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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996 Commission file number: 0-16641
RAINBOW TECHNOLOGIES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 95-3745398
- ---------------------------------------- --------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
50 Technology Drive, Irvine, California 92718
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (ii) has been subject to
such filing requirements for the past 90 days.
Yes X No .
----- -----
The number of shares of common stock, $.001 par value, outstanding as of
March 31, 1996 was 7,422,513.
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RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for
the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II - OTHER INFORMATION
Item 1 to 6 - Not applicable
SIGNATURES 10
</TABLE>
2
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................. $27,676,000 $25,058,000
Marketable securities available for sale... 11,651,000 11,799,000
Accounts receivable, net of allowance for
doubtful accounts of $463,000 and
$450,000 in 1996 and 1995, respectively.. 13,833,000 12,725,000
Inventories ............................... 5,331,000 2,927,000
Unbilled costs and fees.................... 3,022,000 3,962,000
Prepaid expenses and other current assets.. 1,691,000 1,716,000
----------- -----------
Total current assets.................. 63,204,000 58,187,000
Property, plant and equipment, at cost:
Buildings.................................. 9,337,000 9,572,000
Furniture.................................. 1,021,000 797,000
Equipment.................................. 4,368,000 4,075,000
Leasehold improvements..................... 231,000 221,000
----------- -----------
14,957,000 14,665,000
Less accumulated depreciation and
amortization............................. 3,953,000 3,708,000
----------- -----------
Net property, plant and equipment..... 11,004,000 10,957,000
Goodwill, net of accumulated amortization
of $6,894,000 and $6,602,000 in 1996
and 1995, respectively..................... 5,584,000 6,186,000
Other assets, net of accumulated amortization
of $1,438,000 and and $1,400,000 in 1996
and 1995, respectively..................... 5,180,000 4,495,000
----------- -----------
$84,972,000 $79,825,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 5,162,000 $ 3,478,000
Accrued payroll and related expenses....... 1,617,000 2,077,000
Other accrued liabilities.................. 903,000 1,151,000
Income taxes payable....................... 3,736,000 1,916,000
Long-term debt, due within one year........ 308,000 316,000
----------- -----------
Total current liabilities............. 11,726,000 8,938,000
Long-term debt, net of current portion.......... 2,472,000 2,616,000
Deferred income taxes .......................... 1,392,000 1,768,000
Shareholders' equity:
Common stock, $.001 par value, 20,000,000
shares, authorized, 7,422,513 and
7,311,267 shares issued and outstanding
in 1996 and 1995, respectively........... 7,000 7,000
Additional paid-in capital................. 30,349,000 29,823,000
Cumulative translation adjustment.......... 39,000 424,000
Cumulative difference between cost and
market value of marketable securities.... 96,000 52,000
Retained earnings.......................... 38,891,000 36,197,000
----------- -----------
Total shareholders' equity............ 69,382,000 66,503,000
----------- -----------
$84,972,000 $79,825,000
=========== ===========
</TABLE>
See accompanying notes.
3
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
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<S> <C> <C>
Revenues:
Software protection products..... $12,563,000 $10,662,000
Information security products.... 6,127,000 5,091,000
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Total revenues.............. 18,690,000 15,753,000
Operating expenses:
Cost of software protection
products....................... 3,785,000 2,947,000
Cost of information security
products....................... 5,168,000 3,870,000
Selling, general and
administrative................. 3,875,000 3,518,000
Research and development......... 1,224,000 1,362,000
Goodwill amortization............ 452,000 440,000
----------- -----------
Total operating expenses.... 14,504,000 12,137,000
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Operating income...................... 4,186,000 3,616,000
Interest income....................... 433,000 301,000
Interest expense...................... (87,000) (100,000)
Other income (expenses)............... 74,000 (246,000)
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Income before provision for
income taxes........................ 4,606,000 3,571,000
Provision for income taxes ........... 1,912,000 1,417,000
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Net income............................ $ 2,694,000 $ 2,154,000
=========== ===========
Net income per common and common
equivalent share.................... $ 0.35 $ 0.28
=========== ===========
Weighted average common and common
equivalent shares outstanding....... 7,722,000 7,562,000
=========== ===========
</TABLE>
See accompanying notes.
4
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1996 March 31, 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income................................. $ 2,694,000 $ 2,154,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 299,000 293,000
Amortization............................ 735,000 590,000
Change in deferred income taxes......... (671,000) 892,000
Allowance for doubtful accounts......... 15,000 (33,000)
Write-down of investment................ 50,000 -
Changes in operating assets and
liabilities:
Accounts receivable................... (1,210,000) 1,087,000
Inventories........................... (2,420,000) 814,000
Unbilled costs and fees............... 940,000 (993,000)
Prepaid expenses and other current
assets.............................. 14,000 42,000
Other assets.......................... - (9,000)
Accounts payable...................... 1,721,000 (55,000)
Accrued liabilities................... (697,000) (329,000)
Income taxes payable.................. 1,845,000 1,047,000
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Net cash provided by operating
activities..................... 3,315,000 5,500,000
Cash flows from investing activities:
Purchase of marketable securities.......... (338,000) (3,979,000)
Sale of marketable securities.............. 500,000 60,000
Purchases of property, plant, and
equipment................................ (506,000) (222,000)
Other long-term assets..................... (1,053,000) 2,000
----------- ------------
Net cash used in investing
activities..................... (1,397,000) (4,139,000)
Cash flows from financing activities:
Exercise of common stock options........... 932,000 273,000
Payment of long-term debt.................. (76,000) (116,000)
----------- ------------
Net cash provided by financing
activities..................... 856,000 157,000
Effect of exchange rate changes on cash......... (156,000) (124,000)
----------- ------------
Net increase in cash and cash equivalents....... 2,618,000 1,394,000
Cash and cash equivalents at beginning of
period........................................ 25,058,000 19,755,000
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Cash and cash equivalents at end of period...... $27,676,000 $ 21,149,000
=========== ============
Supplemental disclosure of cash flow information:
Income taxes paid.......................... $ 70,000 $ 199,000
Interest paid.............................. 86,000 98,000
</TABLE>
See accompanying notes
5
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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
1. Basis of presentation
The accompanying financial statements consolidate the accounts of Rainbow
Technologies, Inc. (the Company) and its wholly-owned subsidiaries. Amounts for
the three month period ended March 31, 1995 have been restated to reflect the
acquisition of Mykotronx, Inc. (Mykotronx) which has been accounted for using
the pooling of interests method (Note 5). All significant inter-company
balances and transactions have been eliminated.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position at March 31, 1996 and results of operations for the three
months ended March 31, 1996 and 1995. The condensed consolidated financial
statements do not include footnotes and certain financial information normally
presented annually under generally accepted accounting principles and,
therefore, should be read in conjunction with the Company's December 31, 1995
Annual Report on Form 10-K. Results of operations for the three months ended
March 31, 1996 are not necessarily indicative of results to be expected for the
full year.
The Company has subsidiaries in the United Kingdom, Germany, and France. The
Company utilizes the currencies of the countries where its foreign
subsidiaries operate as the functional currency. In accordance with Statement
of Financial Accounting Standards No, 52, the balance sheets of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rates at
the respective dates. The income statements of those subsidiaries are
translated into U.S. dollars at the weighted average exchange rates for the
respective periods presented.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121) in March
1995. On January 1, 1996, the Company adopted SFAS No. 121 during 1996. The
adoption had no material effect on the CompanyAEs consolidated results of
operations or financial position.
2. Earnings per share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during each period. Common equivalent
shares include the potential dilution from the exercise of stock options.
3. Government contracts
The Company is both a prime contractor and subcontractor under fixed-price and
cost-plus-fixed-fee contracts with the U.S. Government (Government). Such
contracts represent over 95% of the Company's contract operations. At the
commencement of each contract or contract modification, the Company submits
pricing proposals to the Government to establish indirect cost rates applicable
to such contracts. These rates, after audit and approval by the Government, are
used to settle costs on contracts completed during the previous fiscal year.
To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable amounts in these financial
statements. These provisional billing rates are adjusted to actual at year-end
and are subject to adjustment after Government audit.
6
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The Company has unbilled costs and fees at March 31, 1996 of $3,022,000. Based
on the Company's experience with similar contracts in recent years, the
unbilled costs and fees are expected to be collected within one year.
4. Inventories
Inventoried costs relating to long-term contracts are stated at the actual
production costs, including pro rata allocations of overhead and general and
administrative costs, incurred to date reduced by amounts identified with
revenue recognized on units delivered. The costs attributed to units delivered
under such long-term contracts are based on the estimated average cost of all
units expected to be produced.
Inventories, other than inventoried costs relating to long term contracts, are
stated at the lower of cost (principally determined on a first-in,
first-out basis) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
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<S> <C> <C>
Raw materials $ 748,000 $1,083,000
Work in process 486,000 434,000
Finished goods 1,345,000 1,313,000
Inventoried costs related
to long-term contracts 2,752,000 97,000
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$5,331,000 $2,927,000
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</TABLE>
5. Acquisitions
On March 6, 1996 the Company entered into an agreement to acquire up to 58% of
Quantum Manufacturing Technologies, Inc. ("QMT") of Albuquerque, New Mexico, in
exchange for $4.2 million, subject to certain technological and business
milestones. QMT, a developmental stage company, has recently obtained the
exclusive worldwide license from Sandia National Laboratories for the
commercial use and exploitation of patented pulsed power ion beam surface
treatment technology known as "IBEST". IBEST technology benefits and enhances
the durability and utility of a large number of industrial and consumer
products at relatively low cost and without creating any impact on the
environment.
On June 1, 1995, the Company acquired Mykotronx in a merger transaction
resulting in Mykotronx becoming a wholly owned subsidiary of Rainbow.
Mykotronx, a California corporation with headquarters in Torrance, California,
designs, develops and manufactures information security products to provide
privacy and security for voice communication and data transmission. These
products are sold to the U.S. Government and customers in the aerospace and
telecommunications industries. Shareholders of Mykotronx received 2.64 shares
of Company common stock for each share of issued and outstanding Mykotronx
common stock. Accordingly, the Company issued 1,620,564 shares of its common
stock to Mykotronx shareholders in exchange for all outstanding Mykotronx
shares. In addition, 195,096 shares of Rainbow common stock were reserved for
issuance upon the exercise of assumed Mykotronx options. The merger was
accounted for as a pooling of interests.
6. Other assets
Included in other assets are certain investments in early-stage companies
including a minority interest investment in Vendor Systems International, Inc.
("VSI"). The Company closely monitors the operations and cash flows of these
companies to evaluate their status and ensure that amounts reported for these
investments do not exceed net realizable value. If the Company determines that
impairment in the investment of any such company exists, an adjustment would be
made to reduce the investment amount to net realizable value.
7
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RAINBOW TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is management's discussion and analysis of certain significant
factors which have affected the consolidated results of operations and
financial position of the Company during the periods included in the
accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the related condensed consolidated
financial statements and associated notes.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Software Information
Protection Security
Products Products Consolidated
---------- ----------- ------------
<S> <C> <C> <C>
For the quarter ended
March 31, 1996
Revenues $12,563,000 $6,127,000 $18,690,000
Operating Income 3,264,000 922,000 4,186,000
For the quarter ended
March 31, 1995
Revenues 10,662,000 5,091,000 15,753,000
Operating Income 2,581,000 1,035,000 3,616,000
</TABLE>
SALES
Revenues from software protection products increased 18% to $12,563,000, when
compared to the same period in 1995. The sales growth was primarily due to
increased unit sales in North American and Asia Pacific markets. Net sales for
the three months ended March 31, 1996 increased 18% in both the United States
and internationally. The average selling price per product in the quarter
ended March 31, 1996 decreased approximately 11% when compared to the same
period in 1995. The decrease in the average selling price during the three
month period is due to the price erosion in the European markets. Unit volume
for the three months ended March 31, 1996 increased 32% when compared to the
corresponding 1995 period. Management believes that the increase is due to the
stronger awareness of the software piracy problem.
Revenues from information security products increased by 20% to $6,127,000,
when compared to the same period in 1995. The revenue growth was primarily due
to the business growth related to the classified portion of the Defense
Messaging System and the development business created by the introduction of a
new generation of microcircuits for satellite to ground communications.
GROSS PROFIT
Gross profit from software protection products for the quarter ended March 31,
1996 was 70% of revenues compared with 72% for the quarter ended March 31,
1995. The decrease in the gross margin was due to lower average selling prices
in the European market.
Gross profit from information security products for the quarter ended March 31,
1996 was 16% of revenues compared with 24% for the quarter ended March 31,
1995. The decrease in the gross margin was due to the change of mix from
predominately product contracts to mostly less profitable research and
development contracts.
8
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the three months ended March
31, 1996 increased by 10% when compared to the corresponding 1995 period. The
increase was primarily due to increased staffing and higher sales compensation
due to increased revenues.
RESEARCH AND DEVELOPMENT
Total research and development expenses for the three months ended March 31,
1996 decreased by 10% when compared to the corresponding 1995 period. The
decrease was due to decreased staffing related to the spin-off of Vendor
System, a product line that the Company discontinued. In addition, the Company
incurred lower outside research and development charges.
OTHER INCOME (EXPENSE)
Interest income for the quarter ended March 31, 1996 increased by 44% to
$433,000 because of higher investment balances.
During the quarter ended March 31, 1996, the Company incurred foreign currency
gains of $174,000, primarily due to dollar denominated deposit accounts
maintained in Europe. During the quarter ended March 31, 1995, the Company
recognized foreign currency losses of $246,000, 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.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percentage of income before the provision
for income taxes for the three months ended March 31, 1996 and 1995 were 42%
and 40%, respectively. The increase in the effective tax rate is due to a
higher federal statutory tax rate and an increased state tax rate resulting
from the acquisition of Mykotronx.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of operating funds have been from operations
and proceeds from sales of the Company's equity securities. The Company's cash
flow from operations for the three months ended March 31, 1996 and 1995 were
$3,312,000 and $5,500,000, respectively.
The Company intends to use its capital resources to expand its product line and
for the acquisition of additional products and technologies.
The Company's use of cash include purchases of property, plant and equipment,
repayment of long-term debt and investment in long- term assets.
The Company's subsidiaries in France carry $5.5 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 the Company's current working capital of $51,478,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's requirement for at least the next twelve
months.
9
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PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Dated: May 13, 1996
RAINBOW TECHNOLOGIES, INC.
By: /s/ PATRICK FEVERY
----------------------------
Patrick Fevery
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 27,676
<SECURITIES> 11,651
<RECEIVABLES> 14,295
<ALLOWANCES> (463)
<INVENTORY> 5,331
<CURRENT-ASSETS> 63,204
<PP&E> 14,957
<DEPRECIATION> 3,953
<TOTAL-ASSETS> 84,972
<CURRENT-LIABILITIES> 11,726
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 69,375
<TOTAL-LIABILITY-AND-EQUITY> 69,382
<SALES> 18,690
<TOTAL-REVENUES> 18,690
<CGS> 8,953
<TOTAL-COSTS> 14,504
<OTHER-EXPENSES> 74
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (87)
<INCOME-PRETAX> 4,606
<INCOME-TAX> 1,912
<INCOME-CONTINUING> 4,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,694
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
