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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE
REQUIRED) For the fiscal year
ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 0-16641
RAINBOW TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 953745398
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 450-7300
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
As at March 26, 1996, the aggregate market value of the voting stock of the
Registrant (based upon the closing sales price of the shares on the NASDAQ
National Market System) held by non-affiliates was approximately $131,000,000.
As at March 26, 1996, there were outstanding 7,401,277 shares of Common Stock of
the Registrant, par value $.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Proxy Statement to be submitted to the
Commission on or before April 29, 1996, are incorporated by reference into
Part III.
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INTRODUCTORY NOTE
The Annual Report on Form 10-K 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 included (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.
ITEM 1. BUSINESS
General
Rainbow Technologies, Inc. and its subsidiaries (the "Company") design,
develop and manufacture (i) software program protection products (the "Software
Protection Products"), which the Company markets to software developers and
information publishers worldwide, and (ii) products that provide secure voice
communication and data transmission using encryption technology (the
"Information Security Products") which the Company markets to organizations of
the United States Government, such as the Department of Defense and National
Aeronautics and Space Administration ("NASA"), and to contractors and
manufacturers in the aerospace and related industries.
In May 1995, the Company acquired Mykotronx, Inc. ("Mykotronx") in a
transaction accounted for as a pooling-of-interests. Located in Torrance
California, Mykotronx is a leading supplier of information security products.
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The Company's principal subsidiaries are located in California, the
United Kingdom, Germany and France. Unless the context otherwise requires, the
term "Company" refers to Rainbow Technologies, Inc. and its subsidiaries.
The Company's general business strategy consists of four main elements.
First, as to Software Protection Products, the Company focuses on improvements
to its technology and products to enhance product performance and maintain the
Company's competitive advantage in the software protection market. The Company
believes that the software protection market will experience a unit growth rate
of 20% per year over the next several years, based on estimates by the Software
Publisher's Association. As to its Information Security Products, the Company
concentrates on technology supporting new telecommunications and hardware
cryptographic applications. Currently, the Company's Information Security
Products are primarily sold to agencies of the U.S. Government, aerospace or
related industry contractors. The Company believes that this market is greater
than $500 million and is one of the fastest growth segments of the U.S.
Government budget. Second, the Company intends to expand its marketing and
distribution efforts for its Software Protection Products both domestically and
internationally. The Company also plans to focus on areas where there is high
incidence of software piracy, such as eastern Europe and the Far East. The
Company intends to actively pursue new markets in the United States for its
Information Security Products. Third, the Company seeks to leverage the core
competencies of both of its business segments to address broad and emerging
issues of information security such as information privacy, information
integrity and digital signature validation. The Company believes that these
emerging markets for security will experience significant growth over the next
five years. Fourth, the Company intends to acquire and invest in technologies
and companies that either expand its core product markets or have the potential
for market leadership.
The Company markets its Software Protection Products worldwide to
software developers and information providers. In 1995, 47% of the Company's
sales of Software Protection Products were made internationally. The Company
markets its Information Security Products to various organizations of the U.S.
Government, including the Department of Defense, NASA and the United States Air
Force, and contractors and manufacturers in the aerospace and related
industries. Approximately 67% of the Company's revenues are derived from
Software Protection Products and approximately 33% of the Company's revenues are
derived from Information Security Products.
Software Protection Products
The Company's Software Protection Products contain hardware and
software components. The hardware component is a "key" which the software
publisher includes with each copy of a protected software program sold to an end
user. The software component is the software licensed to the software developer
which enables the software developer to direct their programs to "look for and
communicate with" the key. The keys incorporate either the Company's proprietary
algorithms programmed into Company designed Application Specific Integrated
Circuits ("ASIC") computer chips, or customer specific information programmed
into a standard computer memory chip. The key is attached by the end user to the
parallel printer port of a stand alone personal computer or a local area network
file server. In "looking for and communicating with" the key, the protected
software program interacts with the key. The interaction consists of a
continuous challenge-and-response procedure requiring the key to be attached to
the computer for the protected software program to operate. In operation, the
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interactions of the protected software and the key are transparent to a user. In
addition, other software programs may operate concurrently with the protected
software program and corresponding key, without interference. Printer operation
is not affected and protected software programs can be copied and backed up to a
hard disk if required by the user.
The Company's Software Protection Products include:
SentinelSuperPro. Features the Company's latest ASIC technology. This
is the Company's first key to combine multiple algorithms with
programmable memory for increased security and flexibility. This
product is compatible with DOS, Windows, Windows NT and Windows 95
based applications.
SentinelPro. An algorithm-based key utilizing the Company's proprietary
ASIC technology for the protection of DOS, Windows, Windows NT, Windows
95, OS/2, UNIX or XENIX based applications.
SentinelScribe. A field writable memory key with full read/write
capabilities for simple field upgrades or where sophisticated software
metering is required for DOS, Windows, Windows NT or OS/2 software.
SentinelC-Plus. A memory-based key designed for DOS, Windows, Windows
NT, OS/2, UNIX or XENIX applications where custom security protection
for special or multiple/modular applications is required.
SentinelEve3. Software protection for Apple Macintosh-based software.
Attaches to the ADB port making it compatible with Apple Power Mac and
PowerBook computers. Protects stand-alone and/or multiple modular
applications.
NetSentinel. For sophisticated network license management to control
concurrent users over LANs running DOS, OS/2, Windows, Windows NT and
Windows 95 based applications. This product is compatible with Novell,
NETBIOS, TCP/IP and IPX/SPX.
MicroSentinel UX. Specifically designed for UNIX and open systems
applications, this key features an intelligent microprocessor for
sophisticated operation control. It can serve many marketing functions
including execution control, software leasing, site license management
and can be used as a portable host-ID.
SentinelLM. A software based license management product for Windows,
Netware and UNIX environments. The product allows developers to offer
end-users highly flexible licensing models and payment schemes.
Information Security Products
The Company believes the importance of protecting the privacy and
security of voice communication and data transmission has increased in direct
proportion with the technological advances, capabilities and overall growth in
the telecommunications field. Information security remains critical to military
and government applications and is increasingly valued by private sector
businesses to protect voice and data communication. The Company's Information
Security Products are integrated circuits and electronic assemblies which
encrypt and decrypt
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(scramble and unscramble) electronic communications and are designed and
developed by the Company for use in military settings, government applications
and for private industry purposes.
The Company, through its subsidiary Mykotronx, enters into development
contracts with agencies of the U.S. Government, aerospace or related industry
contractors. In such contracts, the Company generally agrees to develop an
integrated circuit or other electronic assembly for the customer's particular
application, or modify and enhance one of the Company's Information Security
Products to meet the customer's requirements. As to contracts with agencies of
the U.S. Government, the Company usually serves as the prime contractor or as a
subcontractor, under fixed-price or cost-plus-fixed-fee contracts. The terms of
development contracts with other customers are based upon the customer's
requirements. Contracts with the U.S. Government account for a majority of the
revenues received by the Company from sales of its Information Security
Products. The Company has recently begun to market its Information Security
Products to wider commercial applications that require the transmission of
secure data such as banking and financial transaction information,
telecommunications networks and company-wide intranets.
The Company's Information Security Products are currently categorized
into four general areas of customer applications:
U.S. Government Space. Products for use in connection with satellite
systems launched by the U.S Government or its agencies.
U.S. Government Ground Based Communication Networks. Products to
support a variety of intra and inter-agency ground-based communications
networks such as Department of Defense, Department of State, Department
of the Treasury and other agencies transmitting classified and
sensitive information.
Commercial Space. Products are used for commercial space applications
in connection with direct broadcast satellite (DBS) and other
commercial space based communication satellite systems.
Commercial Ground Based Communications Networks. Products to secure
communications through cellular voice systems, fax machines, computer
networks, portable and standard phone systems.
Research and Development
Because technological advancement and other changes affecting the
personal computer marketplace occur at a rapid pace, the Company's competitive
positions in the software program and information protection industry hinge upon
the adaptation of its current products, and upon the introduction of new
products that gain market acceptance. Accordingly, the Company directs research
and development activity toward applying its hardware and software technology
and its ASIC technology in lowering the cost of existing products, the design
and development of new hardware and software products, and the enhancement of
existing products. The Company has also focused its development of Software
Protection Products on current trends such as cross-platform interoperability
and compatibility with the new operating environments including Windows 95,
Windows NT and OS/2 Warp. Expenditures for research and development for the
years ended December 31, 1995, 1994 and 1993 were $5,218,000, $4,584,000 and
$3,945,000, respectively, or as a percentage of Software Protection Product
sales, 12%, 12%, and 11%,
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respectively. The Company believes that its research and development efforts are
greater than any of its competitors and that the Company's technological
leadership could broaden in the future.
Also, the Company performs research and development with regard to its
Information Security Products in connection with its U.S. Government agencies
contracts. The costs incurred by the Company in connection with such research
and development activities are substantially recoverable by the Company pursuant
to the terms of these contracts. The Company believes that some of the research
and development performed under such contracts can be applied to the emerging
issues of information security.
Sales and Marketing
Software Protection Products
The Company markets its Software Protection Products to software
publishers throughout the world for use with their software programs selling at
retail for $600 or more in the United States, and for use with lower priced
software programs sold internationally. For 1995, 1994 and 1993, 53%, 58% and
57%, respectively, of the Company's Software Protection Product sales were made
in the United States and 47%, 42% and 43%, respectively, were made
internationally. Since its formation, the Company has shipped more than
7,900,000 keys to more than 24,000 customers. Among the Company's major
customers are Autodesk, Inc., Encyclopaedia Britanica, SPSS, Inc., Adobe
Systems, Inc., Wonderware Software Development Corp., Quark Systems, Inc. and
Orcad.
The Company has direct sales and marketing personnel in the United
States, the United Kingdom, Germany and France. The Company also has a
telemarketing sales force that responds to inquiries and referrals and which
makes cold calls to generate sales. In addition, the Company uses 43
distributors in Europe, Asia Pacific, the Middle East, Mexico and South America.
During 1995, 1994 and 1993 the Company had no single customer which accounted
for ten percent or more of the Company's revenues.
The Company's direct sales force makes personal sales calls to targeted
software publishers in order to introduce the Company's products. The direct
sales personnel also make personal calls on software publishers who currently
use the Company's products in an effort to broaden usage of the Company's
products to other software programs. The direct sales force pursues a global
marketing plan which focuses on targeting multinational software publishers and
coordinates the worldwide sales initiative to such publishers.
The Company attends trade shows and uses trade advertising to increase
the level of awareness of the Company and its products. The Company's technical
support personnel, who interact directly with software publishers' engineers,
also assist in the Company's marketing effort through such interaction.
Information Security Products
The Company markets its Information Security Products directly to the
U.S. Government and government related agencies. The Company maintains close
relationships with the
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Department of Defense and the aerospace community. Through these relationships,
the Company receives certain contracts for services and products on a selected
source basis. In addition, contracts are awarded to the Company as the
successful bidder in response to requests for proposal from U.S. Government
agencies and aerospace companies.
Manufacturing
Software Protection Products
The Company's hardware keys are manufactured by subcontractors in the
United States, Asia Pacific and Europe, from components specified and approved
by the Company. The components include ASIC chips, standard computer memory
chips and standard computer hardware parts. The Company maintains control over
the purchasing of materials and the planning and scheduling of the manufacturing
and assembly process. After assembly of the components, the keys are delivered
to the Company's facilities in the United States and Europe where the products
are inspected, tested and configured. The Company believes that it is the lowest
cost producer of software protection products and believes that will continue to
be a competitive advantage.
The Company currently has one supplier of the ASIC chips used in the
Company's largest selling product, SentinelSuperPro. In the event that such
supplier is unable to fulfill the Company's requirements, the Company may
experience an interruption in the production of SentinelSuperPro until an
alternative source of supply is developed. The Company maintains a three month
inventory of ASIC chips in order to limit the potential for such an
interruption. The Company believes that there are a number of companies capable
of commencing the manufacture of its ASIC chips within approximately three
months of such an interruption.
Information Security Products
For its Information Security Products, the Company's manufacturing
operations include the final assembly and testing of electronic components and
PC boards. PC boards and PC board components are purchased and then assembled by
outside contractors. The Company assembles the parts and components, creating a
finished unit which is then tested and shipped.
The Company has specific cryptographic technology embedded into ASIC
integrated circuits which are fabricated to the Company's specifications by
integrated circuit manufacturers. The Company currently has relationships with
two such integrated circuit manufacturers, VLSI Technologies and United
Technologies Microelectronics Center. These ASIC integrated circuits are
processed to the specifications of the U.S. Government and the Company. These
two suppliers are the only suppliers capable of meeting the U.S. Government
specifications. Until an alternate source of supply is developed, any
interruption in the availability of these integrated circuits could have a
material adverse effect on the operations of the Company.
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Backlog
The Company manufactures its Software Protection Products on the basis
of its forecast of near-term demand and maintains inventory in advance of
receipt of firm customer orders. Orders from software publishers are generally
placed on an "as needed" basis and are usually shipped by the Company within one
week after receipt of the order. For these reasons, the Company's backlog of
Software Protection Product orders at any particular time is generally not large
and not indicative of future sales levels.
As of December 31, 1995, the backlog for the Company's Information
Security Products represented in excess of six months of revenues. Actual
revenue recognition of the backlog mix of contracts can vary from three months
to two years.
Trade Secrets
The Company believes that the value of its Software Protection Products
is dependent upon its proprietary algorithms and encryption techniques remaining
"trade secrets." The Company has obtained copyright protection on certain of its
products and trademark protection for certain of its trade names. The Company
has not obtained, and presently does not intend to obtain, patents on certain of
the other designs used in its products, since an issued patent may make public
certain information that should be kept secret for the benefit of those using
the Company's products. There can be no assurance that the Company's proprietary
technology will remain a secret or that others will not develop similar
technology and use such technology to compete with the Company. There can be no
assurance that if the Company decides to apply for patents in the future for any
of its products, or on any new technology or products derived therefrom, that
patents will be granted.
Competition
Software Protection Products
The worldwide software protection industry is highly competitive and
characterized by rapid technological advances in both computer hardware and
software development. The Company believes it is the industry leader with an
estimated 50% worldwide market share. The Company's principal competitors in the
software protection industry are FAST Security, AG, Aladdin Knowledge Systems,
Ltd. and Software Security, Inc. The Company also competes with smaller
companies. The Company believes that it offers the most cost effective Software
Protection Products available to software publishers. Although certain of the
Company's competitors offer lower prices, the Company believes that its
technical support services and the ease of implementation of its products
favorably distinguish the Company from its competitors.
Information Security Products
The Company's principal competitors for its Information Security
Products are Group Technologies, National Semiconductor and Motorola.
Employees
The Company presently employs 270 full-time employees divided among
sales and marketing, manufacturing, research and development and administration.
The Company believes
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that its employee relations are excellent. The employees and the Company are not
parties to collective bargaining agreements.
Recent Events
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. The Company made an initial investment of $1.2 million
for 35% of the common stock of QMT. QMT, a developmental stage company formed
in 1995, 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". QMT
believes IBEST technology benefits and enhances the surface durability and
utility of a large number of industrial and consumer products at relatively
low cost and without creating any impact on the environment. According to a
recent issue of New Coatings and Surface Finishings Newsletter, the overall
market for the surface treatment industry worldwide is $8 - 10 billion. One of
the fastest growing areas is in the replacement of solvent, chrome and heavy
metal based processes, with environmentally friendly processes.
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ITEM 2. PROPERTIES
The Company's executive offices and principal facility are located in a
55,800 square foot building in Irvine, California. The Company leases the
facility pursuant to a lease expiring June 2000.
The Company owns a 5,000 square foot facility in the United Kingdom
which is used primarily for northern European sales and administration. The
Company also owns an 8,000 square foot facility in Paris, France which is used
primarily for southern European sales and administration.
The Company leases a facility in Torrance, California, at which
Mykotronx maintains its principal offices, design and production facilities. The
lease is for 27,000 square feet, and expires in 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company believes that there are no legal proceedings, pending or
contemplated, to which the Company, or any of its subsidiaries, is the subject
or to which the Company or any of its subsidiaries is a party. The Company also
knows of no material legal proceeding pending or threatened, or judgments
entered against any director or executive officer of the Company or any of its
subsidiaries in his/her capacity as such where the position of any such director
or executive officer is adverse to the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Neither the Board of Directors nor any security holder submitted any
matter during the fourth quarter of the fiscal year covered by this Report to a
vote of the security holders through solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the NASDAQ National Market
System under the symbol "RNBO". The following table sets forth high and low
"sales" prices of the shares of Common Stock of the Company for the periods
indicated (as reported by the National Quotation Bureau).
<TABLE>
<CAPTION>
SALES PRICE
-----------
HIGH LOW
---- ---
<S> <C> <C>
1996 First Quarter $23 5/8 $18 1/4
(through February 29, 1996)
1995 First Quarter 18 1/8 13 7/8
1995 Second Quarter 24 1/2 15 1/4
1995 Third Quarter 26 1/4 17 1/2
1995 Fourth Quarter 24 11/16 17 1/2
1994 First Quarter 24 15 1/2
1994 Second Quarter 18 11 3/4
1994 Third Quarter 15 3/8 9 1/2
1994 Fourth Quarter 17 1/4 11 1/8
</TABLE>
As of February 29, 1996, there were approximately 4,000 holders of record
of the Company's Common Stock including those shares held in "street name".
The Company has never paid cash dividends on its Common Stock and the Board
of Directors intends to retain all of its earnings, if any, to finance the
development and expansion of its business. However, there can be no assurance
that the Company can successfully expand its operations, or that such expansion
will prove profitable. Future dividend policy will depend upon the Company's
earnings, capital requirements, financial condition and other factors considered
relevant by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the
consolidated financial statements of the Company for the five years ended
December 31, 1995. Data for the years ended December 31, 1994, 1993, 1992 and
1991 have been restated to include the financial information of Mykotronx, which
was acquired in May 1995 and accounted for as a pooling-of-interests.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1995 1994 1993 1992* 1991
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Income Statement
Data:
Revenues $ 66,308 $ 55,083 $ 44,113 $ 33,927 $ 21,657
Income before taxes 16,610 12,163 10,669 9,537 6,334
Net income 9,638 6,996 6,669 5,803 4,055
Net income per share $ 1.25 $ 0.94 $ 0.92 $ 0.83 $ 0.68
Proforma net income
(unaudited) 9,638 6,996 6,376 5,517 3,818
Proforma net income
per share (unaudited) $ 1.25 $ 0.94 $ 0.88 $ 0.79 $ 0.64
Shares used in Calculating Net
Income per share 7,700,000 7,415,000 7,251,000 7,023,000 5,988,264
Selected Consolidated Balance Sheet Data:
Total assets $ 79,825 $ 64,867 $ 54,901 $ 46,707 $ 29,321
Working capital 49,249 37,911 29,666 20,079 24,497
Long-term debt 2,616 2,695 2,730 3,275 --
Shareholders' equity 66,503 54,323 45,461 36,259 26,362
</TABLE>
*Reflects the operations, assets and liabilities of Microphar S.A. which was
acquired effective June 1, 1992 and accounted for as a purchase.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is management's discussion and analysis of certain
significant factors that have affected the profitability of the Company's
business segments (Software Protection and Information Security Products) and
its consolidated results of operations and financial condition during the
periods included in the accompanying consolidated financial statements. The
discussion reflects the impact of the acquisition of Mykotronx, which was
accounted for using the pooling-of-interests method as described more fully in
Note 2 to the consolidated financial statements. The following should be read
in conjunction with the consolidated financial statements and related notes.
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1995 COMPARED WITH 1994
Global Software Protection Products revenue for the year ended December
31, 1995 increased 15% to $44,346,000 as compared with 1994. The revenue growth
was primarily due to increased unit sales in European markets. Software
Protection Products revenue for the year ended December 31, 1995 in Europe
increased by 39%. The average selling price per product in the year ended
December 31, 1995 decreased approximately 6% from the year ended December 31,
1994.
During the year ended December 31, 1995, approximately 24% of the Company's
Software Protection Products revenue was subject to currency fluctuations, up
from 23% in 1994. Software Protection Products revenue in the future is
expected to continue to be affected by foreign currency rate fluctuations.
Information Security Products revenue for the year ended December 31, 1995
increased 33% to $21,962,000, as compared with 1994. The revenue growth was due
to higher performance on software and service contracts across various product
lines. Additionally, the space communication security business experienced
strong growth, particularly in high grade security products for government
network security.
Software Protection Products gross profit for the year ended December 31,
1995 was 71% of revenue compared with 70% for the year ended December 31, 1994.
The increase in gross margin was due to increased sales in Europe with
corresponding higher margins. There can be no assurance that the Company will
improve or maintain the level of gross profit percentage it experienced during
the year ended December 31, 1995.
Gross profit from Information Security Products for the year ended December
31, 1995 was 23% of revenues compared with 18% of revenues for the year ended
December 31, 1994. The increase in gross profit was due to the increased volume
of space communications products that benefited from continued economies of
scale. Gross profit is highly dependent on the mix of contracts with higher
margin percentages versus contracts with lower margin percentages.
Consolidated selling, general and administrative expenses for the years
ended December 31, 1995 and 1994 were 21% and 20% of revenues, respectively.
Selling, general and administrative expenses for the year ended December 31,
1995 increased by $3,066,000 as compared with 1994. This increase was
primarily due to additional staff, increased compensation expenses, expenses
incurred in connection with the Mykotronx acquisition and amortization
expense related to other minor acquisitions.
Total research and development expenses were 8% of revenue for the years
ended December 31, 1995 and 1994. In 1994, the Company capitalized $735,000 of
software development costs. There were no such capitalized software costs during
1995. Current research and development activities are focused on additional ASIC
development for future software protection and the adaptation of the Company's
existing products to additional software operating environments and computer
platforms.
Interest income for the year ended December 31, 1995 increased by 128% to
$1,689,000, as compared with 1994, primarily because of higher investment
balances.
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During the year ended December 31, 1995, the Company incurred foreign
currency losses of $268,000, primarily due to dollar denominated deposit
accounts maintained in Europe. During the year ended December 31, 1994, the
Company recognized foreign currency losses of $588,000, also primarily due to
dollar denominated deposit accounts maintained in Europe. Such foreign currency
gains and losses result from the movement in the value of the U.S. dollar
against the functional currencies used by the Company's foreign subsidiaries.
During the year ended December 31, 1994, the Company wrote off a $252,000
investment it held in a company that subsequently filed for bankruptcy
protection in January 1995.
The effective tax rate decreased to 42.0% for the year ended December 31,
1995 from 42.5% for the year ended December 31, 1994. The decrease in the tax
rate is due to the expansion of business unit profits in European countries with
lower effective tax rates.
1994 COMPARED WITH 1993
Software Protection Products revenue for the year ended December 31, 1994
increased 10% to $38,512,000, when compared to the same period in 1993. The
revenue growth was primarily due to increased unit sales to both existing and
new customers in the North American market and the Asia Pacific region. Software
Protection Products revenue for the year ended December 31, 1994 in the United
States increased by 12% and international revenue increased by 5% over the year
ended December 31, 1993. The average selling price per product in the year ended
December 31, 1994 decreased approximately 12% from the year ended December 31,
1993.
During the year ended December 31, 1994, approximately 23% of the Company's
Software Protection Products revenue was subject to currency fluctuations,
down from 29% in 1993.
Information Security Products revenue for the year ended December 31, 1994
increased 84% to $16,571,000, when compared to 1993. The revenue growth was
primarily due to comparable increases in volume of product sold. The core space
communication security business area benefited from increased sales of mature
products and the development and introduction of two new products. In the
commercial business area, increased revenues were realized because of increased
acceptance of the Mykotronx "key escrow" Clipper and Capstone chips and the
related PCMCIA card called Fortezza.
Gross profit for Software Protection Products for the year ended December
31, 1994 was 70% of Software Protection Products revenue compared with 74% for
the year ended December 31, 1993. The decrease was primarily due to lower
average selling prices.
Gross profit from Information Security Products for the year ended
December 31, 1994 was 18% of revenues compared with 9% of revenues for the year
ended December 31, 1993. The increase in gross profit was due to the increased
volume of space communications products which benefited from economies of scale.
Selling, general and administrative expenses for the years ended December
31, 1994 and 1993 were 20% and 25% of total revenues, respectively. Selling,
general and administrative expenses for the year ended December 31, 1994
decreased by $36,000 compared to the year
13
<PAGE> 15
ended December 31, 1993. This decrease was primarily due to reductions in
management overhead.
Total research and development expenses for the year ended December 31,
1994 were 8% of total revenues and increased by 16% to $4,584,000, when compared
to the year ended December 31, 1993. The increase was primarily due to the
addition of engineering personnel. In 1994, the Company capitalized $735,000 of
software development costs.
Interest income for the year ended December 31, 1994, increased by 25% to
$742,000, as compared to 1993, because of a general rise in interest rates and
higher investment balances.
During the year ended December 31, 1994, the Company incurred foreign
currency losses of $588,000, primarily due to dollar denominated deposit
accounts maintained in Europe. During the year ended December 31, 1993, the
Company recognized foreign currency gains of $439,000, also primarily due to
dollar denominated deposit accounts maintained in Europe. Such foreign currency
gains and losses result from the movement of the value of the U.S. dollar
against the functional currencies used by the Company's foreign subsidiaries.
During the year ended December 31, 1994, the Company wrote off a $252,000
investment in a company that filed for bankruptcy protection in January 1995.
The effective tax rate increased to 42.5% for the year ended December 31,
1994, from the proforma effective tax rate of 40.0% for the year ended December
31, 1993. The increase in the tax rate was primarily due to the decreased
availability of research and experimentation credits.
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 during 1995, 1994 and 1993 was $13,203,000,
$8,422,000, and $7,434,000, respectively.
The Company intends to use its capital resources to expand its product
lines and for possible acquisitions of additional products and technologies.
There are no significant capital requirements at this time.
The Company's subsidiaries in France carry $5.2 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.
Management believes that the effect of inflation on the business of the
Company for the past three years has been minimal.
The Company believes that its current working capital of $49,249,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's working capital requirements through at
least December 31, 1996.
14
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Schedule of the Company are
listed in Item 14 (a) and included herein on pages F-1 through F-23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not had any disagreement with its independent auditors
on any matter of accounting principles or practices or financial statement
disclosure.
15
<PAGE> 17
PART III
ITEM 10. ALL DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information appearing under the caption
"Election of Directors" in the Company's Proxy Statement to be submitted to the
Commission on or before April 29, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the caption
"Executive Compensation" in the Company's Proxy Statement to be submitted to the
Commission on or before April 29, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Reference is made to the information appearing under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be submitted to the Commission on or before April
29, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information appearing under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement to be submitted to the Commission on or before April 29, 1996.
16
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 1995 and 1994.
Consolidated Statements of Income for the years ended December 31, 1995, 1994
and 1993.
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993.
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
(a) 2. Consolidated Financial Statement Schedule
II. Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and 1993.
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial statements or
notes thereto.
(a) 3. Exhibits
2. Agreement and Plan of Reorganization, dated as of January 26, 1995
among the Company, Rainbow Acquisition Inc., a California corporation and a
wholly owned subsidiary of Rainbow, and Mykotronx, Inc., a California
corporation ("Mykotronx") (incorporated by reference to the Company's
Registration Statement on Form S-4 under the Securities Act of 1933, as amended,
effective on April 20,1995, Registration No. 33-89918).
3(i) Articles of Incorporation of Rainbow, as amended (incorporated by
reference to Exhibit 3(a) to Rainbow's Registration Statement on Form S-18 under
the Securities Act of 1933, as amended, filed on July 20, 1987, File No.
33-15956-LA (the "S-18 Registration Statement")).
3(ii) By-Laws of Rainbow (incorporated by reference to Exhibit 3(b) to
the S-18 Registration Statement).
4(a) See Exhibit 3(i).
4(b) See Exhibit 3(ii).
17
<PAGE> 19
10(a) Lease for premises at 50 Technology Drive, Irvine, California, dated June
1, 1995, between the Company and Birtcher Medical Systems, Inc. a California
corporation.
10(b) Agreement, dated May 26, 1989, between the Company and Catalyst
Semiconductor, Inc. (incorporated by reference to Exhibit 10(h) of the Company's
1989 Annual Report on Form 10-K under the Securities Exchange Act of 1934 filed
in March 1990 (the "1989 10-K").
10(c) Agreement, dated August 17, 1989, between the Company and Catalyst
Semiconductor, Inc. (incorporated by reference to Exhibit 10(i) of the 1989
10-K).
10(d) 1990 Incentive Stock Option Plan as amended (incorporated by reference to
Exhibit 10(j) of the 1991 10-K).
10(e) Asset Purchase Agreement, dated January 20, 1994, between the Company and
the AND Group, Inc. (incorporated by reference to Exhibit 10(s) to the Company's
1993 Annual Report on Form 10-K under the Securities Exchange Act of 1934 filed
in March 1994 (the "1993 10-K").
10(f) Employment Agreement, dated February 16, 1990, between the Company and
Walter W. Straub (incorporated by reference to Exhibit 10(j) of the 1989 10-K).
10(g) Change of Control Agreement, dated February 16, 1990, between the Company
and Walter W. Straub (incorporated by reference to Exhibit 10(k) of the 1989
10-K).
10(h) Employment Agreement, dated January 15, 1992, between the Company and
Peter M. Craig (incorporated by reference to Exhibit 10(m) of the 1991 10-K).
10(i) Change of Control Agreement, dated January 15, 1992, between the Company
and Peter M. Craig (incorporated by reference to Exhibit 10(n) of the 1991
10-K).
10(j) Employment Agreement, dated January 5, 1995, between the Company and
Norman L. Denton, III (incorporated by reference to Exhibit 10(j) of the
Company's 1994 Annual Report on Form 10-K under the Securities Exchange Act of
1934, filed in March 1995 (the "1994 10-K")).
10(k) Change of Control Agreement, dated January 5, 1995, between the Company
and Norman L. Denton, III (incorporated by reference to Exhibit 10(k) to the
1994 10-K).
10(l) Employment Agreement, dated January 5, 1995, between the Company and
Patrick E. Fevery (incorporated by reference to Exhibit 10(l) of the 1994 10-K).
10(m) Change of Control Agreement, dated January 5, 1995, between the Company
and Patrick E. Fevery (incorporated by reference to Exhibit 10(m) of the 1994
10-K).
10(n) Employment Agreement, dated January 5, 1995, between the Company and Paul
A. Bock (incorporated by reference to Exhibit 10(n) of the 1994 10-K).
10(o) Change of Control Agreement, dated January 5, 1995, between the Company
and Paul A. Bock (incorporated by reference to Exhibit 10(o) of the 1994 10-K).
18
<PAGE> 20
10(p) Employment Agreement, dated May 31, 1995, among Mykotronx, the Company and
Theodore S. Bettwy.
10(q) Employment Agreement dated May 31, 1995, among Mykotronx, the Company and
John C. Droge.
21(a) List of Rainbow's wholly-owned subsidiaries.
23 Consents of Independent Auditors.
(a) Ernst & Young LLP.
(b) KMPG Peat Marwick LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended
December 31, 1995.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RAINBOW TECHNOLOGIES, INC.,
Registrant
By: /s/ Walter W. Straub
--------------------------
Walter W. Straub, President
Chief Executive Officer,
and Chairman of the Board
Date: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Walter W. Straub President, Chief Executive March 29, 1996
- -------------------- Officer, and
Walter W. Straub Chairman of the Board
/s/ Peter M. Craig Executive Vice President, March 29, 1996
- -------------------- Secretary and Director
Peter M. Craig
/s/ Patrick E. Fevery Vice President and March 29, 1996
- --------------------- Chief Financial Officer
Patrick E. Fevery
Director March , 1996
- ---------------------
Alan K. Jennings
Director March , 1996
- ---------------------
Richard P. Abraham
Director March , 1996
- ---------------------
Marvin Hoffman
Director March , 1996
- ---------------------
Frederick M. Haney
</TABLE>
20
<PAGE> 22
RAINBOW TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Auditors..................................... F-2
Consolidated Balance Sheets......................................... F-4
Consolidated Statements of Income................................... F-5
Consolidated Statements of Shareholders' Equity .................... F-6
Consolidated Statements of Cash Flows............................... F-7
Notes to Consolidated Financial Statements.......................... F-8
Schedule II - Consolidated Valuation and Qualifying Accounts ....... F-23
</TABLE>
F-1
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rainbow Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Rainbow
Technologies, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We did not audit the financial statements of Mykotronx, Inc., a
wholly-owned subsidiary acquired on June 1, 1995 and accounted for as a
pooling-of-interests, which statements reflect total assets of $6,340,000 as of
December 31, 1994, and total revenues of $16,571,000 and $8,995,000 for the
years ended December 31, 1994 and 1993, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the data included for Mykotronx, Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rainbow Technologies,
Inc. at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Orange County, California
February 16, 1996
F-2
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Mykotronx, Inc.
We have audited the balance sheet of Mykotronx, Inc. as of December 31, 1994
and the related statements of earnings, shareholders' equity and cash flows
(not presented herein) for the two years ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mykotronx, Inc., as of December
31, 1994 and the results of its operations and its cash flows for the two
years ended December 31, 1994 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
February 16, 1995
F-3
<PAGE> 25
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................ $25,058,000 $19,755,000
Marketable securities available-for-sale ................................. 11,799,000 3,592,000
Accounts receivable, net of allowance for doubtful accounts
of $450,000 and $368,000 in 1995 and 1994, respectively ................ 12,725,000 10,337,000
Note receivable .......................................................... - 3,000,000
Inventories .............................................................. 2,927,000 2,862,000
Unbilled costs and fees .................................................. 3,962,000 2,895,000
Prepaid expenses and other current assets ................................ 1,716,000 1,878,000
----------- -----------
Total current assets ................................................ 58,187,000 44,319,000
Property, plant and equipment, at cost:
Buildings ................................................................ 9,572,000 8,889,000
Furniture ................................................................ 797,000 750,000
Equipment ................................................................ 4,075,000 3,322,000
Leasehold improvements ................................................... 221,000 494,000
----------- -----------
14,665,000 13,455,000
Less accumulated depreciation and amortization ........................... 3,708,000 3,586,000
----------- -----------
Net property, plant and equipment ................................... 10,957,000 9,869,000
Goodwill, net of accumulated amortization of $6,602,000 and
$4,380,000 in 1995 and 1994, respectively ................................ 6,186,000 7,425,000
Other assets, net of accumulated amortization of $1,193,000
and $627,000 in 1995 and 1994, respectively .............................. 4,495,000 3,254,000
----------- -----------
$79,825,000 $64,867,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 3,476,000 $ 2,098,000
Accrued payroll and related expenses ..................................... 2,077,000 1,858,000
Other accrued liabilities ................................................ 1,151,000 1,264,000
Income taxes payable ..................................................... 1,916,000 402,000
Billings in excess of costs and fees ..................................... 2,000 422,000
Long-term debt, due within one year ...................................... 316,000 364,000
----------- -----------
Total current liabilities ........................................... 8,938,000 6,408,000
Long-term debt, net of current portion ..................................... 2,616,000 2,695,000
Deferred income taxes ...................................................... 1,768,000 1,441,000
Commitments ................................................................
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
7,311,267 and 7,165,105 shares issued and outstanding
in 1995 and 1994, respectively (Note 8) ................................ 7,000 7,000
Additional paid-in capital ............................................... 29,823,000 28,222,000
Cumulative translation adjustment ........................................ 424,000 (465,000)
Cumulative difference between cost and
market value of marketable securities .................................. 52,000 -
Retained earnings ........................................................ 36,197,000 26,559,000
----------- -----------
Total shareholders' equity .......................................... 66,503,000 54,323,000
----------- -----------
$79,825,000 $64,867,000
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 26
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Software protection products ......... $44,346,000 $38,512,000 $35,118,000
Information security products ........ 21,962,000 16,571,000 8,995,000
----------- ----------- -----------
Total revenues .................. 66,308,000 55,083,000 44,113,000
Operating expenses:
Cost of software protection products . 12,701,000 11,589,000 9,190,000
Cost of information security products 16,865,000 13,521,000 8,188,000
Selling, general and administrative .. 14,135,000 11,069,000 11,105,000
Research and development ............. 5,218,000 4,584,000 3,945,000
Goodwill amortization ................ 1,830,000 1,676,000 1,608,000
----------- ----------- -----------
Total operating expenses ........ 50,749,000 42,439,000 34,036,000
----------- ----------- -----------
Operating income ....................... 15,559,000 12,644,000 10,077,000
Interest income ........................ 1,689,000 742,000 593,000
Interest expense ....................... (370,000) (383,000) (440,000)
Foreign currency gains (losses) ........ (268,000) (588,000) 439,000
Write-down of investment ............... - (252,000) -
----------- ----------- -----------
Income before provision for income taxes 16,610,000 12,163,000 10,669,000
Provision for income taxes ............. 6,972,000 5,167,000 4,000,000
----------- ----------- -----------
Net income ............................. $ 9,638,000 $ 6,996,000 $ 6,669,000
=========== =========== ===========
Net income per common and common
equivalent share ..................... $ 1.25 $ 0.94 $ 0.92
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding ........ 7,700,000 7,415,000 7,251,000
=========== =========== ===========
Proforma data (unaudited):
Net income ............................. $ 9,638,000 $ 6,996,000 $ 6,669,000
Proforma provision for income taxes .... - - 293,000
----------- ----------- -----------
Net income after proforma
income tax adjustment ................ $ 9,638,000 $ 6,996,000 $ 6,376,000
=========== =========== ===========
Proforma net income per common and
common equivalent share .............. $ 1.25 $ 0.94 $ 0.88
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 27
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Cumulative
difference
between cost
Additional Cumulative and market value
Common Stock paid-in translation of marketable Retained
Shares Amount capital adjustment securities earnings Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 .... 6,742,207 $6,000 $22,541,000 $(1,458,000) $ - $15,169,000 $36,258,000
Exercise of common stock
options .................... 364,641 1,000 1,980,000 - - - 1,981,000
Tax benefit of employee stock
options .................... - - 1,460,000 - - - 1,460,000
Distribution to former
Mykotronx shareholders ...... - - - - - (399,000) (399,000)
Translation adjustment, net ... - - - (508,000) - - (508,000)
Net income .................... - - - - - 6,669,000 6,669,000
-------------------------------------------------------------------------------------------
Balance, December 31, 1993 .... 7,106,848 7,000 25,981,000 (1,966,000) - 21,439,000 45,461,000
Exercise of common stock
options .................... 138,117 - 593,000 - - - 593,000
Tax benefit of employee stock
options .................... - - 173,000 - - - 173,000
Repurchase of shares of former
Mykotronx shareholders ...... (79,860) - (5,000) - - (101,000) (106,000)
Distribution to former
Mykotronx shareholders ...... - - - - - (295,000) (295,000)
Transfer of retained earnings
to additional paid-in capital
upon termination of Mykotronx
S Corporation election ...... - - 1,480,000 - - (1,480,000) -
Translation adjustment, net ... - - - 1,501,000 - - 1,501,000
Net income .................... - - - - - 6,996,000 6,996,000
-------------------------------------------------------------------------------------------
Balance, December 31, 1994 .... 7,165,105 7,000 28,222,000 (465,000) - 26,559,000 54,323,000
Exercise of common stock
options .................... 146,162 - 1,192,000 - - - 1,192,000
Tax benefit of employee stock
options .................... - - 409,000 - - - 409,000
Unrealized gain on
marketable securities ....... - - - - 52,000 - 52,000
Translation adjustment, net ... - - - 889,000 - - 889,000
Net income .................... - - - - - 9,638,000 9,638,000
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 .... 7,311,267 $7,000 $29,823,000 $ 424,000 $52,000 $36,197,000 $66,503,000
===========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 28
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 9,638,000 $ 6,996,000 $ 6,669,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization ............................................. 2,352,000 2,034,000 1,676,000
Depreciation ............................................. 1,186,000 1,080,000 1,002,000
Change in deferred income taxes .......................... 621,000 25,000 (87,000)
Allowance for doubtful accounts .......................... 73,000 16,000 163,000
Loss from retirement of property, plant and equipment .... 7,000 28,000 16,000
Write-down of investment ................................. - 252,000 -
Changes in operating assets and liabilities:
Accounts receivable .................................... (2,311,000) (1,413,000) (1,961,000)
Inventories ............................................ (6,000) 298,000 (1,150,000)
Unbilled costs and fees ................................ (1,067,000) (1,460,000) (867,000)
Prepaid expenses and other current assets .............. 150,000 225,000 (207,000)
Other assets ........................................... - (31,000) (127,000)
Accounts payable ....................................... 1,353,000 391,000 1,050,000
Accrued liabilities .................................... 71,000 376,000 1,422,000
Billings in excess of costs and fees ................... (420,000) 417,000 (134,000)
Income taxes payable ................................... 1,556,000 (812,000) (31,000)
------------ ------------ -----------
Net cash provided by operating activities ............ 13,203,000 8,422,000 7,434,000
Cash flows from investing activities:
Purchases of marketable securities ......................... (12,271,000) (12,376,000) (9,361,000)
Sales of marketable securities ............................. 4,115,000 16,990,000 4,851,000
Purchases of property, plant and equipment ................. (1,670,000) (559,000) (639,000)
Notes receivable ........................................... 3,000,000 (3,000,000) -
Other long-term assets ..................................... (1,751,000) (578,000) (352,000)
Acquisition of AND Group, Inc. ............................. - (1,498,000) -
Capitalized software development costs ..................... - (735,000) -
------------ ------------ -----------
Net cash used in investing activities ................ (8,577,000) (1,756,000) (5,501,000)
Cash flows from financing activities:
Exercise of common stock options ........................... 1,192,000 593,000 1,981,000
Payment of long-term debt .................................. (357,000) (496,000) (395,000)
Principal payments of capital lease ........................ (31,000) (25,000) (5,000)
Repurchase of shares of former Mykotronx shareholders....... - (106,000) (399,000)
Distribution to former Mykotronx S Corporation
shareholders ............................................. - (295,000) -
------------ ------------ -----------
Net cash provided by (used in) financing activities .. 804,000 (329,000) 1,182,000
Effect of exchange rate changes on cash ...................... (127,000) 482,000 (249,000)
------------ ------------ -----------
Net increase in cash and cash equivalents .................... 5,303,000 6,819,000 2,866,000
Cash and cash equivalents at beginning of year ............... 19,755,000 12,936,000 10,070,000
------------ ------------ -----------
Cash and cash equivalents at end of year ..................... $ 25,058,000 $ 19,755,000 $12,936,000
============ ============ ===========
Supplemental disclosure of cash flow information:
Income taxes paid .......................................... $ 6,005,000 $ 6,059,000 $ 2,927,000
Interest paid .............................................. 302,000 381,000 440,000
</TABLE>
See accompanying notes.
F-7
<PAGE> 29
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Rainbow Technologies, Inc. (the Company) develops, manufactures, programs
and markets products which prevent the unauthorized use of intellectual
property, including software programs (known as the Software Protection Products
segment of the business), and also develops and manufactures information
security products to provide privacy and security for voice communication and
data transmission (known as the Information Security Products segment of the
business). The accompanying financial statements consolidate the accounts of the
Company and its wholly-owned subsidiaries and have been restated for all prior
periods presented to reflect the acquisition of Mykotronx, Inc. (Mykotronx)
which has been accounted for using the pooling-of-interests method (Note 2). All
significant intercompany balances and transactions have been eliminated. Certain
amounts previously reported have been reclassified to conform with the 1995
presentation.
Use of Estimates
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 allowance for inventory obsolescence, accrued warranty
costs, the allowance for deferred tax assets and total estimated contract costs
associated with billed and unbilled contract revenues.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Marketable Securities
The Company's marketable securities consist of tax-exempt and other debt
instruments that bear interest at variable rates. At December 31, 1993, the
Company adopted Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS No. 115). SFAS No.
115 requires that the Company's marketable securities be carried at fair value;
and that unrealized gains and losses on securities available-for-sale be
reported net of tax as a separate component of shareholders' equity. The
adoption of SFAS No. 115 has had no effect on the Company's results of
operations nor has it had a material impact on the Company's equity for any of
the years presented. The Company's portfolio of marketable debt securities at
December 31, 1995 matures as follows: 85% in 1996, 0% in 1997-2000, 2% in
2001-2005 and 14% thereafter.
F-8
<PAGE> 30
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Software Development Costs
Software development costs incurred subsequent to the determination of
technological feasibility and marketability of a software product are
capitalized. 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.
At December 31, 1995 and 1994, the Company had capitalized computer
software costs of $735,000 which will not be amortized until technological
feasibility and marketability is established.
Inventories
Inventoried costs relating to long-term contracts are stated at the actual
production cost, 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 (on a first-in, first-out basis) or market.
Property, Plant and Equipment
Property, plant, equipment and leasehold improvements are depreciated using
the straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings................................ 31 years
Furniture................................ 5 to 7 years
Equipment................................ 3 to 7 years
Leasehold improvements .............. Term of lease
</TABLE>
Intangible Assets
Intangible assets consisting of goodwill and patents are amortized using
the straight-line method over seven years. Goodwill represents the excess of
purchase price over the estimated fair value of assets acquired.
Long-Lived Assets
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. The Company will adopt SFAS No. 121 during 1996. Such adoption will not
have a material effect on the Company's consolidated results of operations or
financial position.
F-9
<PAGE> 31
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Revenue Recognition:
Software Protection Products
The Company recognizes revenues from Software Protection Product sales at
the time of shipment. Provision is made currently for estimated product returns
which may occur under programs the Company has with certain of its distributors.
Information Security Products
Catalog product revenues and revenues under certain fixed-price contracts
calling for delivery of a specified number of units are recognized as deliveries
are made. Revenues under cost-reimbursement contracts are recognized as costs
are incurred and include estimated earned fees in the proportion that costs
incurred to date bear to total estimated costs. Certain contracts are awarded on
a fixed-price incentive fee basis. Incentive fees on such contracts are
considered when estimating revenues and profit rates and are recognized when the
amounts can reasonably be determined. The costs attributed to units delivered
under fixed-price contracts are based on the estimated average cost per unit at
contract completion. For research and development and other cost-plus-fee type
contracts, the Company recognizes contract revenues using the
percentage-of-completion method. The estimated contract revenues are recognized
based on percentage-of-completion as determined by the cost-to-cost basis
whereby revenues are recognized ratably as contract costs are incurred. Profits
expected to be realized on long-term contracts are based on total revenues and
estimated costs at completion. Revisions to contract profits are recorded in the
accounting periods in which the revisions are made. Estimated losses on
contracts are recorded when identified.
Warranty
The Company generally warrants its products for one year. An estimate of
the amount required to cover warranty expense on products sold is charged
against income at the time of sale.
Advertising
The Company expenses the costs of advertising as incurred. Advertising
expense was $908,000, $807,000 and $620,000 for 1995, 1994 and 1993,
respectively.
Research and Development
Expenditures for research and development are expensed as incurred.
Income Taxes
Deferred taxes are provided for items recognized in different periods for
financial and tax reporting purposes in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting For Income Taxes."
Foreign 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 Stockholders' 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.
F-10
<PAGE> 32
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
The Company may enter into foreign exchange contracts as a hedge against
foreign currency denominated receivables. It does not engage in currency
speculation. Foreign currency transaction gains and losses are included in
current earnings. There were no foreign exchange contracts at December 31, 1995.
Stock Option Plans
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) in October 1995. SFAS No. 123 establishes financial accounting and
reporting standards for stock-based compensation plans and to transactions in
which an entity issues its equity instruments to acquire goods and services from
nonemployees. The new accounting standards prescribed by SFAS No. 123 are
optional, and the Company may continue to account for its plans under previous
standards. The Company does not expect to adopt the new accounting standards,
consequently, SFAS No. 123 will not have an impact on the Company's consolidated
results of operations or financial position. However, proforma disclosures of
net earnings and earnings per share will be made in 1996 as if the SFAS No. 123
accounting standards had been adopted.
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
determined using the treasury stock method, when the effect of such options is
dilutive.
Concentrations of Business and Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables and interest bearing investments. The
Company performs on-going credit evaluations of its customers and generally does
not require collateral. The Company maintains adequate reserves for potential
losses and such losses, which have historically been minimal, have been included
in management's estimates. The Company places substantially all its interest
bearing investments with major financial institutions and, by policy, limits the
amount of credit exposure to any one financial institution.
The Company sells the majority of its Software Protection Products to
software developers and wholesale distributors throughout North America, Europe
and Asia Pacific. The majority of the Company's Information Security Products
are sold to the U.S. Government (Note 3). The U.S. Government accounted for over
81%, 95% and 80% of contract revenues in 1995, 1994 and 1993, respectively. In
addition, approximately 90% of contract accounts receivable and over 90% of
unbilled costs and fees at December 31, 1995 and 1994, respectively, were
related to the U.S. Government.
F-11
<PAGE> 33
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. ACQUISITIONS
On June 1, 1995, the Company acquired Mykotronx in a merger transaction
resulting in Mykotronx becoming a wholly-owned subsidiary of Rainbow. The merger
was accounted for as a pooling-of-interests. 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 the Company's 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 stock options.
Expenses associated with the merger of approximately $552,000 were included
in the consolidated results of operations for the year ended December 31, 1995.
Revenue and net income from the combining companies included in the
accompanying consolidated results of operations were as follows:
<TABLE>
<CAPTION>
Rainbow Mykotronx Consolidated
------- --------- -------------
For the five months ended May 31, 1995
(prior to the effective date of the merger):
<S> <C> <C> <C>
Revenue $ 16,634,000 $ 9,663,000 $ 26,297,000
Net income 2,426,000 1,278,000 3,704,000
For the year ended December 31, 1994:
Revenue 38,512,000 16,571,000 55,083,000
Net income 5,552,000 1,444,000 6,996,000
For the year ended December 31, 1993:
Revenue 35,118,000 8,995,000 44,113,000
Net income 5,963,000 706,000 6,669,000
</TABLE>
There were no significant intercompany transactions between Rainbow and
Mykotronx during any period presented.
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. 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.
In exchange for a minority interest, the Company contributed the assets
acquired from the AND Group, Inc. and certain other assets to Vendor Systems
International, Inc. (VSI). VSI is a company located in Minneapolis, Minnesota.
F-12
<PAGE> 34
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
3. GOVERNMENT CONTRACTS
The Company is both a prime contractor and subcontractor under fixed-price
and cost reimbursement 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. 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 of $3,962,000 and $2,895,000 at
December 31, 1995 and 1994, respectively . Based on the Company's experience
with similar contracts in recent years, the unbilled costs and fees are expected
to be collected within one year.
4. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw materials ................................... $1,083,000 $ 657,000
Work in process ................................. 434,000 318,000
Finished goods .................................. 1,313,000 1,389,000
Inventoried costs relating to long-term contracts,
net of amounts attributed to revenue
recognized to date............................ 97,000 498,000
----------- ----------
$2,927,000 $2,862,000
========== =========
</TABLE>
The amount of general and administrative expenses remaining in inventoried
costs relating to long-term contracts at December 31, 1995 and 1994 were
$11,000 and $51,000, respectively.
F-13
<PAGE> 35
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
5. LONG-TERM DEBT
Long-term debt consists of a note payable to a bank with principal and interest
at 11.98% payable quarterly, in French Francs. The note matures in January 2005
and is secured by a building with a net book value of $7,451,000 at December 31,
1995.
Annual principal payments are as follows:
<TABLE>
<S> <C>
1996 ............................. $ 316,000
1997 ............................. 317,000
1998 ............................. 317,000
1999 ............................. 317,000
2000 ............................. 317,000
Thereafter ............................. 1,348,000
----------
$2,932,000
==========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented are estimates of the fair values of the financial
instruments at a specific point in time using available market information and
appropriate valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not intend to dispose of or liquidate such instruments prior to maturity.
The carrying values and estimated fair values of the Company's financial
instruments are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------------- -------------------------------
Estimated Estimated
Carrying Value Fair Value Carrying Value Fair Value
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Marketable securities $11,799,000 $11,799,000 $3,592,000 $3,592,000
=========== =========== ========== ==========
Long-term debt $ 2,932,000 $ 3,363,000 $3,059,000 $3,472,000
============ =========== ========== ==========
</TABLE>
7. COMMITMENTS
The Company has purchase commitments with various vendors for approximately
$2,540,000 as of December 31, 1995. These purchase commitments are payable
during 1996.
F-14
<PAGE> 36
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Annual obligations under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1996 ........................... $ 1,055,000
1997 ........................... 1,061,000
1998 ........................... 1,022,000
1999 ........................... 1,007,000
2000 ........................... 678,000
Thereafter....................... 71,000
-----------
$ 4,894,000
===========
</TABLE>
Rent expense charged to operations for the years ended December 31, 1995,
1994 and 1993 was $1,076,000, $677,000 and $549,000, respectively.
8. COMMON STOCK
In August 1987, the Board of Directors adopted an incentive stock option
plan and a non-qualified stock option plan under which options could be granted
to purchase up to an aggregate of 700,000 shares of the Company's common stock.
The exercise price for options granted under these plans could not be less than
100% of the fair market value of the common stock on the date of grant. Options
become exercisable and expire at the discretion of the Board of Directors,
although the plans specify that no options shall be exercisable prior to 12
months from the date of grant and all options expire five years from the date of
grant.
On April 12, 1990, the Board of Directors of the Company terminated certain
existing stock option plans and approved the Company's 1990 Stock Option Plan
under which non-statutory or incentive stock options may be granted to key
employees and individuals who provide services to the Company. Up to an
aggregate of 450,000 shares of the Company's common stock were originally
authorized for issuance. On June 29, 1993, the Board of Directors of the Company
amended the Company's Restated 1990 Stock Option Plan to authorize the issuance
of an additional 450,000 shares of common stock. At the May 31, 1995 shareholder
meeting, an increase of 750,000 shares was approved. As of December 31, 1995 the
total number of shares reserved for issuance under the existing stock option
plan and agreements total 435,623.
F-15
<PAGE> 37
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
The following is a summary of changes in options outstanding pursuant to
the plans for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Outstanding options at beginning
of year.................................... 1,040,596 819,769
Granted ....................................... 351,300 530,996
Canceled....................................... (14,590) (172,052)
Exercised ..................................... (146,162) (138,117)
--------- ---------
Outstanding options at end of year ............ 1,231,144 1,040,596
========= =========
Options exercisable at end of year ............ 430,306 325,684
========= =========
Prices of options exercised during the year.... $3.125 - $17.25 $1.075 - $17.00
Prices of outstanding options at end of year... $2.038 - $18.75 $2.038 - $17.25
</TABLE>
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ....................................... $3,558,000 $3,511,000 $1,949,000
State ....................................... 1,193,000 855,000 447,000
Foreign ....................................... 1,728,000 812,000 1,691,000
---------- ---------- ---------
6,479,000 5,178,000 4,087,000
Deferred:
Federal ....................................... 329,000 (308,000) (151,000)
State ....................................... 34,000 99,000 264,000
Foreign ....................................... 130,000 198,000 (200,000)
---------- ---------- ------------
493,000 (11,000) (87,000)
---------- ---------- -------------
$6,972,000 $5,167,000 $4,000,000
========== ========== ==========
</TABLE>
F-16
<PAGE> 38
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
The proforma unaudited income tax adjustment represents taxes which would
have been reported had Mykotronx been subject to federal and state income taxes
as a C Corporation. Prior to January 1, 1994, Mykotronx was an S Corporation
and, therefore, its income was generally not taxable to the corporation as it
passed through to its shareholders. The S Corporation election was terminated on
January 1, 1994, and Mykotronx became a reporting tax paying (C Corporation)
entity. The proforma unaudited provision for income taxes for the year ended
December 31, 1993 consisted of the following:
<TABLE>
<S> <C>
Current:
Federal $264,000
State 77,000
--------
341,000
Deferred:
Federal (39,000)
State (9,000)
--------
(48,000)
--------
$293,000
========
</TABLE>
As a result of the termination of the S Corporation status of Mykotronx,
Inc., on January 1, 1994, Rainbow assumed the tax basis of the assets and
liabilities of the former Mykotronx, Inc., which differed from the financial
statement basis of those items. A deferred tax asset of $44,000 was recorded as
a result of this S Corporation termination. Additionally, upon termination of
the S Corporation status, undistributed retained earnings totaling $1,480,000
were transferred to additional paid-in capital.
A reconciliation of the statutory federal income tax provision to the
actual provision follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax expense............... $5,714,000 $4,244,000 $3,380,000
Non-deductible amortization of goodwill............ 610,000 587,000 546,000
State taxes, net of federal benefit................ 797,000 623,000 477,000
Non-deductible merger related costs................ 185,000 123,000 -
Effect of foreign operations, net ................. (50,000) 103,000 (26,000)
Research and experimentation credit ............... (30,000) (185,000) (250,000)
Municipal interest................................. (156,000) (166,000) (52,000)
Other.............................................. (98,000) (162,000) (75,000)
----------- --------- -----------
$6,972,000 $5,167,000 $4,000,000
========== ========== ==========
</TABLE>
F-17
<PAGE> 39
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Foreign tax loss carryforwards ....................... $ 423,000 $ 531,000
Contract revenue recognized for tax reporting purposes 184,000 184,000
State taxes not currently deductible ................. 380,000 290,000
Accruals and reserves not currently tax deductible ... 271,000 334,000
Cumulative translation adjustment .................... - 328,000
----------- -----------
Total deferred tax assets ........................ 1,258,000 1,667,000
Valuation allowance for deferred tax assets .......... (423,000) (531,000)
----------- -----------
835,000 1,136,000
Deferred tax liabilities:
Cumulative translation adjustment .................... (298,000) -
Accruals without tax effect .......................... (37,000) (315,000)
Tax depreciation ..................................... (1,433,000) (1,349,000)
----------- -----------
Total deferred tax liabilities ................... (1,768,000) (1,664,000)
----------- -----------
Net deferred tax liabilities .............................. $ (933,000) $ (528,000)
=========== ===========
</TABLE>
United States and foreign earnings before income taxes are as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
United States...................... $13,000,000 $10,000,000 $7,352,000
Foreign............................ 3,610,000 2,163,000 3,317,000
------------ ----------- ---------
$16,610,000 $12,163,000 $10,669,000
=========== =========== ===========
</TABLE>
The Company realized tax benefits of $409,000, $173,000 and $1,460,000 in
1995, 1994 and 1993, respectively, from the exercise of non-qualified stock
options and disqualifying disposition of incentive stock options.
10. BENEFIT PLANS
At December 31, 1995, the Company sponsored two tax deferred defined
contribution plans (the Plans) for all eligible US employees, each of which was
sponsored by the predecessor companies prior to the merger between Rainbow and
Mykotronx. The Plans were merged effective January 1, 1996. Under both Plans,
the employer matches certain employee contributions. Under the Mykotronx plan,
the employer may also make discretionary contributions. During the years ended
December 31, 1995, 1994 and 1993, Company contributions under both Plans totaled
approximately $166,000, $147,000 and $103,000, respectively.
F-18
<PAGE> 40
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
11. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, 1994 and 1993 the Company made
purchases of services on competitive terms from a company controlled by a
director of the Company totaling $112,000, $168,000 and $123,000, respectively.
12. INDUSTRY SEGMENTS
The Company operates in two industry segments. The first segment is the
development and sale of devices which protect data and software from
unauthorized use (Software Protection Products segment). The second segment is
the development and sale of information security products to provide privacy and
security for voice communication and data transmission (Information Security
Products segment).
A summary of the Company's operations by industry segment follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-----------------------------------------------------------------
Software Information
Protection Security Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $44,346,000 $21,962,000 $ - $66,308,000
Operating income 10,613,000 4,946,000 - 15,559,000
Identifiable assets 70,962,000 8,863,000 - 79,825,000
Depreciation and amortization 3,386,000 152,000 - 3,538,000
Capital expenditures 1,308,000 362,000 - 1,670,000
<CAPTION>
For the year ended December 31, 1994
-----------------------------------------------------------------
Software Information
Protection Security Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $38,512,000 $16,571,000 $ - $55,083,000
Operating income 9,978,000 2,666,000 - 12,644,000
Identifiable assets 58,527,000 6,340,000 - 64,867,000
Depreciation and amortization 3,043,000 71,000 - 3,114,000
Capital expenditures 418,000 141,000 - 559,000
<CAPTION>
For the year ended December 31, 1993
-----------------------------------------------------------------
Software Information
Protection Security Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $35,118,000 $8,995,000 $ - $44,113,000
Operating income 9,361,000 716,000 - 10,077,000
Identifiable assets 50,884,000 4,017,000 - 54,901,000
Depreciation and amortization 2,602,000 76,000 - 2,678,000
Capital expenditures 537,000 102,000 - 639,000
</TABLE>
F-19
<PAGE> 41
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-----------------------------------------------------------------
United
States Europe Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $50,154,000 $16,154,000 $ - $66,308,000
Transfers between
geographic areas 892,000 3,249,000 (4,141,000) -
----------- ----------- ------------ -----------
Net sales $51,046,000 $19,403,000 $(4,141,000) $66,308,000
=========== =========== ============ ===========
Operating income $12,201,000 $ 5,007,000 $(1,649,000) $15,559,000
Identifiable assets 43,782,000 36,163,000 (120,000) 79,825,000
<CAPTION>
For the year ended December 31, 1994
-----------------------------------------------------------------
United
States Europe Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $43,423,000 $11,660,000 $ - $55,083,000
Transfers between
geographic areas 532,000 2,531,000 (3,063,000) -
---------- ----------- ----------- -----------
Net sales $43,955,000 $14,191,000 $(3,063,000) $55,083,000
=========== =========== =========== ===========
Operating income $11,811,000 $ 2,793,000 $(1,960,000) $12,644,000
Identifiable assets 36,248,000 28,779,000 (160,000) 64,867,000
</TABLE>
F-20
<PAGE> 42
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
For the year ended December 31, 1993
-----------------------------------------------------------------
United
States Europe Elimination Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $32,956,000 $11,157,000 $ - $44,113,000
Transfers between
geographic areas 1,393,000 2,918,000 (4,311,000) -
----------- ----------- ------------ -----------
Net sales $34,349,000 $14,075,000 $(4,311,000) $44,113,000
=========== =========== ============ ===========
Operating income $ 7,287,000 $ 3,030,000 $ (240,000) $10,077,000
Identifiable assets 28,357,000 26,784,000 (240,000) 54,901,000
</TABLE>
Geographic information for Europe encompasses the Company's operations in
France, the United Kingdom and Germany. In determining operating income for each
geographic area, sales and purchases between geographic areas have been
accounted for on the basis of internal transfer prices set by the Company.
Identifiable assets are those tangible and intangible assets used in operations
in each geographic area.
13. SUBSEQUENT EVENT
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. The Company made an initial investment of $1.2 million
for 35% of the common stock of QMT. QMT, a developmental stage company formed
in 1995, 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".
F-21
<PAGE> 43
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
14. SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1995 June 30, 1995 September 30, 1995 December 31, 1995
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Software Protection $10,662,000 $10,570,000 $10,720,000 $12,394,000
Information Security 5,091,000 6,091,000 5,090,000 5,690,000
----------- ----------- ----------- -----------
Total revenues 15,753,000 16,661,000 15,810,000 18,084,000
=========== =========== =========== ===========
Cost of revenues:
Software Protection 2,947,000 3,095,000 2,910,000 3,749,000
Information Security 3,870,000 4,650,000 4,007,000 4,338,000
----------- ----------- ----------- -----------
Total cost of revenues 6,817,000 7,745,000 6,917,000 8,087,000
=========== =========== =========== ===========
Operating income 3,616,000 3,594,000 3,685,000 4,664,000
Net income 2,154,000 2,257,000 2,480,000 2,747,000
Net income per share $0.28 $0.30 $0.32 $0.35
</TABLE>
<TABLE>
<CAPTION>
March 31, 1994 June 30, 1994 September 30, 1994 December 31, 1994
-------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Software Protection $ 9,023,000 $ 9,279,000 $ 9,011,000 $11,199,000
Information Security 3,733,000 5,181,000 3,721,000 3,936,000
----------- ----------- ----------- -----------
Total revenues 12,756,000 14,460,000 12,732,000 15,135,000
=========== =========== =========== ===========
Cost of revenues:
Software Protection 2,403,000 2,744,000 2,856,000 3,586,000
Information Security 3,382,000 4,075,000 3,119,000 2,945,000
----------- ----------- ----------- -----------
Total cost of revenues 5,785,000 6,819,000 5,975,000 6,531,000
=========== =========== =========== ===========
Operating income 2,774,000 3,001,000 2,901,000 3,968,000
Net income 1,663,000 1,592,000 1,661,000 2,080,000
Earnings per share $0.22 $0.22 $0.22 $0.28
</TABLE>
Net income per share is computed independently for each of the quarters
presented and the summation of quarterly amounts may not equal the total net
income per share reported for the year.
F-22
<PAGE> 44
RAINBOW TECHNOLOGIES, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS/
BEGINNING RECOVERIES BALANCE AT
DESCRIPTION OF YEAR ADDITIONS AND WRITE-OFFS END OF YEAR
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the year ended December 31:
1995
Allowance for doubtful accounts receivable $368,000 $ 73,000 $ 9,000 $450,000
1994
Allowance for doubtful accounts receivable $486,000 $ 16,000 $(134,000) $368,000
1993
Allowance for doubtful accounts receivable $390,000 $163,000 $ (67,000) $486,000
</TABLE>
F-23
<PAGE> 1
Exhibit 10(a)
STANDARD SUBLEASE
American Industrial Real Estate Association
1. PARTIES. This Sublease, dated, for reference purposes only, May 3, 1995,
is made by and between Birtcher Medical Systems, Inc., a California
corporation (herein called "Sublessor") and Rainbow Technologies, Inc., a
Delaware corporation (herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the
County of Orange, State of California commonly known as 50 Technology Drive,
Irvine Spectrum, Irvine, CA and described as a building consisting of
approximately 55,872 square feet located at the Lakeview Business Park.
Said real property, including the land and all improvements thereon, is
hereinafter called the "Premises".
3. TERM.
3 1 TERM. The term of this Sublease shall be for five (5) years , and
three (3) months commencing on June 1, 1995 and ending on August 22, 2000
unless sooner terminated pursuant to any provision hereof
3 2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, it
for any reason Sublessor cannot deliver possession of the Premises to
Sublessee on said date, Sublessor shall not be subject to any liability
therefore, nor shall such failure affect the validity of this lease or the
obligations of Sublessee hereunder or extend the term hereof, but in such
case Sublessee shall not be obligated to pay rent until possession of the
Premises is tendered to Sublessee, provided, however, that if Sublessor shall
not have delivered possession of the Premises within sixty (60) days from
said commencement date, Sublessee may, at Sublessee's option, by notice in
writing to Sublessor within ten (10) days thereafter, cancel this Sublease,in
which event the parties shall be discharged from all obligations thereunder.
If Sublessee occupies the Premises prior to said commencement date, such
occupancy shall be subject to all provisions hereof, such occupancy shall not
advance the termination date and Sublessee shall pay rent for such period at
the initial monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $ 40,000, in advance, on the lst day of each month of the
term hereof.
<PAGE> 2
Sublessee shall pay Sublessor upon the execution hereof $40,0000 as rent for
June l, 1995 through June 30, 1995 (first month's rent).
Rent for any period during the term hereof which is for less than one month
shall be a prorata portion of the monthly installment. Rent shall be payable
in lawful money of the United States to Sublessor at the address stated
herein or to such other persons or at such other places as Sublessor may
designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $40,000.00 as security for Sublessees faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to
restore said deposit to the full amount here and above stated and Sublessee's
failure to do so shall be a material breach of this Sublease. Sublessor shall
not be required to Keep said deposit separate from its general accounts. If
Sublessee performs all of Sublessee's obligations hereunder, said deposit, or
so much thereof as has not theretofore been applied by Sublessor, shall be
returned, without payment of interest or other increment for its use to
Sublessee (or at Sublessor's option, to the last assignee, if any, of
Sublessee's interest hereunder) at the expiration of the term hereof, and
after Sublessee has vacated the Premises. No trust relationship is created
herein between Sublessor and Sublessee with respect to said Security Deposit.
6 1 USE The Premises shall be used and occupied only for see Item 12 of
the Master Lease.
6 2 COMPLIANCE WITH LAW.
(a) Sublessor warrants to Sublessee that the Premises, in its existing
state but without regard to the use for which Sublessee will use the
premisis, does not violate any applicable building code regulation or
oradinance at the time that this Sublease is executed. In the event, that it
is determined that this warranty has been violated, then it shall be the
obligation of the Sublessor, after written notice from Sublessee, to promptly
at Sublessor's sole cost and expense, rectify any such violation. In the
event that Sublessee does not give to Sublessor written notice of the
violation of this warranty within one year from the commencement of the term
of this sublease, it shall be conclusively deemed that such violation did not
exist and the correction of the same shall be the obligation of the
Sublessee.
<PAGE> 3
(b) Except as provided in paragraph 6.2 (a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes ordinances,
rules regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Subessee
of the Premses. Sublessee shall not use or permit the use of the Premises in
any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant of the building containing the Premises, which shall
tend to disturb such other tenants.
6.3 CONDITION OF PREMISES. See Addendum Section 6.3.
7. MASTER LEASE
7.1 Sublessor is the Lessee of the Premisis by virtue of a Lease,
hereinafter referred to as the "Master Lease" a copy of which is attached
hereto marked Exhibit 1, dated March 16, 1990, wherein the Irvine Company is
the Lessor, hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.
7.3 The terms, condition and respective obligations of Sublessor and
Sublessee to each other under this Sublease, shall be the terms and condition
of the Master Lease, except for those provisions of the Master Lease which
are directly contradicted by this Sublease, in which event the terms of this
Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Landlord"
is used, it shall be deemed to mean the Sublessor herein and wherever in the
Master Lease "Tenant" it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with,
for the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease, except for the following paragraphs which
are excluded therefrom. Article 1-2, 3, 4, 7, 8, 9, 11, 13, 14, and Sections
3.2, 3.3, 3.4, 3.5, 3.6, 4.1, 4.2, 4.7, and Section Six, Exhibits C, D, E,
Lease Riders #1, 5, 8, and Work Letter Riders #5, 6, and First, Second, Third
and Fourth Amendments to the Lease.
7.5 The obligations that Sublessee has assumed under Paragraph 7.4
hereof and hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under Paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees,
<PAGE> 4
arising out of Sublessee's failure to comply with or perform Sublessee's
Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire
term of this Sublease, subject, however, to any earlier termination of the
Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless of and from all liability, judgments, costs, damages, claims or
demands arising out of Sublessor's failure to comply with or perform
Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any parts to the
Master Lease.
8 ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8 2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents
accruing under this Sublease. However, if Sublessor shall default in the
performance of its obligations to Master Lessor then Master Lessor may, at
its option, receive and collect, directly from Sublessee, all rent owing and
to be owed under this Sublease. Master Lessor shall not, by reason of this
assignment of the Sublease nor by reason of the collection of rents from the
Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to
perform and comply with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease,
to pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Sublessor to the contrary and Sublessor shall have no right or claim against
Sublessee for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
<PAGE> 5
9.1 In the event that the Master Lease requires that Sublessor obtam
the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, on or before May 26, 1995 Master
Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease,nor the Master
Lessor's consent, shall not be effective unless, within 10 days of the date
hereof, said guarantors sign this Sublease thereby giving guarantors consent
to this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay the rent and perform and
comply with all of the obligations of Sublessor to be performed under the
Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or
any one else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions the Master Lease.
(c) The consent to this Sublease shall not constitute a
consent to any subsequent subletting or assignment.
(d) in the event of any default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors
or any one else liable under the Master Lease or this Sublease without first
exhaustmg Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
moditications thereto without notifying Sublessor nor any one else liable
under the Master Lease and without obtaining their consent and such action
shall not relieve such persons from liability.
(f) In the event that Sublessor shall default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obilgations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepay rents nor any security deposit paid by Sublessee, nor shall Master
Lessor be liable for any other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor
at the end of this document shall constitute their consent to the terms of
this Sublease.
<PAGE> 6
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations
to be performed by Sublessor and that the Master Lease is in full force and
effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall
have the right to cure any default of Sublessor described in any notice of
default within ten days after service of such notice of default on Sublessee.
If such default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to
Cushman & Wakefield of California, Inc. a licensed real estate broker,
(herein called "Broker"), a fee as set forth in a separate agreement between
Sublessor and Broker, or in the event there is no separate agreement between
Sublessor and Broker, the sum of $134,200.00 for brokerage services rendered
by Broker to Sublessor in this transaction. Cushman & Wakefield will pay to
Grubb & Ellis Company $73,200.00 of the $134,200.00.
10.2 Sublessor agrees that it Sublessee exercises any option or right
of first refusal granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this Sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase
adjacent property which Sublessor may own or in which Sublessor has an
interest, or if Broker is the procuring cause of any lease, sublease, or sale
pertaining to the Premises or any adjacent property which Sublessor may own
or in which Sublessor has an interest, then as to any of said transactions
Sublessor shall pay to Broker a fee, in cash, in accordance with the schedule
of Broker in effect at the time of the execution this Sublease.
Notwithstanding the foregoing, Sublessor's obligation under this Paragraph 10
2 is limited to a transaction in which Sublessor is acting as a Sublessor,
lessor, or seller.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action
to enforce the terms hereof or to declare rights hereunder, the prevailing
party in any such action, on trial and appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the
Court. The provision of this paragraph shall inure to the benefit of the
Broker named herein who seeks to enforce a right hereunder.
12. ADDITIONAL PROVISIONS. [if there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there
are additional provisions place the same here.]
SEE ATTACHED ADDENDUM FOR ADDITIONAL PROVISIONS
<PAGE> 7
It this Sublease has been filled in it has been prepared for submission
to your attorney for his approval. No representation or recommendation is
made by the real estate broker or its agents or employees as to the legal
sufficiency, legal effect, or tax consequences of this Sublease or the
transaction relating thereto.
Executed at Birtcher Medical Systems
on ______________________ a California corporation
Execited at "Sublessor"
Rainbow Technologies, Inc.
a Delaware corporation
9292 Jeronimo Road
Irvine, CA 92718
The Irvine Company
550 Newport Center Drive
Newport Beach, CA 92660
<PAGE> 8
CONSENT TO SUBLETTING
I. PARTIES AND DATES.
This Consent to Subletting ("Consent") dated May 31, 1995, is by and
between THE IRVINE COMPANY, a Michigan corporation ("Landlord"), BIRTCHER
MEDICAL SYSTEMS, INC., a California corporation ("Tenant"), and RAINBOW
TECHNOLOGIES INC., a Delaware corporation ("Subtenant").
II. RECITALS.
Landland and Tenant are parties to a standard form space lease dated
March 16, 1990, as amended by a First Amendment to Lease dated February 26, 1991
(collectively the "Lease"), for certain space located at 50 Technology Drive,
Irvine, California ("Premises").
The Lease contains provisions which require, among other things, Tenant
to obtain Landlord's consent to any subletting of the Premises. Tenant has
requested Landlord to consent to a subletting of the Premises to Subtenant.
III. CONSENT TO SUBLETTING.
For valuable consideration including Tenant's and Subtenant's agreement
to the provisions of this Consent, Landlord consents to a subletting to
Subtenant of approximately 55,872 rentable square feet of the Premises. Tenant
and Subtenant agree that this Consent is conditioned upon their agreement that:
A. The sublease agreement ("Sublease") between Tenant and Subtenant is
expressly subject to the provisions of the Lease, a copy of which Subtenant
acknowledges it has received.
B. Tenant will deliver a copy of the Sublease to Landlord within five
(5) business days of Landlord's request, provided that if the Sublease is not in
writing, Tenant may deliver a reasonably detailed summary of the Sublease
including information respecting the length of the term and the amount of rent
and other charges payable under the Sublease, which summary shall be approved by
Subtenant.
C. Tenant's obligations under the Lease shall not be affected by this
Consent.
D. Landlord shall be entitled to receive profits derived by Tenant from
this subletting in accordance with the provisions of the Lease.
E. The provisions of the Lease respecting assignment and subletting are
not waived with respect to future assignments and sublettings.
F. Subtenant is not claiming any interest in a right belonging solely
to Tenant pursuant to the Lease.
1
<PAGE> 9
G. The Lease is in full force and effect and that Landlord is not in
breach of any provision of the Lease.
H. That if the Sublease terminates by reason of a termination of the
Lease, Landlord may, at its option, by delivering written notice to Subtenant,
assume the obligation of Tenant under the Sublease in which event Subtenant
shall recognize Landlord as if it were Sublandlord under the Sublease.
IV. SUBTENANT'S PRINCIPAL PLACE OF BUSINESS.
The address of Subtenant's principal place of business is:
50 Technology Drive
Irvine, CA 92718
V. GENERAL.
A. EFFECT OF SUBLETTING. The Lease and Tenant's obligations to Landlord
shall not be deemed to have been modified by this Consent.
B. ENTIRE AGREEMENT. This Consent embodies the entire understanding
between Landlord, Tenant and Subtenant with respect to the subletting and can be
changed only by an instrument in writing signed by the party against whom
enforcement is sought.
C. COUNTERPARTS. If this Consent is executed in counterparts, each is
hereby declared to be an original; all, however, shall constitute but one in the
same Consent. In any action or proceeding, any photographic, photostatic, or
other copy of this Consent may be introduced into evidence without foundation.
D. DEFINED TERMS. All words commencing with initial capital letters in
this Consent and defined in the Lease shall have the same meaning in this
Consent as in the Lease.
E. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation or
partnership, or is comprised of either or both of them, each individual
executing this Consent for the corporation or partnership represents that he or
she is duly authorized to execute and deliver this Consent on behalf of the
corporation or partnership and that this Consent is binding upon the corporation
or partnership in accordance with its terms.
F. ATTORNEYS' FEES. The provisions of the Lease respecting payment of
attorneys' fees shall also apply to this Consent to Subletting.
VI. EXECUTION.
2
<PAGE> 10
Landlord, Tenant and Subtenant have entered into this Consent as of the
date set forth in "I. PARTIES AND DATE" above.
TENANT: LANDLORD:
BIRTCHER MEDICAL SYSTEMS, INC. THE IRVINE COMPANY,
a California corporation a Michigan corporation
By: __________________ By: ____________________
Name: ________________ Clarence W. Barker, President
Title: _________________ Irvine Industrial Company, a
division of The Irvine Company
By: ___________________ By:_____________________
Name: _________________ John C. Tsu,
Title: __________________ Assistant Secretary
SUBTENANT:
RAINBOW TECHNOLOGIES INC.,
a Delaware corporation
By: _________________________
Name: ______________________
Title: _______________________
By: ________________________
Name: ______________________
Title: _______________________
3
<PAGE> 11
Grubb & Ellis Company
Commercial Real Estate Services
State of California
SALE/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
The United States Congress has enacted the Americans With Disabilities Act.
Among other things, this act is intended to make many business establishments
equally accessible to persons with a variety of disabilities; modifications to
real property may be required. State and local laws also may mandate changes.
The real estate brokers in this transaction are not qualified to advise you as
to what, if any, changes may be required now, or in the future. Owners and
tenants should consult the attorneys and qualified design professionals of
their choice for information regarding these matters. Real estate brokers
cannot determine which attorneys or design professionals have the appropriate
expertise in this area.
Various construction materials may contain items that have been or may be in
the future be determined to be hazardous (toxic) or undesirable and may need
to be specifically treated/handled or removed. For example, some transformers
and other electrical components contain PCB's, and asbestos has been used in
components such as fire-proofing, heating and cooling systems, air duct
insulation, spray-on and tile acoustical materials, linoleum, floor tiles,
roofing, dry wall and plaster. Due to prior or current uses of the Property or
in the area, the Property may have hazardous or undesirable metals, minerals,
chemicals, hydrocarbons, or biological or radioactive items (including
electric and magnetic fields) in soils, water, building components, above or
below ground containers or elsewhere in areas that may or may not be
accessible or noticeable. Such items may leak or otherwise be released. Real
estate agents have no expertise in the detection or correction of hazardous or
undesirable items. Expert inspections are necessary . Current or future laws
may require clean up by past. present and/or future owners and/or operators.
It is the responsibility of the Seller/Lessor and Buyer/Tenant to retain
qualified experts to detect and correct such matters and to consult with legal
counsel of their choice to determine what provisions, if any, they may wish to
include in transaction documents regarding the Property.
To the best of Seller/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to Seller/Lessor
regarding asbestos and other hazardous materials and undesirable substances
related to the Property. Sellers/Lessors are required under California Health
and Safety Code Section 25915 et seq. to disclose reports and surveys
regarding asbestos to certain persons, including their employees, contractors,
co-owners, purchasers and tenants. Buyers/Tenants have similar disclosure
obligations. Sellers/Lessors and Buyers/Tenants have additional hazardous
materials disclosure responsibilities to each other under California Health
and Safety
<PAGE> 12
Code Section 25359.7 and other California laws. Consult your
attorney regarding this matter. Grubb & Ellis Company is not qualified to
assist you in this matter or provide you with other legal or tax advice.
SUBLESSOR SUBLESSEE
By: ____________________ By: ________________________
Title: ___________________ Title: _______________________
Date: ___________________ Date: _______________________
<PAGE> 1
Exhibit 10(p)
EMPLOYMENT AGREEMENT, dated as of May 31, 1995 by and between Theodore
S. Bettwy residing at 4478 Spencer Street, Torrance, California 90503
("Employee") and Mykotronx, Inc., a California corporation with offices at 357
Van Ness Way, Suite 200, Torrance, California 90501 ("Mykotronx") and Rainbow
Technologies, Inc., a Delaware corporation with offices at 9292 Jeronimo Road,
Irvine, California 92718 ("Rainbow").
RECITALS
WHEREAS, Employee is presently the President of Mykotronx, and has
extensive knowledge with respect thereto;
WHEREAS, Mykotronx and Rainbow are concurrently herewith entering into
an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
pursuant to which it is anticipated that Rainbow Acquisition, Inc., a California
corporation and wholly-owned subsidiary of Rainbow, will be merged with and into
Mykotronx (the "Merger"), with Mykotronx, as the surviving corporation, becoming
a wholly-owned subsidiary of Rainbow on the items and conditions set forth in
the Reorganization Agreement;
WHEREAS, Mykotronx and Rainbow desire that Mykotronx employs Employee
after the date the Merger is consummated (the "Closing Date") and Employee's
willingness to serve as an employee of Mykotronx on the terms herein specified
was a material factor in inducing Rainbow to enter into the Reorganization
Agreement;
WHEREAS, it is a condition to Mykotronx' and Rainbow's obligations to
consummate the Merger that Employee enter into this Employment Agreement (the
"Agreement"); and
WHEREAS, the parties wish to set forth the terms of their employment
relationship in this Agreement.
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements set forth herein, the parties hereto agree to as follows:
1. EMPLOYMENT WITH MYKOTRONX. Mykotronx agrees to employ Employee and Employee
agrees to serve as an employee of Mykotronx. During the "Term" (as defined in
Section 4.1 of this Agreement), Employee will devote his full skill, efforts,
business time and attention to his employment with Mykotronx under this
Agreement. Employee will report to the Board of Directors of Mykotronx.
Employee's duties will be executive in nature and are expected to include, but
not necessarily be limited to, serving in the capacity of President of Mykotronx
and such other duties as the Board of Directors of Mykotronx shall from time to
time direct (such services are referred to as the "Services").
2. COMPENSATION AND BENEFITS.
2.1 BASE COMPENSATION. During the Term, Mykotronx will pay Employee
biweekly payments of base compensation at the rate of $124,800 per annum (the
"Base Compensation").
2.2 ADDITIONAL COMPENSATION. As additional compensation during the
Term, Mykotronx will pay Employee an amount equal to .5% of Mykotronx "sales"
and 3% of Mykotronx "profits after taxes" (the "Additional Compensation"). Any
earned Additional Compensation will be paid by Mykotronx to Employee biannually
within 10 days of the issuance of its profit and loss statement for the first
six month period and the fiscal year then ended, which payment at year end will
be adjusted for any overpayment or underpayment in the six month installment for
such fiscal year. The terms "sales" and "profit after tax" as used herein shall
have the meanings imputed to them in the Mykotronx financial statements for the
Mykotronx fiscal years ended December 31, 1993 and 1994, consistently applied.
1
<PAGE> 2
2.3 COMPENSATION PROCEDURE. Base Compensation and Additional
Compensation will be paid and withholding effected in accordance with Mykotronx'
standard payroll practices.
2.4 STOCK OPTIONS. On the Closing Date, Employee will receive options
to purchase 20,000 shares of Rainbow Common Stock, subject to Rainbow's standard
vesting requirements, at an exercise price to be determined in accordance with
the provisions of Rainbow's Restated 1990 Incentive Stock Option Plan (the
"Plan"). Employee acknowledges that the grant of additional stock options by
Rainbow to Employee under the Plan, if any, shall be made at the sole discretion
of the Stock Option Committee of the Board of Directors of Rainbow.
2.5 BENEFITS. Mykotronx shall provide Employee with benefits during the
Term in an amount and type commensurate with other executive employees of
Mykotronx.
3. ANNUAL REVIEW. The parties agree that subsequent to the end of each calendar
year during the Term, Mykotronx will review Employee job performance and the
Base Compensation and Additional Compensation then paid to Employee.
4. TERMINATION; EFFECT OF TERMINATION.
4.1 TERM. The initial term of this Agreement shall be a period of two
(2) years commencing on the Closing Date (the "Initial Term"). The term of this
Agreement will be automatically renewable for one (1) year periods (the
"Subsequent Term") upon the expiration of the Initial Term and any Subsequent
Term unless this Agreement has been terminated by either party upon notice of at
least 90 days prior to the end of the then current Term. The Initial Term and
the Subsequent Term are referred to collectively as the "Term."
4.2 TERMINATION PROCEDURE. Employee may terminate his employment
relationship with Mykotronx pursuant to this Agreement for any reason upon 30
days notice to Mykotronx. If Employee gives such notice, or Mykotronx notifies
Employee of its intent to terminate Employee's employment for "Cause" pursuant
to Section 4.3 below, Mykotronx, in its sole discretion, may require Employee to
cease exercise of his responsibilities and performance of Services for Mykotronx
at any time prior to the effective date of the notice of termination. The
effective date of the termination of Employee's employment relationship with
Mykotronx is referred to as the "Termination Date." Except as provided in this
Section 4.2, Mykotronx may require Employee to cease exercise of his
responsibilities and/or performance of services, but may not terminate his
employment during the Initial Term.
4.3 TERMINATION FOR CAUSE. Notwithstanding any contrary provision of
this Agreement, Mykotronx shall have the right to terminate Employee's
employment with Mykotronx during the Term for "Cause" (as defined herein) or in
the event of Employee's death or "Disability" (as defined herein). For the
purposes of this Agreement, the term "Cause" will mean:
4.3.1 Employee's repeated material breach in respect of, or
refusal to perform his duties, as reasonably assigned
by the Board of Directors consistent with his
position;
4.3.2 Employee is convicted of any felony or crime of moral
turpitude;
4.3.3 Abusive use of drugs or alcohol by Employee;
4.3.4 Embezzlement or misappropriation by Employee of
Mykotronx assets; or
4.3.5 Repeated, unexcused breaches or absences in
contravention of
2
<PAGE> 3
Mykotronx' reasonable policies as pronounced from time to time.
The term "Disability" shall be defined as Mykotronx' inability, through
physical or mental illness or other cause, to perform the majority of Employee's
usual duties for at least a period of three (3) continuous months or more.
4.4 PAYMENT ON TERMINATION. Any termination of Employee's employment
relationship with Mykotronx under this Section 4 will be without damages or
liability to Mykotronx for compensation and other benefits which would have
accrued hereunder after the Termination Date, but all Base Compensation and
Additional Compensation, and benefits accrued through the Termination Date will
be paid to Employee within thirty (30) days of the Termination Date.
5. RESTRICTIVE COVENANTS.
5.1 ACKNOWLEDGMENTS. Employee acknowledges that fulfillment of the
obligations hereunder will result in the Employee becoming familiar with the
business affairs of Mykotronx and Rainbow and any present or future parent,
subsidiary or affiliate of Mykotronx or Rainbow, including, but not limited to,
information about costs, profits, markets, sales, technology and customers. The
Employee further acknowledges that this information is essential to the
operation of Mykotronx and such information constitutes trade secrets of
Mykotronx (the "Trade Secrets").
5.2 ACKNOWLEDGMENT OF PROPRIETARY INFORMATION AGREEMENT. Mykotronx and
the Employee acknowledge that they are parties to an "Employee Proprietary
Information and Invention Agreement, dated February 3, 1993 (the "Proprietary
Information Agreement") pursuant to which Employee has agreed to certain
restrictions regarding the Mykotronx "Proprietary Information" (as that term is
defined in the Proprietary Information Agreement). In addition, the parties
agree that for the purposes of this Agreement, the description of "Proprietary
Information" shall be supplemented to include any information exchanged by the
parties regarding the business and affairs of Rainbow. Accordingly, the parties
agree that the term "Proprietary Information" when used in this Agreement shall
have the meaning assigned to it in the Proprietary Information Agreement as
supplemented by the preceding sentence, and that all such Proprietary
Information shall be treated in the manner set forth in the Proprietary
Information Agreement. The parties further agree that except for the supplement
contained in this paragraph, the Proprietary Information Agreement remains in
full force and effect, and any conflicts between this Agreement and the
Proprietary Information Agreement regarding Proprietary Information shall be
resolved in favor of the Proprietary Information Agreement.
5.3 RETURN OF MATERIALS. At the end of the Term or upon earlier
termination of Employee's relationship with Mykotronx pursuant to this
Agreement, Employee will promptly return to Mykotronx all items of any nature
that belong to Mykotronx and all records (in any form, format or medium)
containing or relating to, the Proprietary Information or the Trade Secrets.
5.4 RESTRICTIVE COVENANT. The Employee agrees that during his
employment, the Employee shall not directly or indirectly through any other
person, firm or corporation compete with or be engaged in the same business as
Mykotronx or directly or indirectly, for Employee's own benefit or for, with or
through any other person, firm, or corporation, own, manage, operate, control,
loan money to, or participate in the ownership, management, operation, control
of, or be connected as a director, officer, employee, partner, consultant,
agent, independent contractor, or otherwise with, or acquiesce in the use of his
name to any organization competing with or that is engaged in the same business
as Mykotronx (the "Restrictive Covenant").
5.5 EXTENSION OF RESTRICTIVE COVENANTS. If the employment of Employee
is terminated by Rainbow for Cause or voluntarily by Employee at any time during
the Initial Term, Mykotronx may, but shall not be obligated to, extend the
Restrictive Covenant for a period of one year following termination
3
<PAGE> 4
of employment; and if Employee's employment is terminated for such reasons at
any time following the Initial Term, Mykotronx may extend the Restrictive
Covenant for a period of six (6) months following termination. In either such
event, Mykotronx shall pay to Employee, at normal intervals, during and for the
period that the Restrictive Covenant remains in effect, an amount equal to
Employee's Base Compensation as of the date of termination.
5.6 RESTRICTIVE COVENANTS REASONABLE AND NECESSARY. The Employee agrees
that the provisions of this Section 5 are reasonable and necessary to protect
Mykotronx in the conduct of its business. If any restriction contained in this
Section 5 shall be deemed to be invalid, illegal, or unenforceable by reason of
the extent, duration or geographical scope, or other provisions hereof and in
its reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
6. SPECIFIC PERFORMANCE. Employee, recognizing that irreparable injury shall
result to Mykotronx in the event of Employee's breach of the terms and
conditions of this Agreement, agrees that in the event of his breach or
threatened breach, Mykotronx shall be entitled to injunctive relief restraining
Employee, and any and all persons or entities acting for or with him, from such
breach or threatened breach. Nothing herein contained, however, shall be
construed as prohibiting Mykotronx from pursuing any other remedies available to
it by reason of such breach or threatened breach.
7. GENERAL.
7.1 OTHER AGREEMENTS. Employee represents to Mykotronx that Employee is
not a party to any other agreements or commitments that would materially impair
his ability to perform his obligations under this Agreement and Employee will
not enter into any other such agreements unless authorized to do so by
Mykotronx.
7.2 ENFORCEABILITY. If any provision of this Agreement will be found by
any court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision will, to the extent allowable by law, be modified
by a court so that it becomes enforceable and, as modified, will be enforced as
any other provision hereof, all the other provisions continuing in full force
and effect.
7.3 NO WAIVER. The failure by either party at any time to require
performance or compliance by the other of any of its obligations or agreements
will in no way affect the right to require such performance or compliance at any
time thereafter. The waiver by either party of a breach of any provision hereof
will not be taken or held to be a waiver of any preceding or succeeding breach
of such provision or as a waiver of the provision itself. No waiver of any kind
will be effective or binding, unless it is in writing and is signed by the party
against which such waiver is sought to be enforced.
7.4 ASSIGNMENT. This Agreement and all rights hereunder are personal to
Employee and may not be transferred or assigned by Employee at any time.
Mykotronx may assign its rights, together with its obligations hereunder, to any
parent, subsidiary, affiliates or successors, in connection with any sale,
transfer or other disposition of all or substantially all of its business and
assets, provided, however, that any such assignee assumes Mykotronx'
obligations.
7.5 HEADINGS. The headings contained in this Agreement are for
reference purposes only and will in no way affect the meaning or interpretation
of this Agreement. In this Agreement, the singular includes the plural, and
plural the singular, the masculine gender includes both male and female
referents, and the word "or" is used in the inclusive sense.
7.6 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of California, excluding that body of law
applicable to conflict of laws.
4
<PAGE> 5
7.7 SURVIVAL. The provisions of Section 5 will survive the termination
or expiration of this Agreement as a continuing agreement of Mykotronx and
Employee.
7.8 NOTICE. All notices, requests, demands and other communications
hereunder will be in writing and will be deemed to have been duly given when (A)
delivered personally; or (B) three days after mailing by certified mail, return
receipt requested, postage prepaid or upon proof of delivery by prepaid express
courier, to the address of the applicable party as set forth in the preamble to
this Agreement. Addresses may be changed by notice given in accordance with the
provisions of the Reorganization Agreement, except that a notice of change of
address will not be deemed to have been duly given until actually received by
the addressee.
7.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, and all of which together will
comprise one and the same instrument.
8. GUARANTEE. If for any reason Mykotronx fails or is unable to perform its
obligations under this Agreement, Rainbow, the parent of Mykotronx, guarantees
the performance of, and agrees to perform in the place of Mykotronx, all such
obligations of Mykotronx.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MYKOTRONX, INC.
By:________________________________ _________________________________
John C. Droge, Vice President Theodore S. Bettwy, Employee
AGREED AS TO SECTION 8
RAINBOW TECHNOLOGIES, INC.
By:________________________________
Walter W. Straub, President
6
<PAGE> 1
Exhibit 10(q)
EMPLOYMENT AGREEMENT, dated as of May 31, 1995 by and between John C.
Droge residing at 414 Sixth Street, Hermosa Beach, California 90254 ("Employee")
and Mykotronx, Inc., a California corporation with offices at 357 Van Ness Way,
Suite 200, Torrance, California 90501 ("Mykotronx") and Rainbow Technologies,
Inc., a Delaware corporation with offices at 9292 Jeronimo Road, Irvine,
California 92718 ("Rainbow").
RECITALS
WHEREAS, Employee is presently the Vice President of Program
Development of Mykotronx, and has extensive knowledge with respect thereto;
WHEREAS, Mykotronx and Rainbow are concurrently herewith entering into
an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
pursuant to which it is anticipated that Rainbow Acquisition, Inc., a California
corporation and wholly-owned subsidiary of Rainbow, will be merged with and into
Mykotronx (the "Merger"), with Mykotronx, as the surviving corporation, becoming
a wholly-owned subsidiary of Rainbow on the items and conditions set forth in
the Reorganization Agreement;
WHEREAS, Mykotronx and Rainbow desire that Mykotronx employs Employee
after the date the Merger is consummated (the "Closing Date") and Employee's
willingness to serve as an employee of Mykotronx on the terms herein specified
was a material factor in inducing Rainbow to enter into the Reorganization
Agreement;
WHEREAS, it is a condition to Mykotronx' and Rainbow's obligations to
consummate the Merger that Employee enter into this Employment Agreement (the
"Agreement"); and
WHEREAS, the parties wish to set forth the terms of their employment
relationship in this Agreement.
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
1. EMPLOYMENT WITH MYKOTRONX. Mykotronx agrees to employ Employee and Employee
agrees to serve as an employee of Mykotronx. During the "Term" (as defined in
Section 4.1 of this Agreement), Employee will devote his full skill, efforts,
business time and attention to his employment with Mykotronx under this
Agreement. Employee will report to the President of Mykotronx. Employee's duties
will be executive in nature and are expected to include, but not necessarily be
limited to, serving in a program development capacity for Mykotronx and such
other duties as the Board of Directors of Mykotronx shall from time to time
direct (such services are referred to as the "Services").
2. COMPENSATION AND BENEFITS.
2.1 BASE COMPENSATION. During the Term, Mykotronx will pay Employee
biweekly payments of base compensation at the rate of $110,968 per annum (the
"Base Compensation").
2.2 ADDITIONAL COMPENSATION. As additional compensation during the
Term, Mykotronx will pay Employee an amount equal to .3% of Mykotronx "sales"
and 2% of Mykotronx "profits after taxes" (the "Additional Compensation"). Any
earned Additional Compensation will be paid by Mykotronx to Employee biannually
within 10 days of the issuance of its profit and loss statement for the first
six month period and the fiscal year then ended, which payment at year end will
be adjusted for any overpayment or underpayment in the six month installment for
such fiscal year. The terms "sales" and "profit after tax" as used herein shall
have the meanings imputed to them in the Mykotronx financial statements for the
Mykotronx fiscal years ended December 31, 1993 and 1994, consistently applied.
1
<PAGE> 2
2.3 COMPENSATION PROCEDURE. Base Compensation and Additional
Compensation will be paid and withholding effected in accordance with Mykotronx'
standard payroll practices.
2.4 STOCK OPTIONS. On the Closing Date, Employee will receive options
to purchase 20,000 shares of Rainbow Common Stock, subject to Rainbow's standard
vesting requirements, at an exercise price to be determined in accordance with
the provisions of Rainbow's Restated 1990 Incentive Stock Option Plan (the
"Plan"). Employee acknowledges that the grant of additional stock options by
Rainbow to Employee under the Plan, if any, shall be made at the sole discretion
of the Stock Option Committee of the Board of Directors of Rainbow.
2.5 BENEFITS. Mykotronx shall provide Employee with benefits during the
Term in an amount and type commensurate with other executive employees of
Mykotronx.
3. ANNUAL REVIEW. The parties agree that subsequent to the end of each calendar
year during the Term, Mykotronx will review Employee job performance and the
Base Compensation and Additional Compensation then paid to Employee.
4. TERMINATION; EFFECT OF TERMINATION.
4.1 TERM. The initial term of this Agreement shall be a period of two
(2) years commencing on the Closing Date (the "Initial Term"). The term of this
Agreement will be automatically renewable for one (1) year periods (the
"Subsequent Term") upon the expiration of the Initial Term and any Subsequent
Term unless this Agreement has been terminated by either party upon notice of at
least 90 days prior to the end of the then current Term. The Initial Term and
the Subsequent Term are referred to collectively as the "Term."
4.2 TERMINATION PROCEDURE. Employee may terminate his employment
relationship with Mykotronx pursuant to this Agreement for any reason upon 30
days notice to Mykotronx. If Employee gives such notice, or Mykotronx notifies
Employee of its intent to terminate Employee's employment for "Cause" pursuant
to Section 4.3 below, Mykotronx, in its sole discretion, may require Employee to
cease exercise of his responsibilities and performance of Services for Mykotronx
at any time prior to the effective date of the notice of termination. The
effective date of the termination of Employee's employment relationship with
Mykotronx is referred to as the "Termination Date." Except as provided in this
Section 4.2, Mykotronx may require Employee to cease exercise of his
responsibilities and/or performance of services, but may not terminate his
employment during the Initial Term.
4.3 TERMINATION FOR CAUSE. Notwithstanding any contrary provision of
this Agreement, Mykotronx shall have the right to terminate Employee's
employment with Mykotronx during the Term for "Cause" (as defined herein) or in
the event of Employee's death or "Disability" (as defined herein). For the
purposes of this Agreement, the term "Cause" will mean:
4.3.1 Employee's repeated material breach in respect of, or
refusal to perform his duties, as reasonably assigned
by the President consistent with his position;
4.3.2 Employee is convicted of any felony or crime of moral
turpitude;
4.3.3 Abusive use of drugs or alcohol by Employee;
4.3.4 Embezzlement or misappropriation by Employee of
Mykotronx assets; or
4.3.5 Repeated, unexcused breaches or absences in
contravention of Mykotronx' reasonable policies as
pronounced from time to time.
2
<PAGE> 3
The term "Disability" shall be defined as Mykotronx' inability, through
physical or mental illness or other cause, to perform the majority of Employee's
usual duties for at least a period of three (3) continuous months or more.
4.4 PAYMENT ON TERMINATION. Any termination of Employee's employment
relationship with Mykotronx under this Section 4 will be without damages or
liability to Mykotronx for compensation and other benefits which would have
accrued hereunder after the Termination Date, but all Base Compensation and
Additional Compensation, and benefits accrued through the Termination Date will
be paid to Employee within thirty (30) days of the Termination Date.
5. RESTRICTIVE COVENANTS.
5.1 ACKNOWLEDGMENTS. Employee acknowledges that fulfillment of the
obligations hereunder will result in the Employee becoming familiar with the
business affairs of Mykotronx and Rainbow and any present or future parent,
subsidiary or affiliate of Mykotronx or Rainbow, including, but not limited to,
information about costs, profits, markets, sales, technology and customers. The
Employee further acknowledges that this information is essential to the
operation of Mykotronx and such information constitutes trade secrets of
Mykotronx (the "Trade Secrets").
5.2 ACKNOWLEDGMENT OF PROPRIETARY INFORMATION AGREEMENT. Mykotronx and
the Employee acknowledge that they are parties to an "Employee Proprietary
Information and Invention Agreement, dated April 2, 1990 (the "Proprietary
Information Agreement") pursuant to which Employee has agreed to certain
restrictions regarding the Mykotronx "Proprietary Information" (as that term is
defined in the Proprietary Information Agreement). In addition, the parties
agree that for the purposes of this Agreement, the description of "Proprietary
Information" shall be supplemented to include any information exchanged by the
parties regarding the business and affairs of Rainbow. Accordingly, the parties
agree that the term "Proprietary Information" when used in this Agreement shall
have the meaning assigned to it in the Proprietary Information Agreement as
supplemented by the preceding sentence, and that all such Proprietary
Information shall be treated in the manner set forth in the Proprietary
Information Agreement. The parties further agree that except for the supplement
contained in this paragraph, the Proprietary Information Agreement remains in
full force and effect, and any conflicts between this Agreement and the
Proprietary Information Agreement regarding the Proprietary Information shall be
resolved in favor of the Proprietary Information Agreement.
5.3 RETURN OF MATERIALS. At the end of the Term or upon earlier
termination of Employee's relationship with Mykotronx pursuant to this
Agreement, Employee will promptly return to Mykotronx all items of any nature
that belong to Mykotronx and all records (in any form, format or medium)
containing or relating to, the Proprietary Information or the Trade Secrets.
5.4 RESTRICTIVE COVENANT. The Employee agrees that during his
employment, the Employee shall not directly or indirectly through any other
person, firm or corporation compete with or be engaged in the same business as
Mykotronx or directly or indirectly, for Employee's own benefit or for, with or
through any other person, firm, or corporation, own, manage, operate, control,
loan money to, or participate in the ownership, management, operation, control
of, or be connected as a director, officer, employee, partner, consultant,
agent, independent contractor, or otherwise with, or acquiesce in the use of his
name to any organization competing with or that is engaged in the same business
as Mykotronx (the "Restrictive Covenant").
5.5 EXTENSION OF RESTRICTIVE COVENANTS. If the employment of Employee
is terminated by Rainbow for Cause or voluntarily by Employee at any time during
the Initial Term, Mykotronx may, but shall not be obligated to, extend the
Restrictive Covenant for a period of one year following termination of
employment; and if Employee's employment is terminated for such reasons at any
time following the Initial Term, Mykotronx may extend the Restrictive Covenant
for a period of six (6) months following
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<PAGE> 4
termination. In either such event, Mykotronx shall pay to Employee, at normal
intervals, during and for the period that the Restrictive Covenant remains in
effect, an amount equal to Employee's Base Compensation as of the date of
termination.
5.6 RESTRICTIVE COVENANTS REASONABLE AND NECESSARY. The Employee agrees
that the provisions of this Section 5 are reasonable and necessary to protect
Mykotronx in the conduct of its business. If any restriction contained in this
Section 5 shall be deemed to be invalid, illegal, or unenforceable by reason of
the extent, duration or geographical scope, or other provisions hereof and in
its reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
6. SPECIFIC PERFORMANCE. Employee, recognizing that irreparable injury shall
result to Mykotronx in the event of Employee's breach of the terms and
conditions of this Agreement, agrees that in the event of his breach or
threatened breach, Mykotronx shall be entitled to injunctive relief restraining
Employee, and any and all persons or entities acting for or with him, from such
breach or threatened breach. Nothing herein contained, however, shall be
construed as prohibiting Mykotronx from pursuing any other remedies available to
it by reason of such breach or threatened breach.
7. GENERAL.
7.1 OTHER AGREEMENTS. Employee represents to Mykotronx that Employee is
not a party to any other agreements or commitments that would materially impair
his ability to perform his obligations under this Agreement and Employee will
not enter into any other such agreements unless authorized to do so by
Mykotronx.
7.2 ENFORCEABILITY. If any provision of this Agreement will be found by
any court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision will, to the extent allowable by law, be modified
by a court so that it becomes enforceable and, as modified, will be enforced as
any other provision hereof, all the other provisions continuing in full force
and effect.
7.3 NO WAIVER. The failure by either party at any time to require
performance or compliance by the other of any of its obligations or agreements
will in no way affect the right to require such performance or compliance at any
time thereafter. The waiver by either party of a breach of any provision hereof
will not be taken or held to be a waiver of any preceding or succeeding breach
of such provision or as a waiver of the provision itself. No waiver of any kind
will be effective or binding, unless it is in writing and is signed by the party
against which such waiver is sought to be enforced.
7.4 ASSIGNMENT. This Agreement and all rights hereunder are personal to
Employee and may not be transferred or assigned by Employee at any time.
Mykotronx may assign its rights, together with its obligations hereunder, to any
parent, subsidiary, affiliates or successors, in connection with any sale,
transfer or other disposition of all or substantially all of its business and
assets, provided, however, that any such assignee assumes Mykotronx'
obligations.
7.5 HEADINGS. The headings contained in this Agreement are for
reference purposes only and will in no way affect the meaning or interpretation
of this Agreement. In this Agreement, the singular includes the plural, and
plural the singular, the masculine gender includes both male and female
referents, and the word "or" is used in the inclusive sense.
7.6 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of California, excluding that body of law
applicable to conflict of laws.
7.7 SURVIVAL. The provisions of Section 5 will survive the termination
or expiration of this Agreement as a continuing agreement of Mykotronx and
Employee.
4
<PAGE> 5
7.8 NOTICE. All notices, requests, demands and other communications
hereunder will be in writing and will be deemed to have been duly given when (A)
delivered personally; or (B) three days after mailing by certified mail, return
receipt requested, postage prepaid or upon proof of delivery by prepaid express
courier, to the address of the applicable party as set forth in the preamble to
this Agreement. Addresses may be changed by notice given in accordance with the
provisions of the Reorganization Agreement, except that a notice of change of
address will not be deemed to have been duly given until actually received by
the addressee.
7.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, and all of which together will
comprise one and the same instrument.
8. GUARANTEE. If for any reason Mykotronx fails or is unable to perform its
obligations under this Agreement, Rainbow, parent of Mykotronx, guarantees the
performance of, and agrees to perform in the place of Mykotronx, all such
obligations of Mykotronx.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MYKOTRONX, INC.
By:________________________________ _________________________________
Theodore S. Bettwy, President John C. Droge, Employee
AGREED AS TO SECTION 8
RAINBOW TECHNOLOGIES, INC.
By:________________________________
Walter W. Straub, President
5
<PAGE> 1
EXHIBIT 21(a)
THE COMPANY'S WHOLLY-OWNED SUBSIDIARIES
Rainbow Microphar
122, Ave. Charles de Gaulle
92522 Neuilly sur Seine, Cedex,
FRANCE
TEL: 33-1-41-43-29-00
FAX: 33-1-46-24-76-91
Rainbow Technologies, Ltd.
4 The Forum, Hanworth Lane
Chertsey, Surrey KT16 9JX
UNITED KINGDOM
TEL: 44-1-932-570066
FAX: 44-1-932-570743
Rainbow Technologies, GmbH
Lise Meitner Strasse 1
85716 Untersehleissheim
GERMANY
TEL: 49-89-32-17-98-00
FAX: 49-89-32-17-98-50
Mykotronx
357 Van Ness Way, Suite 200
Torrance, CA 90501
TEL: 310-533-8100
FAX: 310-533-0527
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-60267 and Form S-8 No. 33-60265) pertaining to the
Assumed Options of Mykotronx, Inc., 1987 Non-Qualified Stock Option Plan, 1987
Incentive Stock Option Plan and 1990 Stock Option Plan of Rainbow Technologies,
Inc., of our report dated February 16, 1996, with respect to the consolidated
financial statements and schedule of Rainbow Technologies, Inc. included in this
Annual Report (Form 10-K) for the year ended December 31, 1995.
Ernst and Young LLP
Orange County, California
March 29, 1996
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (No. 33-60267) on Form S-8 of Rainbow Technologies, Inc., of our
report dated February 16, 1995, with respect to the balance sheet of Mykotronx,
Inc., as of December 31, 1994, and the related statements of earnings,
shareholders' equity and cash flows for the two years ended December 31, 1994,
insofar as it relates to the data included in the consolidated financial
statements and schedule of Rainbow Technologies, Inc., included in the 1995
Annual Report on Form 10-K.
KPMG Peat Marwick LLP
Los Angeles, California
March 29, 1996
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