<PAGE> 1
AMENDMENT #1
TO
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended SEPTEMBER 30, 1996 Commission file number: 0-16641
RAINBOW TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3745398
(State of incorporation) (I.R.S. Employer Identification No.)
50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of common stock, $.001 par value, outstanding as of
September 30, 1996 was 7,413,431.
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RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
for the three and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1996 and 1995 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II - OTHER INFORMATION
Item 1 to 6 - Not applicable
SIGNATURES 11
2
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents .................................... $ 30,188,000 $ 25,058,000
Marketable securities available-for-sale ..................... 10,728,000 11,799,000
Accounts receivable, net of allowance for doubtful accounts of
$356,000 and $450,000 in 1996 and 1995, respectively ...... 12,667,000 12,725,000
Inventories .................................................. 6,446,000 2,927,000
Unbilled costs and fees ...................................... 1,680,000 3,962,000
Prepaid expenses and other current assets .................... 1,727,000 1,716,000
------------ ------------
Total current assets .................................... 63,436,000 58,187,000
------------ ------------
Property, plant and equipment, at cost:
Buildings .................................................... 9,153,000 9,572,000
Furniture .................................................... 1,093,000 797,000
Equipment .................................................... 5,500,000 4,075,000
Leasehold improvements ....................................... 305,000 221,000
------------ ------------
16,051,000 14,665,000
Less accumulated depreciation and amortization ............... 4,571,000 3,708,000
------------ ------------
Net property, plant and equipment ....................... 11,480,000 10,957,000
Goodwill, net of accumulated amortization of $7,613,000
and $6,602,000 in 1996 and 1995, respectively ............... 4,567,000 6,186,000
Other assets, net of accumulated amortization of $2,325,000
and $1,193,000 in 1996 and 1995, respectively ............... 5,979,000 4,495,000
------------ ------------
$ 85,462,000 $ 79,825,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 3,706,000 $ 3,476,000
Accrued payroll and related expenses ......................... 2,512,000 2,077,000
Other accrued liabilities .................................... 971,000 1,151,000
Income taxes payable ......................................... 141,000 1,916,000
Billings in excess of costs and fees ......................... 314,000 2,000
Long-term debt, due within one year .......................... 301,000 316,000
------------ ------------
Total current liabilities ............................... 7,945,000 8,938,000
Long-term debt, net of current portion ........................... 2,258,000 2,616,000
Deferred income taxes ............................................ 1,079,000 1,768,000
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
7,413,431 and 7,311,267 shares issued and outstanding in
1996 and 1995, respectively .................................. 7,000 7,000
Additional paid-in capital ................................... 30,045,000 29,823,000
Cumulative translation adjustment ............................ (184,000) 424,000
Cumulative difference between cost and market value
of marketable securities .................................. 164,000 52,000
Retained earnings ............................................ 44,148,000 36,197,000
------------ ------------
Total shareholders' equity .............................. 74,180,000 66,503,000
------------ ------------
$ 85,462,000 $ 79,825,000
============ ============
</TABLE>
See accompanying notes
3
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software protection products ........... $ 12,507,000 $ 10,720,000 $ 38,532,000 $ 31,952,000
Information security products .......... 5,100,000 5,090,000 17,225,000 16,272,000
------------ ------------ ------------ ------------
Total revenues .................... 17,607,000 15,810,000 55,757,000 48,224,000
Operating expenses:
Cost of software protection products.... 3,538,000 2,910,000 11,373,000 8,952,000
Cost of information security products... 4,145,000 4,007,000 14,416,000 12,527,000
Selling, general and administrative .... 4,079,000 3,256,000 11,925,000 10,343,000
Research and development ............... 1,186,000 1,487,000 3,928,000 4,138,000
Goodwill amortization .................. 449,000 465,000 1,344,000 1,369,000
------------ ------------ ------------ ------------
Total operating expenses .......... 13,397,000 12,125,000 42,986,000 37,329,000
------------ ------------ ------------ ------------
Operating income ........................... 4,210,000 3,685,000 12,771,000 10,895,000
Interest income ............................ 354,000 501,000 1,229,000 1,220,000
Interest expense ........................... (80,000) (92,000) (248,000) (297,000)
Other income (expense) ..................... (196,000) 23,000 (218,000) (217,000)
------------ ------------ ------------ ------------
Income before provision
for income taxes ...................... 4,288,000 4,117,000 13,534,000 11,601,000
Provision for income taxes ................. 1,768,000 1,637,000 5,583,000 4,710,000
------------ ------------ ------------ ------------
Net income ................................. $ 2,520,000 $ 2,480,000 $ 7,951,000 $ 6,891,000
============ ============ ============ ============
Net income per common and common
equivalent share ....................... $ 0.33 $ 0.32 $ 1.03 $ 0.89
Weighted average common and common
equivalent shares outstanding .......... 7,691,000 7,811,000 7,729,000 7,700,000
</TABLE>
See accompanying notes
4
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 7,951,000 $ 6,891,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................... 947,000 895,000
Amortization ...................................... 2,251,000 1,595,000
Change in deferred income taxes ................... (343,000) 554,000
Allowance for doubtful accounts ................... (90,000) 23,000
Loss from retirement of property, plant,
and equipment .................................... 25,000 12,000
Write-down of long-term investment ................ 203,000 --
Share in investee's loss .......................... 266,000 --
Write-off of capitalized software ................. 273,000 --
Changes in operating assets and liabilities:
Accounts receivable ............................ 56,000 (1,104,000)
Inventories .................................... (3,531,000) 452,000
Unbilled costs and fees ........................ 2,282,000 (681,000)
Prepaid expenses and other current assets ...... (25,000) 197,000
Accounts payable ............................... 266,000 (843,000)
Accrued liabilities ............................ 276,000 910,000
Billings in excess of costs and fees ........... 312,000 --
Income taxes payable ........................... (1,754,000) 1,267,000
------------ ------------
Net cash provided by operating activities ......... 9,365,000 10,168,000
Cash flows from investing activities:
Purchase of marketable securities .............. (7,099,000) (12,005,000)
Sale of marketable securities .................. 8,282,000 3,715,000
Purchases of property, plant, and equipment .... (1,858,000) (1,314,000)
Other long-term assets ......................... (3,170,000) (412,000)
Notes receivable ............................... -- 3,000,000
------------ ------------
Net cash used in investing activities ............. (3,845,000) (7,016,000)
Cash flows from financing activities:
Exercise of common stock options .................. 729,000 979,000
Payment of long-term debt ......................... (229,000) (291,000)
Purchase of treasury stock ........................ (706,000) --
Repayment of capital lease ........................ -- (24,000)
------------ ------------
Net cash (used in) provided by
financing activities ............................ (206,000) 664,000
Effect of exchange rate changes on cash ............... (184,000) 99,000
------------ ------------
Net increase in cash and cash equivalents ............. 5,130,000 3,915,000
Cash and cash equivalents at beginning of period ...... 25,058,000 19,755,000
------------ ------------
Cash and cash equivalents at end of period ............ $ 30,188,000 $ 23,670,000
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid ................................. $ 6,825,000 $ 2,872,000
Interest paid ..................................... 247,000 282,000
</TABLE>
See accompanying notes
5
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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. Basis of presentation
The accompanying financial statements consolidate the accounts of Rainbow
Technologies, Inc. (the Company) and its wholly-owned subsidiaries. Amounts for
the three and nine month periods ended September 30, 1995 have been restated to
reflect the acquisition of Mykotronx, Inc. (Mykotronx) which has been accounted
for using the pooling of interests method (Note 5). All significant
inter-company accounts and transactions have been eliminated.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position at September 30, 1996 and results of operations for the three and nine
months ended September 30, 1996 and 1995, and cash flows for the nine months
ended September 30, 1996. The condensed consolidated financial statements do not
include footnotes and certain financial information normally presented annually
under generally accepted accounting principles and, therefore, should be read in
conjunction with the Company's December 31, 1995 Annual Report on Form 10-K.
Results of operations for the three and nine months ended September 30, 1996 are
not necessarily indicative of results to be expected for the full year.
The Company has subsidiaries in the United Kingdom, Germany, and France. The
Company utilizes the currencies of the countries where its foreign subsidiaries
operate as the functional currency. In accordance with Statement of Financial
Accounting Standards No, 52, the balance sheets of the Company's foreign
subsidiaries are translated into U.S. dollars at the exchange rates at the
respective dates. The income statements of those subsidiaries are translated
into U.S. dollars at the weighted average exchange rates for the respective
periods presented.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121) in March
1995. On January 1, 1996, the Company adopted SFAS No. 121. The adoption had no
material effect on the Company's consolidated results of operations or financial
position.
2. Earnings per share
Earnings per share are based on the weighted average number of common and common
equivalent shares outstanding during each period. Common equivalent shares
include the potential dilution from the exercise of stock options.
3. Government Contracts
The Company is both a prime contractor and subcontractor under fixed-price and
cost-plus-fixed-fee contracts with the U.S. Government (Government). Such
contracts represent over 90% of the Company's contract operations. At the
commencement of each contract or contract modification, the Company submits
pricing proposals to the Government to establish indirect cost rates applicable
to such contracts. These rates, after audit and approval by the Government, are
used to settle costs on contracts completed during the previous fiscal year.
To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable amounts in these financial
statements. These provisional billing rates are adjusted to actual at year-end
and are subject to adjustment after Government audit.
The Company has unbilled costs and fees at September 30, 1996 of $1,680,000.
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.
6
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4. Inventories
Inventoried costs relating to long-term contracts are stated at the actual
production costs, including pro rata allocations of overhead and general and
administrative costs, incurred to date reduced by amounts identified with
revenue recognized on units delivered. The costs attributed to units delivered
under such long-term contracts are based on the estimated average cost of all
units expected to be produced.
Inventories, other than inventoried costs relating to long-term contracts, are
stated at the lower of cost (principally determined on a first-in, first-out
basis) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Raw materials $ 582,000 $1,083,000
Work in process 351,000 434,000
Finished goods 2,837,000 1,313,000
Inventoried costs relating
to long-term contracts 2,676,000 97,000
---------- ----------
$6,446,000 $2,927,000
========== ==========
</TABLE>
5. Acquisitions
On October 1, 1996, the Company acquired all the outstanding shares of Software
Security, Inc. (SSI) of Darien, Connecticut and its subsidiary Software Security
International, Ltd. United Kingdom, for 341,000 shares of Rainbow common stock.
The transaction was accounted for as a pooling of interests. SSI, a privately
held company, was founded in 1983 and is a leading provider of software
protection products to developers worldwide.
On March 6, 1996 the Company entered into an agreement to acquire up to 58% of
Quantum Manufacturing Technologies, Inc. ("QMT") of Albuquerque, New Mexico, in
exchange for $4.2 million, subject to certain technological and business
milestones. QMT, a development stage company, has recently obtained the
exclusive worldwide license from Sandia National Laboratories for the commercial
use and exploitation of patented pulsed power ion beam surface treatment
technology known as "IBEST". IBEST technology benefits and enhances the
durability and utility of a large number of industrial and consumer products at
relatively low cost and without creating any impact on the environment.
On June 1, 1995, the Company acquired Mykotronx in a merger transaction
resulting in Mykotronx becoming a wholly-owned subsidiary of Rainbow. Mykotronx,
a California corporation with headquarters in Torrance, California, designs,
develops and manufactures information security products to provide privacy and
security for voice communication and data transmission. These products are sold
to the U.S. Government and customers in the aerospace and telecommunications
industries. Shareholders of Mykotronx received 2.64 shares of Company common
stock for each share of issued and outstanding Mykotronx common stock.
Accordingly, the Company issued 1,620,564 shares of its common stock to
Mykotronx shareholders in exchange for all outstanding Mykotronx shares. In
addition, 195,096 shares of Rainbow common stock were reserved for issuance upon
the exercise of assumed Mykotronx options. The merger was accounted for as a
pooling of interests.
6. Other assets
Included in other assets are certain investments in early-stage companies
including a minority interest investment in Vendor Systems International
("VSI"). The Company closely monitors the operations and cash flows of these
companies to evaluate their status and ensures that amounts reported for these
investments do not exceed net realizable value. If the Company determines that
impairment in the investment of any such company exists, an adjustment would be
made to reduce the investment amount to net realizable value.
7
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RAINBOW TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain significant
factors which have affected earnings and the financial position of the Company
during the periods included in the accompanying financial statements. This
discussion should be read in conjunction with the related condensed consolidated
financial statements and associated notes. Prior period financial statements
have been restated to reflect the acquisition of Mykotronx, using the pooling of
interest method.
RESULTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Software Protection $12,507 $10,720 $38,532 $31,952
Information Security 5,100 5,090 17,225 16,272
------- ------- ------- -------
Consolidated $17,607 $15,810 $55,757 $48,224
======= ======= ======= =======
OPERATING INCOME
Software Protection $ 3,278 $ 2,602 $10,037 $ 7,150
Information Security 932 1,083 2,734 3,745
------- ------- ------- -------
Consolidated $ 4,210 $ 3,685 $12,771 $10,895
======= ======= ======= =======
</TABLE>
REVENUES
Revenues from software protection products for the three and nine months ended
September 30, 1996 increased 17% and 21%, respectively, when compared to the
same periods in 1995. The sales growth was primarily due to increased unit sales
in North America, Europe and Asia Pacific markets. The average selling price per
product decreased approximately 8% in the three months ended September 30 and
decreased approximately 9% in the nine months ended September 30, 1996 when
compared to the same period in 1995. The decreases in average selling prices are
primarily due to the growth in revenues from major accounts and distributors.
Revenues from information security products for the three and nine months ended
September 30, 1996 remained consistent and increased by 6%, respectively, when
compared to the same periods in 1995. The Company continued to experience low
growth rates due to the slower than anticipated deployment of network security
products within the government. The increase was primarily due to the growth in
satellite communication revenues over the nine months ended September 30, 1995.
8
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GROSS PROFIT
Gross profit from software protection products for the three and nine months
ended September 30, 1996 was 72% and 70% of revenues compared with 73% and 72%,
respectively, over the corresponding periods in 1995. The decrease in gross
margin was primarily due to lower average selling prices in Europe and Asia
Pacific.
Gross profit from information security products for both the three months and
the nine months ended September 30, 1996 was 19% and 16% of revenues compared
with 21% and 23%, respectively, for the corresponding periods in 1995. The
decrease in gross margin was due to the change of mix from predominantly product
contracts to principally less profitable research and development contracts.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for both the three months and the
nine months ended September 30, 1996 increased by 25% and 15% when compared to
the corresponding 1995 periods. The increase was primarily due to increased
personnel, and higher sales compensation due to increased revenues.
RESEARCH AND DEVELOPMENT
Total research and development expenses for the three and nine months ended
September 30, 1996 decreased by 20% and 5%, respectively, when compared to the
corresponding 1995 periods. The decrease was primarily due to the rescheduling
of outside R & D projects.
OTHER INCOME (EXPENSE)
Interest income for the three and nine months ended September 30, 1996 decreased
by 29% and increased by 1%, respectively, primarily due to a shift from taxable
instruments to non-taxable interest bearing instruments.
During the nine months ended September 30, 1996, the Company recognized its
share of operating losses in QMT in which the Company holds a minority
investment. The Company's share of the losses amounted to approximately
$266,000.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percentage of income before the provision
for income taxes for the three and nine months ended September 30, 1996 was 41%
as compared to 40% and 41%, respectively, for the corresponding periods in 1995.
The increase in the effective tax rate for the three months ended September 30,
1996, as compared to the corresponding period 1995, is primarily due to expenses
related to the SSI acquisition, which are not tax-deductible.
9
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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 nine months ended September 30, 1996 and 1995 were
$9,365,000 and $10,168,000, respectively.
Management believes the Company's current working capital of $55,491,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's requirements for at least the next twelve
months.
The Company's use of cash include purchases of property, plant and equipment,
repayment of long-term debt, repurchase of treasury stock and investment in
long-term assets.
The Company intends to use its capital resources to expand its product line and
for the acquisition of additional products and technologies.
The Company's subsidiaries in France carry $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.
10
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PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule - (Previously Filed)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereto
duly authorized.
Date: November 11, 1996
RAINBOW TECHNOLOGIES, INC.
By: /s/ PATRICK FEVERY
----------------------------
Patrick Fevery
Chief Financial Officer
11
