter ended March 31, 1995.
Supplemental unaudited proforma statement of income information assuming the
merger had occurred on January 1, 1994 is a follows (in thousands except
earnings per share):
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Quarters ended March 31,
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(unaudited)
1995 1994
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Net sales $15,754,000 $12,755,000
Operating income 3,613,000 2,779,000
Income before provision for income taxes 3,573,000 2,765,000
Net income 2,157,000 1,659,000
Net income per share $ 0.29 $ 0.22
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The above supplemental unaudited statement of income information includes
Mykotronx information for the quarter ended March 31, 1995 and 1994.
Expenses associated with the merger of approximately $180,000 have been
reflected in the combined results of operations for the quarter ended March 31,
1995.
In January 1994, the Company purchased the assets of the AND Group Inc., a
Canadian corporation, in exchange for the sum of $1.5 million U.S. As a
result, the Company acquired all of the intellectual property rights to a
software product, and extinguished all previously existing obligations to pay
royalties to the AND Group, Inc. The acquisition was accounted for as a
purchase. Results of operations for the AND Group, Inc. are included in the
statements of income from the date of acquisition.
7
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RAINBOW TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES
Net sales for the three months ended March 31, 1995 increased 18% to
$10,662,000 when compared to the corresponding 1994 period. The increase for
the period was primarily due to higher sales in Europe and North America. Net
sales for the three months ended March 31, 1995 increased 8% in the United
States and increased 33% internationally, when compared to the corresponding
1994 period. The average selling price per product decreased by approximately
6% worldwide for the three months ended March 31, 1995, when compared to the
same period in 1994. This was primarily due to the Company's efforts to
increase its market share. Unit volume for the three months ended March 31,
1995 was up 26% when compared to the corresponding 1994 period.
GROSS PROFIT
Gross profit for the three months ended March 31, 1995, was 72% compared with
73% experienced in the corresponding 1994 period. The decrease in gross margin
for the three months ended March 31, 1995 was primarily due to lower average
selling prices as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three months ended March
31, 1995, increased by 28% when compared to the corresponding 1994 period. The
increase during the three months ended March 31, 1995 was due to acquisition
expenses ($180,000) incurred in connection with Mykotronx, higher expenses in
Europe when translated in devalued dollars, additional staffing, increased
professional expenses and higher sales compensation due to increased sales.
RESEARCH AND DEVELOPMENT
Total research and development expenses for the three months ended March 31,
1995 increased 6% when compared to the corresponding 1994 period. The
increase was primarily due to the addition of engineering staff. Current
research and development activities are focused on additional Application
Specific Integrated Circuits development for future products and adaptation of
the Company's products to additional software operating environments and
computer platforms.
OTHER INCOME (EXPENSE)
Interest income for the year ended March 31, 1995 increased by 138% to $300,000
because of a general rise in interest rates and higher investment balances.
During the quarter ended March 31, 1995, the Company incurred predominately
unrealized foreign currency losses of $246,000, primarily due to dollar
denominated deposit accounts maintained in Europe. During the quarter ended
March 31, 1994, the Company recognized foreign currency losses of $41,000, also
primarily due to dollar denominated deposit accounts maintained in Europe.
8
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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.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percentage of income before the provision
for income taxes for the three months ended March 31, 1995 and March 31, 1994
was 40%, respectively.
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 three months ended March 31, 1995 and 1994 was
$5,404,000 and $2,287,000, respectively.
Management believes the Company's current working capital of $38,416,000 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 uses of cash include purchases of property, plant and equipment
and repayment of long-term debt.
The Company intends to use its capital resources to expand its product line and
for the acquisition of additional products and technologies. In January, 1995,
the Company negotiated a definitive agreement to acquire all the outstanding
shares of Mykotronx, Inc., a provider of information security products and
services, subject to shareholder approval.
The Company's subsidiaries in France carry $4.4 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.
9
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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
10
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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.
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Dated: May 12, 1995
RAINBOW TECHNOLOGIES, INC.
By: /s/ PATRICK FEVERY
----------------------------
Patrick Fevery
Chief Financial Officer
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 20,440
<SECURITIES> 7,493
<RECEIVABLES> 8,627
<ALLOWANCES> 347
<INVENTORY> 1,840
<CURRENT-ASSETS> 42,605
<PP&E> 13,906
<DEPRECIATION> 3,594
<TOTAL-ASSETS> 63,788
<CURRENT-LIABILITIES> 4,189
<BONDS> 0
<COMMON> 6
0
0
<OTHER-SE> 54,194
<TOTAL-LIABILITY-AND-EQUITY> 63,788
<SALES> 10,662
<TOTAL-REVENUES> 10,662
<CGS> 2,947
<TOTAL-COSTS> 8,081
<OTHER-EXPENSES> 340
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 2,541
<INCOME-TAX> 1,004
<INCOME-CONTINUING> 1,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 1,537
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
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