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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 1997
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
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RAINBOW TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 953745398
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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 13, 1998, 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 $165,166,799.
As at March 13, 1998, there were outstanding 7,737,318 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 30, 1998, 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 include (i) the existence and development of the
Company's technical and manufacturing capabilities, (ii) anticipated
competition, (iii) potential future growth in revenues and income, (iv)
potential future decreases in costs, and (v) the need for, and availability of
additional financing.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on the assumption that the Company will not
lose a significant customer or customers or experience increased fluctuations of
demand or rescheduling of purchase orders, that the Company's markets will
continue to grow, that the Company's products will remain accepted within their
respective markets and will not be replaced by new technology, that competitive
conditions within the Company's markets will not change materially or adversely,
that the Company will retain key technical and management personnel, that the
Company's forecasts will accurately anticipate market demand, that there will be
no material adverse change in the Company's operations or business and that the
Company will not experience significant supply shortages with respect to
purchased components, sub-systems or raw materials. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. In addition, the business and operations of
the Company are subject to substantial risks which increase the uncertainty
inherent in the forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
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., a Delaware corporation, and its subsidiaries
(the "Company") design, develop, manufacture and sell (i) anti-piracy, license
management, license distribution and license tracking products(the "Software
Protection Products"), which the Company markets to software developers and
information publishers worldwide, (ii) secure satellite, secure network
communications and security co-processor products using encryption technology
(the "Information Security Products") which the Company markets to the United
States Government, contractors and manufacturers in aerospace and related
industries, and companies providing Internet related encrypted electronic
commerce on secure web server environments, and (iii) systems which treat
surfaces of metals with patented ion beam technology to produce hard, pure,
crack-free surfaces that are corrosion and wear resistant ("IBEST").
The Company's principal subsidiaries are located in California,
Connecticut, New Mexico, the United Kingdom, Germany, France, Belarus and the
Netherlands. Unless the context otherwise requires, the term "Company" refers to
Rainbow Technologies, Inc. and its subsidiaries.
The Company's Software Protection Products strategy 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
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 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.
The Company's Information Security Products strategy is to concentrate on
technology supporting new telecommunications and hardware cryptographic
applications. Currently, the Company's Information Security Products are
primarily sold to the U.S. Government, aerospace and related industry
contractors. The
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Company believes that this market is greater than $500 million and is one of the
fastest growth segments of the U.S. Government budget. The Company is actively
pursuing new opportunities in the commercial marketplace, focusing on high
performance cryptographic Internet security products. The Company believes that
these emerging markets for security will experience significant growth over the
next five years.
In February 1998, the Company acquired Wyatt River Software, Inc. ("Wyatt
River"), including its "LicenseServe" and "LicenseTrack" technology in a cash
transaction. The final consideration is subject to a determination based upon a
balance sheet audit of Wyatt River as of the closing date to be issued by Ernst
& Young LLP. The Company will also pay the Wyatt River shareholders an
additional sum based upon sales of the Wyatt River technology through June 30,
1999. From the consideration paid at closing, the Wyatt River shareholders
established certain escrows to serve as a fund for various contingent
liabilities.
In 1997, the Company became the majority shareholder of Quantum
Manufacturing Technologies, Inc. ("QMT"). QMT, located in Albuquerque, New
Mexico, owns an exclusive worldwide license from Sandia National Laboratories
for the commercial use and exploitation of a patented pulsed power ion beam
materials treatment technology. The IBEST technology melts and resolidifies the
surface of materials in less than a millionth of a second using a 5 billion watt
pulse to produce hard, pure, crack-free surfaces that are corrosion and wear
resistant. QMT is a development stage company formed in 1996.
In October 1997, the Company acquired from AlliedSignal, Inc. certain
assets comprising AlliedSignal's "KIV-7" information security product line in a
cash transaction. The Company is the sole supplier of KIV-7 to various agencies
of the U.S. Government. Simultaneous with the closing of the asset purchase
transaction, the Company entered into a manufacturing and development agreement
with AlliedSignal whereby AlliedSignal will continue to manufacture current
KIV-7 products for the Company, and will complete the development of an enhanced
version of the KIV-7 product.
In October 1996, the Company acquired Software Security Inc., a Connecticut
corporation, and its subsidiaries ("SSI") in a transaction accounted for as a
pooling-of-interests. Located in Stamford, Connecticut, SSI designs,
manufactures, sells and distributes software protection products.
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.
The Company markets its Software Protection Products worldwide to software
developers and information providers. In 1997, 43% 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,
contractors and manufacturers in aerospace and related industries, and companies
providing Internet related encrypted electronic commerce on secure web server
environments. Approximately 63% of the Company's revenues are derived from
Software Protection Products, approximately 36% of the Company's revenues are
derived from Information Security Products, and approximately 1% of the
Company's revenues are derived from IBEST treatment revenues.
SOFTWARE PROTECTION PRODUCTS
The Company's Software Protection Products are a combination of software
and hardware-based components for the licensing, distribution and protection of
developer software. The hardware component is a "key" which the software
developer includes with each copy of a protected software program sold to an
end-user. The software component is 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 the Company's proprietary
algorithms programmed into Company designed Application Specific Integrated
Circuits ("ASIC") computer chips. The key is attached by the end-user to the
parallel printer port of a stand alone personal computer or a 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
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operation, the interactions of the protected software and the key are
transparent to the end-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 the end-user can create
back-up copies of all protected software programs.
The Company also offers software-based products. These products offer
developers greater licensing flexibility. These products ensure concurrent usage
agreements on networks, create "try and buy" CD-ROMs, and allow for the delivery
or activation of software over the Internet.
Additionally, the Company offers a software-only based product to large
corporations to assist in the monitoring and tracking of company software usage
across their networks.
The Company's Software Protection Products include:
SentinelSuperPro. Features the Company's next generation ASIC
technology. This is the industry's first key to combine multiple algorithms
with programmable memory for increased security and flexibility. This
product is compatible with DOS, Windows, Windows 95 and Windows NT based
applications.
SentinelPro. An algorithm-based key utilizing the Company's
proprietary ASIC technology for the protection of DOS, Windows, Windows 95,
Windows NT, OS/2, UNIX or XENIX based applications.
Sentinel License Manager. A software based license management product
for Windows, Netware and UNIX environments. The product allows developers
to control network usage of software with remote upgrade capabilities.
End-users are offered a wide variety of licensing models for them to try,
buy and use software. Product features include the capability to securely
distribute software on CD-ROM or via the Internet.
SentinelTrack. Provides Information Technology managers with a
solution to monitor and manage software usage across their corporate
network. Benefits include ensuring compliance with software licenses and
maximizing budgets by purchasing only as much software as needed. This
product runs across Unix, Windows, Netware, DOS, Macintosh and Java and
provides a wide selection of user reports.
SentinelExpress. A software licensing tool for software developers to
provide secure software distribution and license activation via the
Internet. It allows developers to securely distribute demos and licensed
applications on the Internet, and automatically generate or activate
software licenses from the developer's web site. It allows consumers to
evaluate, purchase and activate software automatically and easily through a
developer's web site 24 hours a day.
SentinelEve3. Software protection for Apple Macintosh-based software.
Attaches to the ADB port making it compatible with Apple PowerMac and
PowerBook computers. Protects stand-alone and/or multiple modular
applications.
NetSentinel-Mac. Software protection to control concurrent usage on
Apple Macintosh networks.
NetSentinel. For sophisticated network license management to control
concurrent users over LANs running DOS, OS/2, Windows, Windows 95 and
Windows NT 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.
INFORMATION SECURITY PRODUCTS
The Company believes the importance of protecting the privacy and security
of satellite and network communications has increased in direct proportion to
technological advances, capabilities and overall growth in the
telecommunications field. Information security remains critical to government
and defense applications,
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and is increasingly valued by private sector businesses to protect
communications. The Company's Information Security Products comprise ASIC
circuits, electronic assemblies and equipment to encrypt and decrypt (scramble
and unscramble) electronic communications, and are designed and developed by the
Company for use in government applications and commercial applications.
The Company sells its products to the U.S. Government, foreign governments
and aerospace companies. In these sales, the Company enters into development
contracts with the U.S. Government, aerospace and related industry contractors.
Under development contracts, the Company typically agrees to provide engineering
services for the development of an ASIC circuit or other electronic assembly for
the customer's particular application. The Company usually serves as the prime
contractor or as a subcontractor, with either fixed-price or cost-plus-fixed-fee
terms. Contracts with the U.S. Government for 1997 accounted for approximately
52% of revenues received by the Company from sales of its Information Security
Products.
The Company is marketing its Information Security Products to broader
commercial applications, such as securing the transmission of data for banking
and financial transactions, telecommunications networks and organizational
intranets. The Company also markets its CryptoSwift accelerator boards to
companies providing Internet related encrypted electronic commerce or secure web
server environments.
The Company's Information Security Products are currently categorized into
two general areas of customer applications:
A.) SATELLITE AND NETWORK COMMUNICATIONS PRODUCTS.
Space Based Products. These products comprise ASIC circuits and
electronic assemblies to decrypt (unscramble) satellite command links,
and encrypt (scramble) the communications that provide vital information
about the satellite (telemetry).
Ground Based Communications Products. These ASIC circuits,
electronic assemblies and equipment encrypt satellite command links and
decrypt telemetry links.
Voice Communications Products. These consist of ASIC circuits,
electronic assemblies and equipment that encrypt and decrypt voice
transmissions over radio or telephone communications networks.
Data Communications Products. These products, which comprise ASIC
circuits, electronic assemblies and equipment, encrypt and decrypt data
or digital information transmitted over communications networks or into
storage media.
B.) INTERNET SECURITY PRODUCTS.
CryptoSwift. A high performance security co-processor for Internet
transaction servers engaged in e-commerce, electronic brokerage,
financial services and other applications that require security
functions of privacy and strong user authentication. It economically
addresses the problem of server overload due to the calculation intense
mathematics associated with public key cryptography. This form of
encryption is widely deployed in all web servers and browsers in use
today and is the basis for Secure Sockets Layer (SSL) and Secure
Electronic Transaction (SET) protocols. CryptoSwift is an industry
standard PCI bus card with proprietary ASIC co-processor. Using patent
pending "wide integer" multipliers, it performs all the mathematics
associated with public key cryptography, allowing the server CPU to
perform less calculation intense tasks.
IBEST APPLICATIONS AND SERVICES
The Company's IBEST technology is used in applications to treat materials
so as to change their surface properties to produce hard, pure, crack-free
surfaces which are corrosion and wear resistant. The Company offers its IBEST
technology to customers by either treating materials for the benefit of a
customer at its Alberquerque, New Mexico facility, on an out-sourced basis, or
by selling a license to use the IBEST technology for use on a particular
application at the customer's facility.
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RESEARCH AND DEVELOPMENT
Because of the rapid technological advances and other changes affecting the
Company's markets, the Company's competitive position hinges upon the adaptation
of its current products, to such changes in the market. Introduction of new
products that gain market acceptance are crucial to sustainable growth.
Accordingly, the Company directs research and development activity toward
applying its ASIC and software technology in lowering the cost of existing
products, the design and development of new hardware and software products and
the enhancement of existing products.
Expenditures for research and development related to Software Protection
Products for the years ended December 31, 1997, 1996 and 1995 were $5,830,000,
$5,423,000 and $5,407,000, respectively, or as a percentage of Software
Protection Products revenues, 10%, 9% and 11%, 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.
The Company performs research and development with regard to its
Information Security Products in connection with U.S. Government 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. Expenditures for research and development related to
Information Security Products for the years ended December 31, 1997, 1996 and
1995 were $1,649,000, $824,000 and $666,000, respectively, or as a percentage of
Information Security Products revenues, 5%, 3% and 3%, respectively.
Research and development expenditures for IBEST for the year ended 1997
were $945,000.
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
$500 or more in the United States, and for use with lower priced software
programs sold internationally. For 1997, 1996 and 1995, 57%, 55% and 51%,
respectively, of the Company's Software Protection Product sales were made in
the United States and 43%, 45% and 49%, respectively, were made internationally.
Since its formation, the Company has shipped more than 15,300,000 keys to more
than 29,000 customers. Among the Company's major customers are Autodesk, Inc.,
Macromedia, Inc., SPSS, Inc., Adobe Systems, Inc., Intellution, Inc., Wonderware
Corporation and Orcad, Inc.
The Company has its own direct sales and marketing personnel for Software
Protection Products in the United States, the United Kingdom, Germany, France,
Belarus and China. In addition, the Company has 48 distributors worldwide.
During 1997, 1996 and 1995, the Company had no single customer which accounted
for ten percent or more of the Company's revenues.
The Company's direct sales force calls on targeted software publishers in
order to increase usage of the Company's products. The direct sales force
pursues a global marketing plan which focuses on multinational software.
All segments of the Company exhibit at trade shows and advertise in trade
publications. The Company's technical support personnel also assist in the
Company's marketing effort through pre-sale and post-sale activity.
Information Security Products
The Company markets its Information Security Products directly to the U.S.
Government and maintains close relationships with government related agencies
and the aerospace industry. Through these relationships, the Company receives
contracts for services and products on a selected source basis. In addition,
contracts are
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awarded to the Company in response to requests for proposal from U.S. Government
agencies and aerospace companies.
The Company markets its CryptoSwift product through its own direct sales
and marketing personnel in the United States. The Company's direct sales force
calls on Fortune 1000 companies and companies providing Internet related
encrypted electronic commerce or secure web server environments.
IBEST Applications and Services
The Company markets its IBEST technology directly to industries which use
materials proven to be enhanced or improved as a result of the application of
the IBEST technology.
MANUFACTURING
Software Protection Products
The Company's hardware keys are manufactured by subcontractors in the
United States, Asia 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 chip used in the
Company's largest selling product, SentinelSuperPro. The Company currently has a
development contract with a new chip supplier in order to provide a second
source for the ASIC chip. However, in the event that the primary 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 six 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 six months of such an
interruption.
Information Security Products
For its Information Security Products, the Company's manufacturing
operations include the testing of ASICs and the final assembly and testing of
its satellite and network communications products.
The Company has specific cryptographic technology embedded into ASIC
circuits which are fabricated to the Company's specifications by ASIC circuit
manufacturers. The Company currently has relationships with three such ASIC
circuit manufacturers, VLSI Technologies, United Technologies Microelectronics
Center and IBM. These ASIC circuits are processed to the specifications of the
U.S. Government and the Company. Any interruption in the availability of these
ASIC circuits could have a material adverse effect on the operations of the
Company.
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, 1997, the backlog for the Company's Information Security
Products represented in excess of five months of revenues. Actual revenue
recognition of the backlog mix of contracts can vary from three months to two
years.
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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. Through its
acquisition of SSI, the Company has obtained patents on certain of its designs
used in certain of its 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 additional 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 55% worldwide market share. The Company's principal competitor in the
software protection industry is Aladdin Knowledge Systems, Ltd. 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, Inc., Motorola, Inc., VLSI Technology, Inc., and nCipher
Corporation.
Employees
The Company presently employs approximately 360 full-time employees divided
among sales and marketing, manufacturing, research and development and
administration. The Company believes that its employee relations are excellent.
The employees and the Company are not parties to collective bargaining
agreements.
Recent Events
The Company purchased certain assets from Elan Computer Group, Inc.
("Elan") in March 1998 in a cash transaction. The assets included Elan's license
manager software technology, which the Company had previously licensed from
Elan, and Elan's end-user maintenance and support relationships. In connection
with the transaction, the Company entered into a Litigation Cooperation
Agreement with Elan in connection with a patent infringement lawsuit entitled
Globetrotter Software, Inc. vs. Elan Computer Group, Inc. No. 97-4176CW and
currently pending in the United States District Court for the Northern District
of California. The action claims that the Elan technology infringes upon patents
owned by Globetrotter.
In February 1998, the Company acquired Wyatt River Software, Inc.,
including its LicenseServe and LicenseTrack technology. See Item 1
Business -- General.
In October 1997, the Company acquired from AlliedSignal, Inc. certain
assets comprising AlliedSignal's "KIV-7" information security product line in a
cash transaction. The Company is the sole supplier of KIV-7 to various agencies
of the U.S. Government. Simultaneous with the closing of the asset purchase
transaction, the Company entered into a manufacturing and development agreement
with AlliedSignal whereby Allied-Signal will continue to manufacture current
KIV-7 products for the Company, and will complete the development of an enhanced
version of the KIV-7 product. See Item 1 Business -- General.
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In July 1997, the Board of Directors of the Company adopted a Shareholder's
Rights Plan. In so doing, the Board of Directors declared a dividend of one
right (a "Right") for each outstanding share of the Company's Common Stock, as
of August 5, 1997 and subsequently with respect to each subsequent issuance of a
share of Common Stock. Following a "Distribution Date," each holder of a Right
is entitled to purchase, at a stated purchase price, shares of the Company's
Common Stock or other property having a value equal to two times of the purchase
price. A Distribution Date will occur on the earlier of (i) the tenth day after
a public announcement that a person other than the Company or its affiliates has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Stock (such person thereby becoming an "Acquiring
Person"), or (ii) the tenth business day after the date of the commencement of,
or first public announcement of the intent of any person to commence, a tender
or exchange offer the consummation of which would result in such person becoming
an Acquiring Person. Following a Distribution Date, the Rights of an Acquiring
Person are null and void and not exercisable. Outstanding Rights are redeemable
by the Board of Directors at any time prior to a Distribution Date at a
redemption price of $0.01 per Right. The Rights will expire at the close of
business on August 5, 2002, unless earlier exercised by the holder or redeemed
by the Company.
The terms and provisions governing the Rights are set forth in the Rights
Agreement dated July 29, 1997 between the Company and U.S. Stock Transfer
Corporation as rights agent.
In May 1997, the Company completed its obligations pursuant to a Stock
Purchase Agreement entered into in March 1996, which resulted in the Company
owning a majority interest in Quantum Manufacturing Technologies, Inc. QMT is
located in Albuquerque, New Mexico. See Item 1 Business -- General.
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, which is used as a
sales, administration, design and production facility. The lease is for 60,000
square feet, and expires in 2002.
The Company leases a facility in Stamford, Connecticut, which is used as a
sales, development and design facility. The lease is for 5,000 square feet, and
expires in 2000.
The Company leases an office in Columbia, Maryland, which is used as a
sales and development facility. The lease is for 3,000 square feet, and expires
in 1999.
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
of, 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).
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SALES PRICE
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HIGH LOW
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1998 First Quarter
(through February 28, 1998)............................... $29 3/8 $23
1997 First Quarter.......................................... 20 3/4 16 1/4
1997 Second Quarter......................................... 19 1/4 13 3/4
1997 Third Quarter.......................................... 24 7/8 16 5/8
1997 Fourth Quarter......................................... 30 20 7/8
1996 First Quarter.......................................... 24 1/4 17 1/4
1996 Second Quarter......................................... 24 16 7/8
1996 Third Quarter.......................................... 20 14 5/8
1996 Fourth Quarter......................................... 22 1/8 17
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As of February 28, 1998, there were approximately 3,900 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.
10
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
the consolidated financial statements of the Company for the five years ended
December 31, 1997 reflects the impact of the acquisition of SSI and Mykotronx,
which were both accounted for using the pooling-of-interests method as described
more fully in Note 2 to the consolidated financial statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED INCOME
STATEMENT DATA:
Total revenues............. $ 94,724 $ 81,710 $ 72,584 $ 60,814 $ 50,182
Income before taxes........ 19,202 17,936 16,790 12,478 11,027
Net income................. 11,332 10,517 9,814 7,182 6,882
Net income per share:
Basic................... $ 1.46 $ 1.36 $ 1.31 $ 0.97 $ 0.95
Diluted................. 1.42 1.32 1.26 0.95 0.93
Shares used in calculating
net income per share:
Basic................... 7,769,000 7,743,000 7,511,000 7,409,000 7,248,000
Diluted................. 7,979,000 7,940,000 7,767,000 7,558,000 7,415,000
Proforma net income
(unaudited)............. $ 11,332 $ 10,517 $ 9,814 $ 7,182 $ 6,589(a)
Proforma net income per
share (unaudited):
Basic................... $ 1.46 $ 1.36 $ 1.31 $ 0.97 $ 0.91(a)
Diluted................. 1.42 1.32 1.26 0.95 0.89(a)
SELECTED CONSOLIDATED BALANCE
SHEET DATA:
Total assets............... $ 103,051 $ 93,364 $ 82,274 $ 67,259 $ 57,315
Working capital............ 55,776 60,166 50,690 39,110 30,563
Long-term debt, net of
current portion......... 1,616 2,145 2,616 2,695 2,730
Shareholders' equity....... 86,359 79,076 68,251 56,231 46,867
</TABLE>
- ---------------
(a) Proforma net income and proforma net income per share reflects unaudited
provisions for income taxes which would have been recorded had Mykotronx
been subject to federal and state income taxes as a C Corporation. Prior to
January 1, 1994, Mykotronx was an S Corporation.
11
<PAGE> 12
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 Products, Information Security Products,
and IBEST) 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 SSI and
Mykotronx, which were both 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.
1997 COMPARED WITH 1996
Global Software Protection Products revenue for the year ended December 31,
1997 increased 5% to $60,125,000 as compared with 1996. The revenue growth was
primarily due to increased unit sales in Asia Pacific and North American
markets. Revenues in Asia Pacific grew by 37%. Revenues in European markets were
consistent in 1997 and 1996. The average selling price per product for the year
ended December 31, 1997 decreased approximately 7% from the year ended December
31, 1996.
During the year ended December 31, 1997, approximately 19% of the Company's
Software Protection Products revenue was subject to currency fluctuations, down
from 22% in 1996. 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, 1997
increased 41% to $34,116,000, as compared with 1996. The revenue growth was
primarily due to increased shipments of secure network communication products.
Gross profit for Software Protection Products for the year ended December
31, 1997 was 71% of revenue compared with 70% for the year ended December 31,
1996. The increase in gross profit was due to improvements in manufacturing
efficiencies. 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, 1997.
Gross profit from Information Security Products for the year ended December
31, 1997 was 20% of revenues compared with 18% of revenues for the year ended
December 31, 1996. The increase in gross profit was due to the change in mix
from less profitable research and development contracts to more profitable
product contracts.
Consolidated selling, general and administrative expenses for the years
ended December 31, 1997 and 1996 were 23% and 24% of revenues, respectively.
Selling, general and administrative expenses for the year ended December 31,
1997 increased by $2,223,000 as compared with 1996. This increase was primarily
due to additional staff and higher marketing expenses for new product
introductions in software protection and information security products.
Total research and development expenses were 9% and 8% of revenues for each
of the years ended December 31, 1997 and 1996, respectively. Current research
and development activities are focused on additional ASIC development for future
products 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, 1997 increased by 6% to
$1,605,000, as compared with 1996, primarily due to higher average cash and cash
equivalent balances during 1997.
During the year ended December 31, 1997, the Company incurred foreign
currency losses of $167,000, primarily due to dollar denominated deposit
accounts maintained in Europe. During the year ended December 31, 1996, the
Company recognized foreign currency gains of $270,000, 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.
12
<PAGE> 13
For the year ended December 31, 1997, the Company recognized a minority
interest share in the loss of Quantum Manufacturing Technologies, a subsidiary
of the Company in which the Company holds a 65% interest. The minority interest
share of the 1997 loss amounted to approximately $448,000.
The effective tax rate was 41% for the year ended December 31, 1997
compared with 41.4% for the year ended December 31, 1996.
1996 COMPARED WITH 1995
Global Software Protection Products revenue for the year ended December 31,
1996 increased 13% to $57,440,000 as compared with 1995. The revenue growth was
primarily due to increased unit sales in European and Asian markets. Software
Protection Products revenue for the year ended December 31, 1996 in Europe
increased by 18% as compared with 1995. The average selling price per product in
the year ended December 31, 1996 decreased approximately 7% from the year ended
December 31, 1995.
During the year ended December 31, 1996, approximately 22% of the Company's
Software Protection Products revenue was subject to currency fluctuations, up
from 21% in 1995. 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, 1996
increased 11% to $24,270,000, as compared with 1995. The revenue growth was
primarily due to increases in satellite communications revenues.
Software Protection Products gross profit for the year ended December 31,
1996 was 70% of revenue compared with 71% for the year ended December 31, 1995.
The decrease in gross margin was due to lower average selling prices in Europe
and Asia Pacific.
Gross profit from Information Security Products for the year ended December
31, 1996 was 18% of revenues compared with 23% of revenues for the year ended
December 31, 1995. The decrease in gross profit was due to a change from
predominately product contracts to mainly less profitable research and
development contracts.
Consolidated selling, general and administrative expenses for the years
ended December 31, 1996 and 1995 were 24% of revenues for each year. Selling,
general and administrative expenses for the year ended December 31, 1996
increased by $1,949,000 as compared with 1995. This increase was primarily due
to additional staff and increased compensation expenses.
Total research and development expenses were 8% of revenues for each of the
years ended December 31, 1996 and 1995. Research and development activities were
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, and on the cryptographic security products
to improve the performance of electronic commerce servers on the Internet.
Interest income for the year ended December 31, 1996 decreased by 12% to
$1,520,000, as compared with 1995, primarily due to a shift from taxable
instruments to non-taxable interest bearing instruments and lower worldwide
interest rates.
During the year ended December 31, 1996, the Company incurred foreign
currency gains of $270,000, primarily due to dollar denominated deposit accounts
maintained in Europe. During the year ended December 31, 1995, the Company
recognized foreign currency losses of $268,000, 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, 1996, the Company recognized its share
of operating losses in Quantum Manufacturing Technologies, of Albuquerque, New
Mexico, in which the Company held a minority investment. The Company's share of
the losses amounted to approximately $524,000.
13
<PAGE> 14
The effective tax rate was 41.4% for the year ended December 31, 1996
compared with 41.6% for the year ended December 31, 1995.
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 1997, 1996 and 1995 was $12,948,000,
$12,262,000, and $13,049,000, respectively.
The Company intends to use its capital resources to expand its product
lines and for possible acquisitions of additional products and technologies. The
Company has no significant capital commitments or requirements at this time.
The Company's subsidiaries in France carry approximately $6.2 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 $55,776,000 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, 1998.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has completed a partial assessment and will have to modify
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at less than $100,000 which will be expensed as
incurred. To date, the Company has not incurred nor expensed any of these
amounts.
The project is estimated to be completed no later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived using assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
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-21.
14
<PAGE> 15
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.
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 30, 1998.
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 30, 1998.
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 30, 1998.
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 30, 1998.
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, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
II. Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
15
<PAGE> 16
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
2. (i) 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).
2. (ii) Agreement and Plan of Merger, dated September 30, 1996, by
and among the Company, RNBO Acquisition Corporation, a
Nevada corporation and a wholly-owned subsidiary of the
Company, and Software Security, Inc., a Connecticut
corporation (incorporated by reference to Exhibit 2(ii) of
the Company's 1996 Annual Report on Form 10-K under the
Securities Exchange Act of 1934 filed in March 1997 (the
"1996 10-K")).
2. (iii) Agreement and Plan of Merger, dated March 6, 1998, by and
among the Company, WRS Acquisition Corp, a California
corporation and wholly owned subsidiary of the Company, and
Wyatt River Software, Inc.
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).
4. (c) Rights Agreement, dated as of July 29, 1997, between the
Company and U.S. Stock Transfer Corporation, as Rights
Agent.
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
(filed as an exhibit to the Company's 1995 Form 10-K).
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) 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 (f) 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 (g) 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 (h) 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).
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
10 (i) 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 (j) 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 (k) 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 (l) 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 (m) 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 (n) 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).
10 (o) Employment Agreement, dated April 7, 1997, between the
Company and Aviram Margalith.
10 (p) Change of Control Agreement, dated April 7, 1997, between
the Company and Aviram Margalith.
10 (q) Employment Agreement, dated January 1, 1998, between the
Company and Laurie Casey.
10 (r) Change of Control Agreement, dated January 1, 1998, between
the Company and Laurie Casey.
10 (s) Employment Agreement, dated January 1, 1998, between the
Company and Richard Burris.
10 (t) Change of Control Agreement, dated January 1, 1998, between
the Company and Richard Burris.
21 List of Rainbow's wholly-owned subsidiaries.
23 (a) Consent of Independent Auditors
27 FINANCIAL DATA SCHEDULE
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended
December 31, 1997.
17
<PAGE> 18
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.
By: /s/ WALTER M. STRAUB
------------------------------------
Walter M. Straub
Date: March 27, 1998
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
--------- -----
<C> <S> <C>
/s/ WALTER M. STRAUB President, Chief Executive March 27, 1998
- ----------------------------------------------------- Officer, and Chairman of the
Walter M. Straub Board
/s/ PETER M. CRAIG Vice Chairman, Executive Vice March 27, 1998
- ----------------------------------------------------- President, Secretary and
Peter M. Craig Director
/s/ PATRICK E. FEVERY Vice President and Chief March 27, 1998
- ----------------------------------------------------- Financial Officer
Patrick E. Fevery
/s/ ALAN K. JENNINGS Director March 27, 1998
- -----------------------------------------------------
Alan K. Jennings
/s/ RICHARD P. ABRAHAM Director March 27, 1998
- -----------------------------------------------------
Richard P. Abraham
/s/ MARVIN HOFFMAN Director March 27, 1998
- -----------------------------------------------------
Marvin Hoffman
/s/ FREDERICK M. HANEY Director March 27, 1998
- -----------------------------------------------------
Frederick M. Haney
</TABLE>
<PAGE> 19
<TABLE>
<C> <S> <C>
RAINBOW TECHNOLOGIES, INC.INDEX TO CONSOLIDATED
FINANCIAL STATEMENTSAND FINANCIAL STATEMENT
SCHEDULEFOR THE YEAR ENDED DECEMBER 31, 1997
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Consolidated Valuation and Qualifying
Accounts.................................................. F-21
</TABLE>
F-1
<PAGE> 20
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the financial statement 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 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 consolidated financial position of Rainbow
Technologies, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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.
/s/ ERNST & YOUNG LLP
Orange County, California
February 20, 1998
F-2
<PAGE> 21
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 29,556,000 $31,735,000
Marketable securities available-for-sale.................. 6,841,000 11,437,000
Accounts receivable, net of allowance for doubtful
accounts of $500,000 and $330,000 in 1997 and 1996,
respectively........................................... 16,343,000 15,297,000
Inventories............................................... 9,780,000 7,853,000
Unbilled costs and fees................................... 1,782,000 2,249,000
Prepaid expenses and other current assets................. 4,803,000 2,106,000
------------ -----------
Total current assets.............................. 69,105,000 70,677,000
Property, plant and equipment, at cost:
Buildings................................................. 8,058,000 9,122,000
Furniture................................................. 1,191,000 1,200,000
Equipment................................................. 12,963,000 6,026,000
Leasehold improvements.................................... 636,000 347,000
------------ -----------
22,848,000 16,695,000
Less accumulated depreciation and amortization............ 6,315,000 4,615,000
------------ -----------
Net property, plant and equipment................. 16,533,000 12,080,000
Goodwill, net of accumulated amortization of $8,736,000 and
$7,936,000 in 1997 and 1996, respectively................. 5,543,000 4,064,000
Product licenses, net of accumulated amortization of
$469,000 and $263,000 in 1997 and 1996, respectively...... 6,481,000 118,000
Other assets, net of accumulated amortization of $2,763,000
and $1,936,000 in 1997 and 1996, respectively............. 5,389,000 6,425,000
------------ -----------
$103,051,000 $93,364,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,937,000 $ 4,109,000
Accrued payroll and related expenses...................... 4,199,000 3,339,000
Other accrued liabilities................................. 2,986,000 1,500,000
Income taxes payable...................................... 861,000 948,000
Billings in excess of costs and fees...................... 87,000 314,000
Long-term debt, due within one year....................... 259,000 301,000
------------ -----------
Total current liabilities......................... 13,329,000 10,511,000
Long-term debt, net of current portion...................... 1,616,000 2,145,000
Deferred income taxes....................................... -- 1,515,000
Minority interest........................................... 1,723,000 80,000
Other liabilities........................................... 24,000 37,000
Commitments and contingencies...............................
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized, 7,817,836 and 7,775,389 shares issued and
outstanding in 1997 and 1996, respectively............. 8,000 8,000
Additional paid-in capital................................ 30,633,000 30,686,000
Cumulative translation adjustment......................... (1,833,000) (251,000)
Cumulative difference between cost and market value of
marketable securities.................................. (73,000) 154,000
Retained earnings......................................... 59,811,000 48,479,000
------------ -----------
88,546,000 79,076,000
Less cost of treasury shares (88,868 shares).............. (2,187,000) --
------------ -----------
Total shareholders' equity........................ 86,359,000 79,076,000
------------ -----------
$103,051,000 $93,364,000
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 22
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Software protection products.............................. $60,125,000 $57,440,000 $50,622,000
Information security products............................. 34,116,000 24,270,000 21,962,000
Ion beam surface treatment................................ 483,000 -- --
----------- ----------- -----------
Total revenues.................................... 94,724,000 81,710,000 72,584,000
OPERATING EXPENSES:
Cost of software protection products...................... 17,484,000 17,051,000 14,534,000
Cost of information security products..................... 27,337,000 19,851,000 16,865,000
Cost of ion beam surface treatment........................ 419,000 -- --
Selling, general and administrative....................... 21,735,000 19,512,000 17,563,000
Research and development.................................. 8,424,000 6,247,000 6,073,000
Goodwill amortization..................................... 1,792,000 1,784,000 1,830,000
----------- ----------- -----------
Total operating expenses.......................... 77,191,000 64,445,000 56,865,000
----------- ----------- -----------
Operating income............................................ 17,533,000 17,265,000 15,719,000
Interest income............................................. 1,605,000 1,520,000 1,726,000
Interest expense............................................ (255,000) (325,000) (387,000)
Other income (expense)...................................... 319,000 (524,000) (268,000)
----------- ----------- -----------
Income before provision for income taxes.................... 19,202,000 17,936,000 16,790,000
Provision for income taxes.................................. 7,870,000 7,419,000 6,976,000
----------- ----------- -----------
Net income.................................................. $11,332,000 $10,517,000 $ 9,814,000
=========== =========== ===========
NET INCOME PER SHARE:
Basic..................................................... $ 1.46 $ 1.36 $ 1.31
=========== =========== ===========
Diluted................................................... $ 1.42 $ 1.32 $ 1.26
=========== =========== ===========
SHARES USED IN COMPUTING NET INCOME PER SHARE:
Basic..................................................... 7,769,000 7,743,000 7,511,000
=========== =========== ===========
Diluted................................................... 7,979,000 7,940,000 7,767,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 23
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CUMULATIVE
DIFFERENCE BETWEEN
COMMON STOCK ADDITIONAL CUMULATIVE COST AND MARKET
------------------ PAID-IN TRANSLATION VALUE OF MARKETABLE RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENT SECURITIES EARNINGS STOCK
--------- ------ ----------- ----------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... 7,423,016 $7,000 $28,225,000 $ (465,000) $ -- $28,148,000 $ --
Exercise of common stock
options..................... 146,162 1,000 1,191,000 -- -- -- --
Tax benefit of employee stock
options..................... -- -- 409,000 -- -- -- --
Unrealized gain on marketable
securities.................. -- -- -- -- 52,000 -- --
Translation adjustment, net... -- -- -- 869,000 -- -- --
Net income.................... -- -- -- -- -- 9,814,000 --
--------- ------ ----------- ----------- --------- ----------- -----------
Balance, December 31, 1995.... 7,569,178 8,000 29,825,000 404,000 52,000 37,962,000 --
Exercise of common stock
options..................... 241,211 -- 1,184,000 -- -- -- --
Purchase and retirement of
common stock................ (35,000) -- (706,000) -- -- -- --
Tax benefit of employee stock
options..................... -- -- 383,000 -- -- -- --
Unrealized gain on marketable
securities.................. -- -- -- -- 102,000 -- --
Translation adjustment, net... -- -- -- (655,000) -- -- --
Net income.................... -- -- -- -- -- 10,517,000 --
--------- ------ ----------- ----------- --------- ----------- -----------
Balance, December 31, 1996.... 7,775,389 8,000 30,686,000 (251,000) 154,000 48,479,000 --
Exercise of common stock
options..................... 201,597 -- 2,064,000 -- -- -- --
Purchase and retirement of
common stock................ (159,150) -- (2,767,000) -- -- -- --
Purchase of common stock...... -- -- -- -- -- -- (2,187,000)
Tax benefit of employee stock
options..................... -- -- 650,000 -- -- -- --
Unrealized loss on marketable
securities.................. -- -- -- -- (227,000) -- --
Translation adjustment, net... -- -- -- (1,582,000) -- -- --
Net income.................... -- -- -- -- -- 11,332,000 --
--------- ------ ----------- ----------- --------- ----------- -----------
Balance, December 31, 1997.... 7,817,836 $8,000 $30,633,000 $(1,833,000) $ (73,000) $59,811,000 $(2,187,000)
========= ====== =========== =========== ========= =========== ===========
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, December 31, 1994.... $55,915,000
Exercise of common stock
options..................... 1,192,000
Tax benefit of employee stock
options..................... 409,000
Unrealized gain on marketable
securities.................. 52,000
Translation adjustment, net... 869,000
Net income.................... 9,814,000
-----------
Balance, December 31, 1995.... 68,251,000
Exercise of common stock
options..................... 1,184,000
Purchase and retirement of
common stock................ (706,000)
Tax benefit of employee stock
options..................... 383,000
Unrealized gain on marketable
securities.................. 102,000
Translation adjustment, net... (655,000)
Net income.................... 10,517,000
-----------
Balance, December 31, 1996.... 79,076,000
Exercise of common stock
options..................... 2,064,000
Purchase and retirement of
common stock................ (2,767,000)
Purchase of common stock...... (2,187,000)
Tax benefit of employee stock
options..................... 650,000
Unrealized loss on marketable
securities.................. (227,000)
Translation adjustment, net... (1,582,000)
Net income.................... 11,332,000
-----------
Balance, December 31, 1997.... $86,359,000
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 24
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 11,332,000 $ 10,517,000 $ 9,814,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization........................................... 2,850,000 2,821,000 2,352,000
Depreciation........................................... 2,120,000 1,453,000 1,290,000
Change in deferred income taxes........................ (3,097,000) (666,000) 493,000
Provision for loss on contract......................... 400,000 -- --
Allowance for doubtful accounts........................ 182,000 33,000 76,000
Loss from retirement of property, plant, and
equipment............................................ 32,000 87,000 7,000
Write-down of long-term investment..................... 158,000 203,000 --
Share in investee's loss............................... 45,000 524,000 --
Minority interest in subsidiary's loss................. (448,000) -- --
Write-off of capitalized software...................... 242,000 273,000 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,587,000) (1,539,000) (2,540,000)
Inventories.......................................... (2,811,000) (4,273,000) (65,000)
Unbilled costs and fees.............................. 467,000 1,713,000 (1,067,000)
Prepaid expenses and other current assets............ (282,000) 157,000 89,000
Accounts payable..................................... 348,000 281,000 1,168,000
Accrued liabilities.................................. 4,053,000 1,341,000 289,000
Billings in excess of costs and fees................. (227,000) 312,000 (420,000)
Income taxes payable................................. (829,000) (975,000) 1,563,000
------------ ------------ ------------
Net cash provided by operating activities......... 12,948,000 12,262,000 13,049,000
Cash flows from investing activities:
Purchase of marketable securities........................ (11,995,000) (8,960,000) (12,271,000)
Sale of marketable securities............................ 16,364,000 9,424,000 4,115,000
Purchase of new product line............................. (7,000,000) -- --
Purchases of property, plant, and equipment.............. (6,749,000) (2,719,000) (1,780,000)
Acquired cash from QMT................................... 556,000 -- --
Other long-term assets................................... (1,130,000) (3,703,000) (1,731,000)
Capitalized software development costs................... (1,493,000) (348,000) --
Note receivable.......................................... -- -- 3,000,000
------------ ------------ ------------
Net cash used in investing activities............. (11,447,000) (6,306,000) (8,667,000)
Cash flows from financing activities:
Exercise of common stock options......................... 2,064,000 1,184,000 1,191,000
Payment of long-term debt................................ (279,000) (303,000) (357,000)
Purchase of common stock................................. (2,187,000) -- --
Purchase and retirement of common stock.................. (2,767,000) (706,000) --
Repayment of capital lease............................... -- -- (31,000)
------------ ------------ ------------
Net cash (used in) provided by financing
activities...................................... (3,169,000) 175,000 803,000
Effect of exchange rate changes on cash.................... (511,000) 274,000 (146,000)
------------ ------------ ------------
Net increase in cash and cash equivalents.................. (2,179,000) 6,405,000 5,039,000
Cash and cash equivalents at beginning of period........... 31,735,000 25,330,000 20,291,000
------------ ------------ ------------
Cash and cash equivalents at end of period................. $ 29,556,000 $ 31,735,000 $ 25,330,000
============ ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid........................................ $ 9,827,000 $ 8,105,000 $ 6,005,000
Interest paid............................................ 259,000 247,000 302,000
</TABLE>
See accompanying notes.
F-6
<PAGE> 25
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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; develops and manufactures information
security products to provide privacy and security for satellite and network
communications; and develops ion beam surface treatment technologies. The
accompanying financial statements consolidate the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain amounts previously reported have been
reclassified to conform with the 1997 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 reserve 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
All investment securities are considered to be available-for-sale and are
carried at fair value. Management determines classification at the time of
purchase and re-evaluates its appropriateness at each balance sheet date. The
Company's marketable securities consist of tax-exempt and other debt instruments
that bear interest at variable rates. As of December 31, 1997 gross unrealized
losses were $73,000 while gross unrealized gains were $154,000 as of December
31, 1996. There were no material realized gains or losses recognized for the
years ended December 31, 1997, 1996 and 1995. The cost of securities sold is
based on the specific identification method. The Company's portfolio of
marketable debt securities at December 31, 1997 matures as follows: 44% in 1998,
44% in 1999-2003, and 12% thereafter.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Amortization of capitalized software development costs
commences when the products are available for general release to customers and
are determined using the straight line method over the expected useful lives of
the respective products.
At December 31, 1997 and 1996, the Company had capitalized computer
software costs of $1,844,000 and $766,000, respectively. Amortization of
computer software development costs for the years ended December 31, 1997 and
1996 amounted to $173,000 and $44,000, respectively. There was no such
amortization for the year ended December 31, 1995. During 1997 and 1996, the
Company wrote-off $242,000 and $273,000, respectively, of previously capitalized
computer software development costs.
F-7
<PAGE> 26
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 (first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant, equipment and leasehold improvements are
recorded at cost and depreciated on 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, product licenses and patents are
amortized using the straight-line method over seven to ten years. Goodwill
represents the excess of purchase price over the estimated fair value of assets
acquired.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In accordance
with SFAS No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. The adoption of SFAS
No. 121 had no impact on the Company's financial condition or results of
operations.
REVENUE RECOGNITION
Software Protection Products
The Company recognizes revenues from Software Protection Product sales at
the time of shipment. Provision is currently made 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. Profits expected
F-8
<PAGE> 27
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 period in which the revisions are made. Estimated losses on contracts
are recorded when identified. For research and development and other
cost-plus-fee type contracts, the Company recognizes contract earnings 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.
Ion Beam Surface Treatment Application and Services
Service revenues are recognized upon performance of a validation test
service. Revenues from fixed-price 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.
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 $2,601,000, $2,221,000 and $1,212,000 for 1997, 1996, and 1995,
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 Shareholders' Equity. The
Company has adopted local currencies as the functional currencies for its
subsidiaries because their principal economic activities are most closely tied
to the respective local currencies.
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, 1997.
STOCK OPTION PLANS
Effective January 1, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123) and accordingly, is continuing to
account for its stock-based compensation plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The adoption of SFAS No. 123 had no impact on the Company's
consolidated results of operations or financial position.
F-9
<PAGE> 28
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earning Per Share" (SFAS No. 128) in 1997. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
assumed conversion of all dilutive securities. Earnings per share amounts for
all periods presented have been calculated in accordance with the requirements
of SFAS No. 128.
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
52%, 65%, and 81% of contract revenues in 1997, 1996, and 1995, respectively. In
addition, approximately 99% and 81% of contract accounts receivable and 86% and
78% of unbilled costs and fees at December 31, 1997 and 1996, respectively, were
related to the U.S. Government.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," (SFAS No. 130) which establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by and distributions to shareholders.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS No. 131) which
requires publicly-held companies to report financial and descriptive information
about its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations, and
major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
2. ACQUISITIONS
In October 1997, the Company acquired from AlliedSignal, Inc. for
approximately $7 million certain assets comprising AlliedSignal's "KIV-7"
information security product line in a cash transaction. The Company is the sole
supplier of KIV-7 to various agencies of the U.S. Government. Simultaneous with
the closing of the asset purchase transaction, the Company entered into a
manufacturing and development agreement with AlliedSignal whereby Allied-Signal
will continue to manufacture current KIV-7 products for the Company, and will
complete the development of an enhanced version of the KIV-7 product.
On May 1997, the Company completed its obligations pursuant to a Stock
Purchase Agreement entered into in March 1996 which resulted in the Company
investing approximately $6 million and owning a 65% interest in Quantum
Manufacturing Technologies, Inc. ("QMT"). QMT, located in Albuquerque, New
F-10
<PAGE> 29
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Mexico, owns an exclusive worldwide license from Sandia National Laboratories
for the commercial use and exploitation of a patented pulsed power ion beam
materials treatment technology known as "IBEST". QMT had a 1997 loss of
approximately $1 million. The Company recognized a minority interest share in
the 1997 loss of approximately $448,000.
On October 4, 1996, the Company acquired Software Security, Inc. ("SSI") in
a merger transaction resulting in SSI becoming a wholly-owned subsidiary of
Rainbow. SSI, headquartered in Stamford, Connecticut, designs, develops and
manufactures software security products to prevent the unauthorized use of
intellectual property. These products are sold in the U.S. and Europe.
Shareholders of SSI received 0.35 shares of Company common stock for each share
of issued and outstanding SSI common stock. Accordingly, the Company issued
336,511 shares of its common stock to SSI shareholders in exchange for all
outstanding SSI shares. In addition, 4,366 shares of Rainbow common stock were
reserved for issuance upon the exercise of assumed SSI options. The merger was
accounted for as a pooling-of-interests. Expenses associated with the merger of
approximately $191,000 were included in the consolidated results of operations
for the year ended December 31, 1996. There were no significant intercompany
transactions between Rainbow and SSI during any period presented.
On June 1, 1995, the Company acquired Mykotronx, Inc. ("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>
FOR THE FIVE MONTHS ENDED MAY 31, 1995 (PRIOR TO
THE EFFECTIVE DATE OF THE MERGER):
--------------------------------------------------
RAINBOW MYKOTRONX CONSOLIDATED
-------------- ------------- ---------------
<S> <C> <C> <C>
Revenue............................ $19,314,000 $9,663,000 $28,977,000
Net income......................... 2,489,000 1,278,000 3,767,000
</TABLE>
There were no significant intercompany transactions between Rainbow and
Mykotronx during any period presented.
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.
F-11
<PAGE> 30
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Company has unbilled costs and fees of $1,782,000 and $2,249,000 at
December 31, 1997 and 1996, 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>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials....................................... $ 271,000 $ 908,000
Work in process..................................... 761,000 819,000
Finished goods...................................... 4,257,000 3,211,000
Inventoried costs relating to long-term contracts,
net of amounts attributed to revenues recognized
to date........................................... 4,491,000 2,915,000
---------- ----------
$9,780,000 $7,853,000
========== ==========
</TABLE>
General and administrative expenses in inventory at December 31, 1997 and
1996 were $51,000 and $124,000, respectively.
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 $5,570,000 at
December 31, 1997.
Annual principal payments are as follows:
<TABLE>
<S> <C>
1998............................................. $ 259,000
1999............................................. 259,000
2000............................................. 259,000
2001............................................. 259,000
2002............................................. 259,000
Thereafter....................................... 580,000
----------
$1,875,000
==========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented are estimates of the fair value 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>
1997 1996
------------------------ --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Marketable securities........... $6,481,000 $6,481,000 $11,437,000 $11,437,000
Long-term debt.................. 1,875,000 2,125,000 2,446,000 2,714,000
</TABLE>
F-12
<PAGE> 31
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES
The Company has purchase commitments with various vendors for approximately
$6,787,000 as of December 31, 1997. These purchase commitments are payable in
less than a year.
Annual obligations under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1998............................................. $1,427,000
1999............................................. 1,330,000
2000............................................. 1,057,000
2001............................................. 658,000
2002............................................. 114,000
----------
$4,586,000
==========
</TABLE>
Rent expense charged to operations for the years ended December 31, 1997,
1996 and 1995 was $1,663,000, 1,410,000, and 1,331,000, respectively
8. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
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 the
1987 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.
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 ten years from the
date of grant. In June 1993, the shareholders approved an amendment to the
Company's Restated 1990 Stock Option Plan authorizing the issuance of an
additional 450,000 shares of common stock. In May 1995 an additional increase of
750,000 was approved and in June 1997 an additional increase of 750,000 was
approved. As of December 31, 1997 the total number of shares reserved for
issuance under the existing stock option plan and agreements total 419,000.
F-13
<PAGE> 32
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The following is a summary of changes in options outstanding pursuant to
the plans for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................... 1,341,722 $14.32 1,286,034 $12.80 1,095,486 $10.25
Granted........................ 591,200 16.95 341,879 15.82 351,300 18.74
Exercised...................... (201,597) 10.26 (241,211) 5.74 (146,162) 8.97
Cancelled...................... (124,876) 17.69 (44,980) 16.14 (14,590) 13.88
---------- ------ ---------- ------ ---------- ------
Outstanding -- end of year....... 1,606,449 $15.53 1,341,722 $14.32 1,286,034 $12.80
Exercisable at end of year....... 712,722 $14.42 597,277 $12.97 430,961 $ 9.93
Weighted-average fair value of
options granted during the
year........................... $6.56 $6.18 $7.25
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------
WEIGHTED EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.290 to 6.600.. 42,111 2.17 $ 6.20 42,104 $ 6.20
8.730 to 11.000.. 161,612 6.35 10.98 127,720 10.99
11.750 to 12.000.. 188,005 6.50 11.82 148,710 11.84
13.500 to 16.750.. 459,426 8.88 14.94 97,483 15.16
17.000 to 18.750.. 732,565 8.32 18.15 296,525 18.11
20.750 to 23.625.. 22,730 9.86 23.60 180 20.75
</TABLE>
The weighted average remaining contractual life of stock options
outstanding at December 31, 1997 and 1996 was 8.0 years and 7.6 years,
respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995: risk free interest rate of 5.7% for 1997
and 6.3% for 1996 and 1995; dividend yield of 0% for 1997, 1996 and 1995;
volatility factor of the expected market price of the Company's common stock of
0.39 for 1997 and 0.38 for 1996 and 1995; and a weighted-average life of the
option of 4.0 years for 1997, 1996, and 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-14
<PAGE> 33
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income.......................... $10,120,000 $9,840,000 $9,417,000
Pro forma earnings per share:
Basic....................................... $ 1.30 $ 1.27 $ 1.25
Diluted..................................... 1.27 1.24 1.21
</TABLE>
The results above are not likely to be representative of the effects of
applying SFAS 123 on reported net income or loss for future years as these
amounts reflect the expense for only one to three years vesting.
9. SHAREHOLDER'S RIGHTS PLAN
In July 1997, the Board of Directors of the Company adopted a Shareholder's
Rights Plan. In so doing, the Board of Directors declared a dividend of one
right (a "Right") for each outstanding share of the Company's Common Stock, as
of August 5, 1997 and subsequently with respect to each subsequent issuance of a
share of Common Stock. Following a "Distribution Date," each holder of a Right
is entitled to purchase, at a stated purchase price, shares of the Company's
Common Stock or other property having a value equal to two times of the purchase
price. A Distribution Date will occur on the earlier of (i) the tenth day after
a public announcement that a person other than the Company or its affiliates has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Stock (such person thereby becoming an "Acquiring
Person"), or (ii) the tenth business day after the date of the commencement of,
or first public announcement of the intent of any person to commence, a tender
or exchange offer the consummation of which would result in such person becoming
an Acquiring Person. Following a Distribution Date, the Rights of an Acquiring
Person are null and void and not exercisable. Outstanding Rights are redeemable
by the Board of Directors at any time prior to a Distribution Date at a
redemption price of $0.01 per Right. The Rights will expire at the close of
business on August 5, 2002, unless earlier exercised by the holder or redeemed
by the Company.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal..................................... $ 7,447,000 $4,775,000 $3,496,000
State....................................... 1,362,000 1,387,000 1,202,000
Foreign..................................... 2,158,000 1,923,000 1,785,000
----------- ---------- ----------
10,967,000 8,085,000 6,483,000
Deferred:
Federal..................................... (2,605,000) (567,000) 329,000
State....................................... (254,000) (96,000) 34,000
Foreign..................................... (238,000) (3,000) 130,000
----------- ---------- ----------
(3,097,000) (666,000) 493,000
----------- ---------- ----------
$ 7,870,000 $7,419,000 $6,976,000
=========== ========== ==========
</TABLE>
A reconciliation of the statutory federal income tax provision to the
actual provision follows for the years ended December 31:
F-15
<PAGE> 34
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax expense.......... $ 6,721,000 $6,278,000 $5,777,000
Non-deductible amortization of goodwill....... 627,000 624,000 610,000
State taxes, net of federal benefit........... 720,000 839,000 804,000
Non-deductible merger related costs........... (57,000) 116,000 185,000
Effect of foreign operations, net............. (19,000) (242,000) (116,000)
Research and experimentation credit........... (119,000) -- (30,000)
Municipal interest............................ (209,000) (223,000) (156,000)
Other......................................... 206,000 27,000 (98,000)
----------- ---------- ----------
$ 7,870,000 $7,419,000 $6,976,000
=========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts 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>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Foreign tax loss carryforwards.......................... $ 586,000 $ 554,000
Contract revenue recognized for tax reporting
purposes............................................. 1,563,000 50,000
State taxes not currently deductible.................... 586,000 423,000
Cumulative translation adjustment....................... 383,000 --
Tax credit carryforwards................................ -- 132,000
Accruals and reserves not currently tax deductible...... 2,005,000 1,309,000
----------- -----------
Total deferred tax assets....................... 5,123,000 2,468,000
Valuation allowance for deferred tax assets............. (586,000) (554,000)
----------- -----------
4,537,000 1,914,000
Deferred tax liabilities:
Cumulative translation adjustment....................... -- (14,000)
Accruals without tax effect............................. (266,000) (620,000)
Tax depreciation........................................ (1,395,000) (1,501,000)
----------- -----------
Total deferred tax liabilities.................. (1,661,000) (2,135,000)
----------- -----------
Net deferred tax assets (liabilities)..................... $ 2,876,000 $ ( 221,000)
=========== ===========
</TABLE>
United States and foreign earnings before income taxes are as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
United States....................................... $15,400,000 $14,281,000 $12,875,000
Foreign............................................. 3,802,000 3,655,000 3,915,000
----------- ----------- -----------
$19,202,000 $17,936,000 $16,790,000
=========== =========== ===========
</TABLE>
The Company realized tax benefits of $650,000, $383,000, and $409,000 in
1997, 1996 and 1995, respectively, from the exercise of non-qualified stock
options and disqualifying disposition of incentive stock options.
F-16
<PAGE> 35
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. BENEFIT PLANS
At December 31, 1997, the Company sponsored two tax deferred defined
contribution plans for all eligible US employees, each of which was sponsored by
the predecessor companies prior to the merger of SSI into Rainbow. The Rainbow
and Mykotronx plans were merged effective January 1, 1996. Under both plans, the
employer matches certain employee contributions. During the years ended December
31, 1997, 1996 and 1995, Company contributions under both Plans totaled
approximately $368,000, $307,000, and $183,000, respectively.
12. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, 1996 and 1995 the Company made
purchases of services from companies controlled by directors of the Company
totaling $273,000, $152,000, and $197,000, respectively.
13. INDUSTRY SEGMENTS
The Company operates in three 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). The third segment is the development of ion beam surface
treatment technologies. Summaries of the Company's operations by industry and
geographic area are as follows:
A summary of the Company's operations by industry segment follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
ION BEAM
SOFTWARE INFORMATION SURFACE
PROTECTION SECURITY TREATMENT ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.............. $60,125,000 $34,116,000 $ 483,000 $ -- $ 94,724,000
Operating income
(loss).............. 15,392,000 3,286,000 (1,145,000) -- 17,533,000
Identifiable assets... 84,134,000 28,480,000 5,247,000 (14,810,000) 103,051,000
Depreciation and
amortization........ 3,840,000 807,000 323,000 -- 4,970,000
Capital
expenditures........ 1,094,000 1,839,000 3,816,000 -- 6,749,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------
ION BEAM
SOFTWARE INFORMATION SURFACE
PROTECTION SECURITY TREATMENT ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.............. $57,440,000 $24,270,000 $ -- $ -- $ 81,710,000
Operating income...... 13,736,000 3,529,000 -- -- 17,265,000
Identifiable assets... 78,562,000 15,052,000 -- (250,000) 93,364,000
Depreciation and
amortization........ 4,055,000 219,000 -- -- 4,274,000
Capital
expenditures........ 1,298,000 1,421,000 -- -- 2,719,000
</TABLE>
F-17
<PAGE> 36
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------
ION BEAM
SOFTWARE INFORMATION SURFACE
PROTECTION SECURITY TREATMENT ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.............. $50,622,000 $21,962,000 $ -- $ -- $ 72,584,000
Operating income...... 10,757,000 4,962,000 -- -- 15,719,000
Identifiable assets... 73,411,000 8,863,000 -- -- 82,274,000
Depreciation and
amortization........ 3,490,000 152,000 -- -- 3,642,000
Capital
expenditures........ 1,418,000 362,000 -- -- 1,780,000
</TABLE>
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
UNITED STATES EUROPE ELIMINATION CONSOLIDATED
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers.... $74,972,000 $19,752,000 $ -- $ 94,724,000
Transfers between geographic
areas............................ 2,437,000 2,619,000 (5,056,000) --
----------- ----------- ----------- ------------
Revenues...................... $77,409,000 $22,371,000 $(5,056,000) $ 94,724,000
=========== =========== =========== ============
Operating income................... $13,163,000 $ 4,410,000 $ (40,000) $ 17,533,000
Identifiable assets................ 77,508,000 25,913,000 (370,000) 103,051,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------
UNITED STATES EUROPE ELIMINATION CONSOLIDATED
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $61,976,000 $19,734,000 $ -- $81,710,000
Transfers between geographic areas.... 1,042,000 3,160,000 (4,202,000) --
----------- ----------- ----------- -----------
Revenues............................ $63,018,000 $22,894,000 $(4,202,000) $81,710,000
=========== =========== =========== ===========
Operating income...................... $13,664,000 $ 3,819,000 $ (218,000) $17,265,000
Identifiable assets................... 61,280,000 32,414,000 (330,000) 93,364,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
UNITED STATES EUROPE ELIMINATION CONSOLIDATED
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....... $54,953,000 $17,631,000 $ -- $72,584,000
Transfers between geographic areas.... 1,223,000 3,249,000 (4,472,000) --
----------- ----------- ----------- -----------
Revenues............................ $56,176,000 $20,880,000 $(4,472,000) $72,584,000
=========== =========== =========== ===========
Operating income...................... $12,058,000 $ 5,310,000 $(1,649,000) $15,719,000
Identifiable assets................... 45,442,000 36,952,000 (120,000) 82,274,000
</TABLE>
Geographic information for Europe encompasses the Company's operations in
France, the United Kingdom, Germany, Belarus and the Netherlands. 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.
F-18
<PAGE> 37
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
14. SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Software protection................. $13,973,000 $15,974,000 $14,741,000 $15,437,000
Information security................ 6,810,000 6,859,000 7,314,000 13,133,000
Ion beam surface treatment.......... -- 11,000 201,000 271,000
----------- ----------- ----------- -----------
Total revenues.............. $20,783,000 $22,844,000 $22,256,000 $28,841,000
=========== =========== =========== ===========
COST OF REVENUES:
Software Protection................. $ 4,181,000 $ 4,594,000 $ 4,128,000 $ 4,581,000
Information Security................ 5,711,000 5,243,000 5,975,000 10,408,000
Ion beam surface treatment.......... -- 417,000 2,000 --
----------- ----------- ----------- -----------
Total cost of revenues...... $ 9,892,000 $10,254,000 $10,105,000 $14,989,000
=========== =========== =========== ===========
Operating income...................... $ 3,833,000 $ 4,098,000 $ 4,407,000 $ 5,195,000
Net income............................ 2,432,000 2,814,000 2,787,000 3,299,000
Net income per share:
Basic............................... $ 0.31 $ 0.36 $ 0.36 $ 0.42
Diluted............................. 0.31 0.36 0.35 0.40
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Software Protection................. $14,454,000 $14,853,000 $13,981,000 $14,152,000
Information Security................ 6,127,000 5,997,000 5,101,000 7,045,000
----------- ----------- ----------- -----------
Total revenues.............. $20,581,000 $20,850,000 $19,082,000 $21,197,000
=========== =========== =========== ===========
COST OF REVENUES:
Software Protection................. $ 4,375,000 $ 4,467,000 $ 4,026,000 $ 4,183,000
Information Security................ 5,168,000 5,097,000 4,145,000 5,441,000
----------- ----------- ----------- -----------
Total cost of revenues...... $ 9,543,000 $ 9,564,000 $ 8,171,000 $ 9,624,000
=========== =========== =========== ===========
Operating income...................... $ 4,321,000 $ 4,275,000 $ 3,804,000 $ 4,865,000
Net income............................ 2,833,000 2,674,000 2,049,000 2,961,000
Net income per share:
Basic............................... $ 0.37 $ 0.34 $ 0.26 $ 0.38
Diluted............................. 0.36 0.34 0.26 0.37
</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.
15. IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
F-19
<PAGE> 38
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The Company has completed a partial assessment and will have to modify
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at less than $100,000 that will be expensed as
incurred. To date, the Company has not incurred nor expensed any of these
amounts.
The project is estimated to be completed no later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived using assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
16. SUBSEQUENT EVENTS
The Company purchased certain assets from Elan Computer Group, Inc.
("Elan") in March 1998 in a cash transaction. The assets included Elan's license
manager software technology, which the Company had previously licensed from
Elan, and Elan's end-user maintenance and support relationships. In connection
with the transaction, the Company entered into a Litigation Cooperation
Agreement with Elan in connection with a patent infringement lawsuit entitled
Globetrotter Software, Inc. vs. Elan Computer Group, Inc. No. 97-4176CW which is
currently pending in the United States District Court for the Northern District
of California. The action claims that the Elan technology infringes upon patents
owned by Globetrotter. Management believes that the ulltimate resolution of this
matter will not have a material adverse effect on the Company's financial
position.
In February 1998, the Company acquired Wyatt River Software, Inc. ("Wyatt
River"), including its "LicenseServe" and "LicenseTrack" technology in a cash
transaction. The Company paid initial consideration of approximately $5 million.
Final consideration is subject to a determination based upon a balance sheet
audit of Wyatt River as of the closing date. The Company will also pay the Wyatt
River shareholders an additional sum based upon sales of the Wyatt River
technology through June 30, 1999. From the consideration paid at closing, the
Wyatt River shareholders established certain escrows to serve as a fund for
various contingent liabilities.
On March 17, 1998, the Company's Board of Directors authorized a
three-for-two stock split, subject to shareholder approval. If the proposed
stock split is approved by the shareholders on June 4, 1998, each shareholder
will receive one additional share of common stock for each two shares held on
the record date. These financial statements have not been adjusted to reflect
the impact of the proposed stock split.
F-20
<PAGE> 39
RAINBOW TECHNOLOGIES, INC.
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS/ BALANCE AT
BEGINNING RECOVERIES AND END OF
DESCRIPTION OF YEAR ADDITIONS WRITE-OFFS YEAR
----------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31:
1997
Allowance for doubtful accounts receivable... $330,000 $182,000 $ (12,000) $500,000
1996
Allowance for doubtful accounts receivable... $453,000 $ 33,000 $(156,000) $330,000
1995
Allowance for doubtful accounts receivable... $391,000 $ 76,000 $ (14,000) $453,000
</TABLE>
F-21
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- -------- ----------- ------------
<S> <C> <C>
2.(i) 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)..................................
2.(ii) Agreement and Plan of Merger, dated September 30, 1996, by
and among the Company, RNBO Acquisition Corporation, a
Nevada corporation and a wholly-owned subsidiary of the
Company, and Software Security, Inc., a Connecticut
corporation.................................................
2.(iii) Agreement and Plan of Merger, dated March 6, 1998, by and
among the Company, WRS Acquisition Corp, a California
corporation and wholly owned subsidiary of the Company, and
Wyatt River Software, Inc...................................
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)...........................................
4(c) Rights Agreement, dated as of July 29, 1997, between the
Company and U.S. Stock Transfer Corporation, as Rights
Agent.......................................................
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
(filed as an exhibit to the Company's 1995 Form 10-K).......
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) 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(f) 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(g) 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).............................
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- -------- ----------- ------------
<S> <C> <C>
10(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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).............................
10(o) Employment Agreement, dated April 7, 1997, between the
Company and Aviram Margalith................................
10(p) Change of Control Agreement, dated April 7, 1997, between
the Company and Aviram Margalith............................
10(q) Employment Agreement, dated January 1, 1998, between the
Company and Laurie Casey....................................
10(r) Change of Control Agreement, dated January 1, 1998, between
the Company and Laurie Casey................................
10(s) Employment Agreement, dated January 1, 1998, between the
Company and Richard Burris..................................
10(t) Change of Control Agreement, dated January 1, 1998, between
the Company and Richard Burris..............................
21 List of Rainbow's wholly-owned subsidiaries.................
23(a) Consent of Independent Auditors.............................
27 FINANCIAL DATA SCHEDULE
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the three months ended
December 31, 1997.
<PAGE> 1
EXHIBIT 2.(iii)
AGREEMENT AND PLAN OF MERGER entered into on February 20, 1998, by and
among Rainbow Technologies, Inc., a Delaware corporation with its principal
place of business at 50 Technology Drive, Irvine, CA (the "Buyer"), WRS
Acquisition Corp., a California corporation and wholly owned subsidiary of Buyer
(the "Transitory Subsidiary"), and Wyatt River Software, Inc. a California
corporation with its principal place of business at 1705 Wyatt Drive, Santa
Clara, CA (the "Company"). The Buyer, the Transitory Subsidiary and the Company
are referred to collectively herein as the "Parties" or individually as a
"Party."
This Agreement contemplates a transaction in which the Buyer will
acquire all of the outstanding capital stock of the Company for cash through a
reverse subsidiary merger of the Transitory Subsidiary with and into the
Company.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1 Definitions.
1.1 " Actual Professional Fees" means the actual total of the aggregate
of such fees based upon the final invoices presented to Buyer by each of Ernst &
Young LLP, Merchant, Gould, Smith, Edell, Welter & Schmidt, and Moskowitz Altman
& Hughes LLP in connection with the representation of Buyer in furtherance of
the transactions contemplated by this Agreement; and the final invoices
presented by Falk & Fish to the Company in connection with the representation of
the Company in furtherance of the transactions contemplated by this Agreement.
1.2 "Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
1.3 "Affiliated Group" means any affiliated group within the meaning of
Code Section1504(a) or any similar group defined under a similar provision of
state, local or foreign law.
1.4 "Alternative Audited Balance Sheet" has the meaning assigned in
Section 2.5.2 below.
1.5 "Audited Closing Balance Sheet" means the audited balance sheet of
the Company as of the Closing Date issued by Ernst & Young LLP.
1.6 "Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
1.7 "Buyer" has the meaning set forth in the preface above.
1.8 "Curative Action" has the meaning assigned in Section 9.4 below.
1.9 "Certificate of Merger" has the meaning set forth in Section 2.4
below.
1.10 "Closing" has the meaning set forth in Section 2.2 below.
1.11 "Closing Date" has the meaning set forth in Section 2.2 below.
1.12 "Closing Consideration" means the aggregate total of the Initial
Closing Consideration and the Final Closing Consideration.
1.12.1 "Initial Closing Consideration" has the meanings set forth
in Section 2.5 below
1.12.2 "Final Closing Consideration" has the meanings set forth in
Section 2.5 below.
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1.12.3 "Negative Closing Consideration Adjustment has the meaning
set forth in Section 2.5.3.
1.12.4 "Positive Closing Consideration Adjustment has the meaning
set forth in Section 2.5.3.
1.13 "Code" means the Internal Revenue Code of 1986, as amended.
1.14 "Company" has the meaning set forth in the preface above.
1.15 "Company Shareholders" means any Person who or which holds any
Company Shares.
1.16 "Company Share" means any share of the capital stock of the Company
that is issued and outstanding as of the Closing Date.
1.17 "Company Shareholder Agent" means William Ames, the agent of the
Company Shareholders in connection with certain of the matters contemplated by
the provisions of this Agreement.
1.18 "Confidential Information" means any information concerning the
businesses and affairs of the Company and its Subsidiary, the Buyer, the
Transitory Subsidiary, or the Surviving Corporation that is not already
generally available to the public.
1.19 "Customer Data Base" has the meaning set forth in Section 4.27
below.
1.20 "Deferred Intercompany Transaction" has the meaning set forth in
Reg. Section1.1502-13.
1.21 "Disclosure Schedule" has the meaning set forth in Section 4 below.
1.22 "Dispute Resolution Mechanism" means the method by which the
parties will seek to resolve disputes concerning certain matters adddressed in
this Agreement, as set forth in Section 8 below.
1.23 "Dissenting Share" means any Company Share with respect to which
the holder of record has elected to exercise his or her appraisal rights under
the California Corporations Code.
1.24 "Earn-up Consideration" has the meaning set forth in Section 2.10
below.
1.25 "Effective Time" has the meaning set forth in Section 2.4 below.
1.26 "Environmental, Health, and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as
now or hereafter in effect.
1.27 "Escrow Agent" has the meaning set forth in the Indemnification and
Escrow Agreements of even date herewith between the Buyer and each of the
Company Shareholders.
1.28 "Escrow Funds" has the meaning set forth in Section 2.5.1 below.
1.29 "Estimated Closing Balance Sheet" means the unaudited balance sheet
of the
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<PAGE> 3
Company, dated as of February 19, 1998 prepared and issued by management
of the Company, and attached as Exhibit .
1.30 "Estimated Professional Fees" means the estimate of $300,000 for
the professional fees charged by each of Ernst & Young LLP, Merchant, Gould,
Smith, Edell, Welter & Schmidt, Falk & Fish, and Moskowitz Altman & Hughes LLP
to Buyer in connection with the representation of Buyer in furtherance of the
transactions contemplated by this Agreement
1.31 "Excess Loss Account" has the meaning set forth in Reg.
Section1.1502-19.
1.32 "Financial Statement" has the meaning set forth in Section 4.7
below.
1.33 "GAAP" means United States generally accepted accounting principles
as in effect from time to time.
1.34 "Indemnification and Escrow Agreements" has the meaning set forth
in Section 5.6 below.
1.35 "Intellectual Property" means (i) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof, (ii)
all trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (iii) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (iv) all mask works and all applications,
registrations, and renewals in connection therewith, (v) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (vi) all computer software (including data and related
documentation), (vii) all other proprietary rights, and (viii) all copies and
tangible embodiments thereof (in whatever form or medium).
1.36 "Knowledge" means actual knowledge after reasonable investigation.
1.37 "Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
1.38 "Licensing Technology Products" means (i) the software licensing
technology owned by the Company known as "LicenseServ" and "LicenseTrack,"
protected under copyright registration numbers as set forth on Exhibit C to the
Disclosure Schedule, (ii) the product known as "LicenseMeter," (iii) products
resulting from a combination of LicenseServe and LicenseTrack, (iv) any other
product that offers substantially equivalent functionality and incorporates a
substantial portion of the core source code of LicenseServe or LicenseTrack, and
(v) any subsequent revisions, change of name or enhancement of (i) through (iv).
1.39 "Litigation Escrow" means the escrow in sum of $120,000 established
by the Company Shareholders from the Initial Closing Consideration to fund the
Company's obligation, if any, in connection with the litigation entitled Richard
McInnis v. Central Design Systems, Inc. and William Ames as may be required by a
final judgment when rendered in such action, or any sum paid to settle, dismiss
or otherwise terminate such action.
1.40 "Merger" has the meaning set forth in Section 2.1 below.
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<PAGE> 4
1.41 "Most Recent Balance Sheet" means the balance sheet contained
within the Most Recent Financial Statements.
1.42 "Most Recent Financial Statements" has the meaning set forth in
Section 4.7 below.
1.43 "Most Recent Fiscal Year End" has the meaning set forth in Section
4.7 below.
1.44 "Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
1.45 "Party" has the meaning set forth in the preface above.
1.46 "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
1.47 "Requisite Shareholder Approval" means the affirmative vote of a
majority of the Company Shares in favor of this Agreement and the Merger.
1.48 "Santa Cruz Facility" means the offices maintained by the Company
in Santa Cruz, California.
1.49 "Santa Clara Facility" means the offices maintained by the Company
in Santa Clara, California.
1.50 "Securities Act" means the Securities Act of 1933, as amended.
1.51 "Securities Exchange Act" means the Securities Exchange Act of
1934, as amended.
1.52 "Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (i) mechanic's, materialmen's,
and similar liens, (ii) liens for Taxes not yet due and payable or for Taxes
that the taxpayer is contesting in good faith through appropriate proceedings,
(iii) purchase money liens and liens securing rental payments under capital
lease arrangements, and (iv) other liens arising in the Ordinary Course of
Business and not incurred in connection with the borrowing of money.
1.53 "Shareholder Percentage" means the percentage ownership of the
total number of Company Shares held by each Company Shareholder as set forth on
Schedule 4.2.
1.54 "Subsidiary" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the common stock
or has the power to vote or direct the voting of sufficient securities to elect
a majority of the directors.
1.55 "Surviving Corporation" has the meaning set forth in Section 2.1
below.
1.56 "Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code
Section59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
1.57 "Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
1.58 "Total Assets" has the meaning assigned by GAAP, and is the total
assets set forth on
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<PAGE> 5
the Estimated Closing Balance Sheet and the Audited Closing Balance Sheet.
1.59 "Total Liabilities" has the meaning assigned by GAAP, and is the
total liabilities set forth on the Estimated Closing Balance Sheet and the
Audited Closing Balance Sheet.
1.60 "Net Liabilities" means Total Assets less Total Liabilities.
1.61 "Transitory Subsidiary" has the meaning set forth in the preface
above.
2 Basic Transaction.
2.1 The Merger. On and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary will merge with and into the Company (the
"Merger") at the Effective Time. The Company shall be the corporation surviving
the Merger (the "Surviving Corporation").
2.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Buyer in Irvine,
CA, commencing at 9:00 a.m. local time on
February 25 , 1998 (the "Closing Date").
2.3 Actions at the Closing. At the Closing, (i) the Company will deliver
to the Buyer and the Transitory Subsidiary the various certificates,
instruments, and documents referred to in Section 6.1 below, (ii) the Buyer and
the Transitory Subsidiary will deliver to the Company the various certificates,
instruments, and documents referred to in Section 6.2 below, (iii) the Company
and the Transitory Subsidiary will file with the Secretary of State of the State
of California such certificates and documents as required under the California
Corporations Code for the purpose of effecting the Merger (collectively, the
"Certificate of Merger"), and (iv) the Buyer will cause the Surviving
Corporation to pay the Initial Closing Consideration in the manner provided by
Section 2.5.1 below.
2.4 Effect of Merger.
2.4.1 General. The Merger shall become effective at the time (the
"Effective Time") the Company and the Transitory Subsidiary file the Certificate
of Merger with the Secretary of State of the State of California. The Merger
shall have the effect set forth in the California Corporations Code. The
Surviving Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf of
either the Company or the Transitory Subsidiary in order to carry out and
effectuate the transactions contemplated by this Agreement.
2.4.2 Certificate of Incorporation. The Certificate of
Incorporation of the Surviving Corporation shall be amended and restated at and
as of the Effective Time to read as did the Certificate of Incorporation of the
Transitory Subsidiary immediately prior to the Effective Time (except that the
name of the Surviving Corporation will remain unchanged).
2.4.3 Bylaws. The Bylaws of the Surviving Corporation shall be
amended and restated at and as of the Effective Time to read as did the Bylaws
of the Transitory Subsidiary immediately prior to the Effective Time (except
that the name of the Surviving Corporation will remain unchanged).
2.4.4 Directors and Officers. The directors and officers of the
Transitory Subsidiary shall become the directors and officers of the Surviving
Corporation at and as of the Effective Time (retaining their respective
positions and terms of office).
2.4.5 Conversion of Company Shares. At and as of the Effective
Time, (A) each Company Share (other than any Dissenting Share) shall be
converted into the right to receive an amount (without interest) equal to the
quotient obtained by dividing the Closing Consideration by the total number of
Company Shares, and (B) each Dissenting Share shall be converted into the right
to
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<PAGE> 6
receive payment from the Surviving Corporation with respect thereto in
accordance with the provisions of the California Corporations Law. No Company
Share shall be deemed to be outstanding or to have any rights other than those
set forth above in this Section 2.4.5 after the Effective Time.
2.4.6 Conversion of Capital Stock of the Transitory Subsidiary.
At and as of the Effective Time, each share of Common Stock of the Transitory
Subsidiary shall be converted into one share of Common Stock of the Surviving
Corporation.
2.5 Closing Consideration. The Closing Consideration payable to the
Company Shareholders is comprised of the Initial Closing Consideration and the
Final Closing Consideration.
2.5.1 Initial Closing Consideration. The initial Closing
Consideration is the sum of $3,968,000 (the "Initial Closing Consideration").
2.5.1.1 Procedure for Payment of the Initial Closing
Consideration. Immediately after the Effective Time, the Buyer will deposit with
the Surviving Corporation a sum equal to the Initial Closing Consideration. The
Buyer will dispense the Initial Consideration on behalf of the Company
Shareholders as follows: (i) Buyer will pay $1,250,000 into an escrow fund to
establish the escrow required by the provisions of the General Indemnification
and Escrow Agreement; and (ii) Buyer will pay $120,000 into an escrow fund to
establish the escrow required by the provisions of the Litigation
Indemnification and Escrow Agreement; (iii) Buyer will pay each entity listed on
Schedule 2.5.1 the sum due such entity as listed thereon, and (v) pay the net
remaining balance (after the payment of the sums described in (i) through (iii)
above) by paying each Company Shareholder that portion of such net remaining
balance determined by multiplying the net remaining balance by the Shareholder
Percentage of each Company Shareholder. Each Company Shareholder (other than any
Dissenting Shares) will be paid their portion of the Initial Closing Proceeds by
presenting the certificates representing his or her Company Shares to the Buyer
together with whatever reasonable information and documentation is required by
Buyer. No interest will accrue or be paid to the holder of any outstanding
Company Shares in connection with the payment of the Initial Closing
Consideration.
2.5.2 Determination of Final Closing Consideration. The Final
Closing Consideration will be determined as follows: the Initial Closing
Consideration, subject to an increase or decrease based upon the following
variables: (i) the change in Net Liabilities; and (ii) the addition or
subtraction, as the case may be, of the difference between the Actual
Professional Fees and the Estimated Professional Fees. The change in Net
Liabilities will be based upon a balance sheet audit of the Company as of the
Closing Date conducted by Ernst & Young LLP as compared to the Net Liabilities
of the Company as set forth on the Estimated Closing Balance Sheet. The Audited
Closing Balance Sheet and the final determination of the Final Closing
Consideration by Ernst & Young LLP will be final and conclusive as to all
parties unless the result achieved by Ernst & Young LLP is challenged by the
Company Shareholder Agent, in which case, within five (5) business days of such
challenge, the Company Shareholder Agent and Buyer will meet and negotiate in
good faith any basis for the challenge. In the event the Buyer and the Company
Shareholder Agent are unable to resolve the dispute regarding the result
achieved by Ernst & Young LLP, the Company Shareholder Agent may select a
reputable accounting firm to conduct a separate audit review of the financial
condition of the Company on the date of the Closing and issue an alternative
audited closing balance sheet ( the "Alternative Audited Balance Sheet"). In the
event the Alternative Audited Balance Sheet differs from the Audited Closing
Balance Sheet by at least 15% to the benefit of the Company Shareholders, the
parties will initiate the Dispute Resolution Mechanism.
2.5.3 Closing Consideration Adjustment. Upon the conclusive
determination of the Final Closing Consideration, (i) in the event the Final
Closing Consideration is less than the Initial
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<PAGE> 7
Closing Consideration (a "Negative Closing Consideration Adjustment"), the
Company Shareholders will pay Buyer a sum equal to the Negative Closing
Consideration Adjustment in accordance with the provisions of the General
Indemnification and Escrow Agreement; (ii) in the event the Final Closing
Consideration is greater than the Initial Closing Consideration (a "Positive
Closing Consideration Adjustment"), Buyer will pay the Company Shareholders the
Positive Closing Consideration Adjustment within 10 days of such determination.
2.5.4 Remaining Proceeds. The Buyer may cause the Surviving
Corporation to retain any portion of the Closing Proceeds remaining 180 days
after the Effective Time, and thereafter all former Company Shareholders shall
be entitled to look to the Surviving Corporation (subject to abandoned property,
escheat, and other similar laws) as general creditors thereof with respect to
the cash payable upon surrender of their certificates representing Company
Shares.
2.6 Closing of Transfer Records. After the close of business on the
Closing Date, transfers of Company Shares outstanding prior to the Effective
Time shall not be made on the stock transfer books of the Surviving Corporation.
2.7 Earn-Up Consideration. As additional consideration for entering into
this Agreement, the Buyer agrees to pay to the Company Shareholders an earn-up
sum (the "Earn-Up Consideration") equal to the amount by which revenues
recognized by Buyer or any of its Affiliates from the exploitation of the
Licensing Technology Products exceed $3,000,000. For the purpose of calculating
the Earn-Up Consideration, "revenues" shall mean the revenues resulting from the
exploitation of the Licensing Technology Products generally through January 31,
1999, and revenues resulting from the exploitation of the Licensing Technology
Products during the period between the Closing Date and June 30, 1999 to the
following customers: Sun Microsystems, Intel, Tivoli, Adobe, BMC, Oracle and
their respective subsidiaries. The revenue will be recognized by Buyer based
upon shipments or, if applicable, based on GAAP contract accounting.
Notwithstanding the foregoing, the Earn-Up Consideration shall not exceed
$2,000,000. The Earn-Up Consideration shall be paid by the Buyer to each Company
Shareholder in proportion to the Shareholder Percentage of each Company
Shareholder as set forth in Section 4.2 of the Disclosure Schedule. The Earn-Up
Consideration will be paid in two installments: (i) the first, which shall be in
the amount equal to the Earn-Up Consideration earned through January 31, 1999,
shall be delivered no later than April 1, 1999; and (ii) the second, which shall
be in the amount equal to the Earn-Up Consideration earned through June 30,
1999, shall be delivered no later than September 1, 1999. The amounts payable as
the Earn-Up Consideration shall be deemed to include the interest, if any, that
would be imputed under the Code. The right to receive the Earn-Up Consideration
shall not be assignable by any of the Company Shareholders.
2.7.1 Right to Audit Earn-Up Consideration. Rainbow will maintain a
complete, clear and accurate record of the accounting information related to the
determination of the Earn-Up Consideration. To ensure compliance with the terms
of this Agreement, the Company Shareholders Agent will have the right to have
two inspections and audits of all the relevant accounting and sales books and
records of Buyer, conducted by an independent audit firm reasonably acceptable
to both parties whose fee is paid by the Company Shareholders Agent, and shall
be conducted during regular business hours at Buyer's offices and in such a
manner as to not interfere with Buyer's normal business activities. If such
inspection should disclose an under reporting of Earn-Up Consideration, Buyer
will either (i) promptly pay the Company Shareholders the difference, together
with interest thereon at the rate of 1.5% per month or the highest rate allowed
by law, whichever is lower, from the date on which the revenues associated with
such amounts were recognized by Buyer, plus the accounting fees incurred in
connection with such audit, or (ii) dispute the audit obtained by the Company
Shareholder Agent and submit the matter to the Dispute Resolution Procedure.
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<PAGE> 8
3 Representations and Warranties of the Buyer and the Transitory
Subsidiary. Each of the Buyer and the Transitory Subsidiary represents and
warrants to the Company that the statements contained in this Section 3 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 3).
3.1 Organization of the Buyer and the Transitory Subsidiary. Each of the
Buyer and the Transitory Subsidiary is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
3.2 Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has full power and authority (including full corporate power and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of each of the Buyer and the Transitory Subsidiary, enforceable in accordance
with its terms and conditions.
3.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Buyer or the Transitory Subsidiary is
subject or any provision of the charter or bylaws of either the Buyer or the
Transitory Subsidiary or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
either the Buyer or the Transitory Subsidiary is a party or by which it is bound
or to which any of its assets is subject. Other than in connection with the
provisions of the California Corporations Code, [corporation code sub's state of
incorporation, the Securities Exchange Act, the Securities Act and state
securities laws, ] neither the Buyer nor the Transitory Subsidiary needs to give
any notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement.
3.4 Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has
any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this Agreement
for which any Company Shareholder could become liable or obligated.
3.5 SEC Documents; Buyer Financial Statements. Buyer has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the United States Securities and
Exchange Commission (the "SEC") under the Securities Exchange Act for all
periods since January 1, 1997, all in the form so filed (all of the foregoing
being collectively referred to as the "SEC Documents"). As of their respective
filing dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
none of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a document
subsequently filed with the SEC. The financial statements of Buyer, including
the notes thereto, included in the SEC Documents (the "Buyer Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP consistently
applied (except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) and present fairly
the consolidated financial position of Buyer at the dates
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thereof and the consolidated results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
audit adjustments). There has been no change in Buyer accounting policies except
as described in the notes to the Buyer Financial Statements.
4 Representations and Warranties of the Company. The Company represents
and warrants to the Buyer and the Transitory Subsidiary that the statements
contained in this Section 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 4), except as set forth in the disclosure
schedule accompanying this Agreement and initialed by the Parties (the
"Disclosure Schedule"). Nothing in the Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein,
however, unless the Disclosure Schedule identifies the exception with reasonable
particularity and describes the relevant facts in reasonable detail. Without
limiting the generality of the foregoing, the mere listing (or inclusion of a
copy) of a document or other item shall not be deemed adequate to disclose an
exception to a representation or warranty made herein (unless the representation
or warranty has to do with the existence of the document or other item itself).
The Disclosure Schedule will be arranged in paragraphs corresponding to the
lettered and numbered paragraphs contained in this Section 4.
4.1 Organization, Qualification, and Corporate Power; Authorization of
Transaction. Each of the Company and its Subsidiary is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation. Each of the Company and its Subsidiary is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required. Each of the Company and
its Subsidiary has full corporate power and authority and all licenses, permits,
and authorizations necessary to carry on the businesses in which it is engaged.
Section 4.1 of the Disclosure Schedule lists the directors and officers of each
of the Company and its Subsidiary. The Company has delivered to the Buyer
correct and complete copies of the charter and bylaws of each of the Company and
its Subsidiary (as amended to date). The minute books (containing the records of
meetings of the shareholders, the board of directors, and any committees of the
board of directors), the stock certificate books, and the stock record books of
each of the Company and its Subsidiary are correct and complete. None of the
Company and its Subsidiary is in default under or in violation of any provision
of its charter or bylaws. The Company has full power and authority (including
full corporate power and authority) to execute and deliver this Agreement and to
perform its obligations hereunder; provided, however, that the Company cannot
consummate the Merger unless and until it receives the Requisite Shareholder
Approval. This Agreement constitutes the valid and legally binding obligation of
the Company, enforceable in accordance with its terms and conditions.
4.2 Capitalization. The entire authorized capital stock of the Company
consists of 10,000,000 shares of common stock and 1,000,000 shares of preferred
stock. The entire capital stock of the Company that is issued and outstanding
(the "Company Shares") consists of 1,318,314 shares of common stock. There are
no shares of preferred stock issued or outstanding and there is no capital stock
of the Company held in treasury. All of the Company Shares have been duly
authorized, are validly issued, fully paid, and nonassessable, and are held of
record by the respective Company Shareholders as set forth in Section 4.2 of the
Disclosure Schedule. There are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments that could require the Company to issue, sell, or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company. None of the
Company
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Shareholders is a party to any option, warrant, purchase right, or other
contract or commitment that could require the Company Shareholder to sell,
transfer, or otherwise dispose of any capital stock of the Company (other than
this Agreement). There are no voting trusts, proxies, or other agreements or
understandings, and none of the Company Shareholders is a party to any such
agreement or understanding, with respect to the voting of the capital stock of
the Company.
4.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the Company and its Subsidiary is
subject or any provision of the charter or bylaws of any of the Company and its
Subsidiary or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
any of the Company and its Subsidiary is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets). Other than in connection with the provisions
of the California Corporations Code, none of the Company and its Subsidiary
needs to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order for the
Parties to consummate the transactions contemplated by this Agreement.
4.4 Brokers' Fees. None of the Company and its Subsidiary has any
Liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement except as
set forth on Section 4.4 of the Disclosure Schedule
4.5 Title to Assets. Except as specifically set forth in Section 4.5 of
the Disclosure Schedule, the Company and its Subsidiary have good and marketable
title to, or a valid leasehold interest in, the properties and assets used by
them, located on their premises, or shown on the Most Recent Balance Sheet or
acquired after the date thereof, free and clear of all Security Interests,
except for properties and assets disposed of in the Ordinary Course of Business
since the date of the Most Recent Balance Sheet.
4.6 Subsidiary. Section 4.6 of the Disclosure Schedule sets forth for
Subsidiary of the Company (i) its name and jurisdiction of incorporation, (ii)
the number of shares of authorized capital stock of each class of its capital
stock, (iii) the number of issued and outstanding shares of each class of its
capital stock, the names of the holders thereof, and the number of shares held
by each such holder, and (iv) the number of shares of its capital stock held in
treasury. All of the issued and outstanding shares of capital stock of each
Subsidiary of the Company have been duly authorized and are validly issued,
fully paid, and nonassessable. The Company holds of record and owns beneficially
99.78% of the outstanding shares of the Subsidiary of the Company, free and
clear of any restrictions on transfer (other than restrictions under the
Securities Act and state securities laws), Taxes, Security Interests, options,
warrants, purchase rights, contracts, commitments, equities, claims, and
demands. There are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Company to sell, transfer, or
otherwise dispose of any capital stock of the Company's Subsidiary or that could
require the Company's Subsidiary to issue, sell, or otherwise cause to become
outstanding any of its own capital stock. There are no outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to any Subsidiary of the Company. There are no voting trusts, proxies,
or other agreements or understandings with respect to the voting of any capital
stock of the Company's Subsidiary. Neither the Company nor the Company's
Subsidiary controls directly or indirectly or has any direct or indirect equity
participation in any corporation, partnership, trust, or other business
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association which is not a Subsidiary of the Company.
4.7 Financial Statements. The Company has provided to the Buyer the
following financial statements (collectively the "Financial Statements"):
management compiled (non-consolidated) balance sheets and statements of income,
changes in shareholders' equity, and cash flow as of and for the fiscal years
ended December 31, 1995, December 31, 1996, and December 31, 1997 (the "Most
Recent Fiscal Year End") for the Company. The Company has also provided the
audited financial statements of its Subsidiary for the year ended December 31,
1997. The Financial Statements (including the notes thereto) have been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, present fairly the financial condition of the Company and its
Subsidiary as of such dates and the results of operations of the Company and its
Subsidiary for such periods, are correct and complete, and are consistent with
the books and records of the Company and its Subsidiary (which books and records
are correct and complete).
4.8 Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of any of the Company and its Subsidiary. Without limiting the
generality of the foregoing, since that date:
4.8.1 none of the Company and its Subsidiary has sold, leased,
transferred, or assigned any of its assets, tangible or intangible, other than
for a fair consideration in the Ordinary Course of Business;
4.8.2 none of the Company and its Subsidiary has entered into any
agreement, contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) either involving more than $20,000 or outside
the Ordinary Course of Business;
4.8.3 no party (including any of the Company and its Subsidiary)
has accelerated, terminated, modified, or canceled any agreement, contract,
lease, or license (or series of related agreements, contracts, leases, and
licenses) involving more than $20,000 to which any of the Company and its
Subsidiary is a party or by which any of them is bound;
4.8.4 none of the Company and its Subsidiary has imposed any
Security Interest upon any of its assets, tangible or intangible;
4.8.5 none of the Company and its Subsidiary has made any capital
expenditure (or series of related capital expenditures) either involving more
than $20,000 or outside the Ordinary Course of Business;
4.8.6 none of the Company and its Subsidiary has made any capital
investment in, any loan to, or any acquisition of the securities or assets of,
any other Person (or series of related capital investments, loans, and
acquisitions) either involving more than $20,000 or outside the Ordinary Course
of Business;
4.8.7 none of the Company and its Subsidiary has issued any note,
bond, or other debt security or created, incurred, assumed, or guaranteed any
indebtedness for borrowed money or capitalized lease obligation either involving
more than $5,000 singly or $20,000 in the aggregate;
4.8.8 none of the Company and its Subsidiary has delayed or
postponed the payment of accounts payable and other Liabilities outside the
Ordinary Course of Business;
4.8.9 none of the Company and its Subsidiary has canceled,
compromised, waived, or released any right or claim (or series of related rights
and claims) either involving more than $20,000 or outside the Ordinary Course of
Business;
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4.8.10 none of the Company and its Subsidiary has granted any
license or sublicense of any rights under or with respect to any Intellectual
Property outside the Ordinary Course of Business;
4.8.11 there has been no change made or authorized in the charter
or bylaws of any of the Company and its Subsidiary;
4.8.12 none of the Company and its Subsidiary has issued, sold,
or otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon conversion,
exchange, or exercise) any of its capital stock;
4.8.13 none of the Company and its Subsidiary has declared, set
aside, or paid any dividend or made any distribution with respect to its capital
stock (whether in cash or in kind) or redeemed, purchased, or otherwise acquired
any of its capital stock;
4.8.14 none of the Company and its Subsidiary has experienced any
damage, destruction, or loss (whether or not covered by insurance) to its
property;
4.8.15 none of the Company and its Subsidiary has made any loan
to, or entered into any other transaction with, any of its directors, officers,
and employees outside the Ordinary Course of Business;
4.8.16 none of the Company and its Subsidiary has entered into
any employment contract or collective bargaining agreement, written or oral, or
modified the terms of any existing such contract or agreement;
4.8.17 none of the Company and its Subsidiary has granted any
increase in the base compensation of any of its directors, officers, and
employees outside the Ordinary Course of Business;
4.8.18 none of the Company and its Subsidiary has adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of any of its
directors, officers, and employees (or taken any such action with respect to any
other Employee Benefit Plan (as defined below));
4.8.19 none of the Company and its Subsidiary has made any other
change in employment terms for any of its directors, officers, and employees
outside the Ordinary Course of Business;
4.8.20 none of the Company and its Subsidiary has made or pledged
to make any charitable or other capital contribution outside the Ordinary Course
of Business;
4.8.21 there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary Course of
Business involving any of the Company and its Subsidiary; and
4.8.22 none of the Company and its Subsidiary has committed to
any of the foregoing.
4.9 Undisclosed Liabilities. None of the Company and its Subsidiary has
any Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
any of them giving rise to any Liability), except for (i) Liabilities set forth
on the face of the Most Recent Balance Sheet (rather than in any notes thereto)
and (ii) Liabilities which have arisen after the Most Recent Fiscal Year End in
the Ordinary Course of Business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract, breach
of warranty, tort, infringement, or violation of law).
4.10 Legal Compliance. Each of the Company, its Subsidiary, and their
respective
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predecessors and Affiliates has complied with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder) of federal, state, local, and foreign
governments (and all agencies thereof), and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against any of them alleging any failure so to comply.
4.11 Tax Matters.
4.11.1 Each of the Company and its Subsidiary has filed all Tax
Returns that it was required to file. All such Tax Returns were correct and
complete in all respects. All Taxes owed by any of the Company and its
Subsidiary (whether or not shown on any Tax Return) have been paid. None of the
Company and its Subsidiary currently is the beneficiary of any extension of time
within which to file any Tax Return. No claim has ever been made by an authority
in a jurisdiction where any of the Company and its Subsidiary does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction. There are
no Security Interests on any of the assets of any of the Company and its
Subsidiary that arose in connection with any failure (or alleged failure) to pay
any Tax.
4.11.2 Each of the Company and its Subsidiary has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
shareholder, or other third party.
4.11.3 No director or officer (or employee responsible for Tax
matters) of any of the Company and its Subsidiary expects any authority to
assess any additional Taxes for any period for which Tax Returns have been
filed. There is no dispute or claim concerning any Tax Liability of any of the
Company and its Subsidiary either (i) claimed or raised by any authority in
writing or (ii) as to which any of the directors and officers (and employees
responsible for Tax matters) of the Company and its Subsidiary has Knowledge
based upon personal contact with any agent of such authority. Section 4.11
of the Disclosure Schedule lists all federal, state, local, and foreign income
Tax Returns filed with respect to any of the Company and its Subsidiary for
taxable periods ended on or after December 31, 1995, indicates those Tax Returns
that have been audited, and indicates those Tax Returns that currently are the
subject of audit. The Company has delivered to the Buyer correct and complete
copies of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by any of the Company and its
Subsidiary since December 31, 1995.
4.11.4 None of the Company and its Subsidiary has waived any
statute of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
4.11.5 None of the Company and its Subsidiary has filed a consent
under Code Section341(f) concerning collapsible corporations. None of the
Company and its Subsidiary has made any payments, is obligated to make any
payments, or is a party to any agreement that under certain circumstances could
obligate it to make any payments that will not be deductible under Code
Section280G. None of the Company and its Subsidiary has been a United States
real property holding corporation within the meaning of Code Section897(c)(2)
during the applicable period specified in Code Section897(c)(1)(A)(ii). Each of
the Company and its Subsidiary has disclosed on its federal income Tax Returns
all positions taken therein that could give rise to a substantial understatement
of federal income Tax within the meaning of Code Section6662. None of the
Company and its Subsidiary is a party to any Tax allocation or sharing
agreement. None of the Company and its Subsidiary (i) has been a member of an
Affiliated Group filing a consolidated federal income Tax Return (other than a
group the common parent of which was the Company) or (ii) has any Liability for
the Taxes of any Person (other than any of the Company and its Subsidiary) under
Reg. Section1.1502-6 (or any similar provision of state, local, or foreign law),
as a transferee or successor, by contract, or otherwise.
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4.11.6 The unpaid Taxes of the Company and its Subsidiary (i) did
not, as of the Most Recent Fiscal Year End, exceed the reserve for Tax Liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the Most
Recent Balance Sheet (rather than in any notes thereto) and (ii) do not exceed
that reserve as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the Company and its Subsidiary
in filing their Tax Returns.
4.12 Real Property. Section 4.12 of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to the Company and its
Subsidiary. The Company has delivered to the Buyer correct and complete copies
of the leases and subleases listed in Section 4.12 of the Disclosure Schedule
(as amended to date). With respect to each lease and sublease listed in Section
4.12 of the Disclosure Schedule:
4.12.1 the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect and will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby;
4.12.2 no party to the lease or sublease is in breach, default or
a dispute, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
4.12.3 neither the Company nor its Subsidiary has assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in
the leasehold or subleasehold; and
4.12.4 all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including licenses and
permits) required in connection with the operation thereof and have been
operated and maintained in accordance with applicable laws, rules, and
regulations.
4.13 Intellectual Property.
4.13.1 The Company and its Subsidiary own or have the right to
use pursuant to license, sublicense, agreement, or permission all Intellectual
Property necessary for the operation of the businesses of the Company (at its
Santa Cruz Facility) and its Subsidiary as presently conducted and as presently
proposed to be conducted. Each item of Intellectual Property owned or used by
any of the Company (at its Santa Cruz Facility) and its Subsidiary immediately
prior to the Closing hereunder will be owned or available for use by the Company
or the Subsidiary on identical terms and conditions immediately subsequent to
the Closing hereunder. Each of the Company and its Subsidiary has taken all
necessary action to maintain and protect each item of Intellectual Property that
it owns or uses.
4.13.2 Except as set forth in Section 4.13.2 of the Disclosure
Schedule, none of the Company and its Subsidiary has interfered with, infringed
upon, misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties, and none of the directors and officers (and
employees with responsibility for Intellectual Property matters) of the Company
and its Subsidiary has ever received any charge, complaint, claim, demand, or
notice alleging any such interference, infringement, misappropriation, or
violation (including any claim that any of the Company and its Subsidiary must
license or refrain from using any Intellectual Property rights of any third
party). To the Knowledge of any of the directors and officers (and employees
with responsibility for Intellectual Property matters) of the Company and its
Subsidiary, no third party has interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any Intellectual Property rights of any of
the Company and its Subsidiary.
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4.13.3 Section 4.13.3 of the Disclosure Schedule identifies (i)
each patent or registration which has been issued to the Company with respect to
any of its Intellectual Property, (ii) each pending patent application or
application for registration which the Company has made with respect to any of
its Intellectual Property, (iii) each copyright registration which has been
issued to the Company with respect to the Company's Intellectual Property, and
(iv) each license, agreement, or other permission which the Company has granted
to any third party with respect to any of its Intellectual Property (together
with any exceptions), other than end-user licenses granted in the Ordinary
Course of Business. The Company has delivered to the Buyer correct and complete
copies of all such patents, registrations, applications, licenses, agreements,
and permissions (as amended to date) and has made available to the Buyer correct
and complete copies of all other written documentation evidencing ownership and
prosecution (if applicable) of each such item. Section 4.13.3 of the Disclosure
Schedule also identifies each trade name, registered trademark or unregistered
trademark used by any of the Company and its Subsidiary in connection with any
of its businesses. With respect to each item of Intellectual Property required
to be identified in Section 4.13.3 of the Disclosure Schedule:
4.13.3.1 the Company and its Subsidiary possess all right,
title, and interest in and to the item, free and clear of any Security Interest,
license, or other restriction;
4.13.3.2 the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge;
4.13.3.3 no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to the
Knowledge of any of the directors and officers (and employees with
responsibility for Intellectual Property matters) of the Company and its
Subsidiary, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
4.13.3.4 none of the Company and its Subsidiary has ever
agreed to indemnify any Person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item.
Section 4.13.3 of the Disclosure Schedule lists all actions that must be taken
by the Company within sixty (60) days of the Closing Date, including the payment
of any registration, maintenance or renewal fees or the filing of any documents,
applications or certificates for the purposes of maintaining, perfecting or
preserving or renewing any Company Intellectual Property.
4.13.4 Section 4.13.4 of the Disclosure Schedule (i) identifies
each and every copy, in any medium, of any and all source code pertaining to any
item of Intellectual Property owned or licensed by the Company, (ii) specifies
the location of each such copy of source code, and (iii) identifies each Person
having custody of each copy of source code. For the purpose of maintaining and
protecting the source code, the Company has executed a valid and binding
agreement with each Person having custody of each copy of the source code, and
the Company has delivered correct and complete copies of all such agreements to
the Buyer.
4.13.5 Section 4.13.5 of the Disclosure Schedule identifies each
item of Intellectual Property that any third party owns and that any of the
Company and its Subsidiary uses pursuant to license, sublicense, agreement, or
permission other than off-the-shelf software applications and tools that are not
relicensed by the Company to third parties. The Company has delivered to the
Buyer correct and complete copies of all such licenses, sublicenses, agreements,
and permissions (as amended to date). With respect to each item of Intellectual
Property required to be identified in Section 4.13.5 of the Disclosure Schedule:
4.13.5.1 the license, sublicense, agreement, or permission
covering the
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item is legal, valid, binding, enforceable, and in full force and effect;
4.13.5.2 the license, sublicense, agreement, or permission
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the consummation of the transactions
contemplated hereby;
4.13.5.3 no party to the license, sublicense, agreement,
or permission is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or permit
termination, modification, or acceleration thereunder;
4.13.5.4 no party to the license, sublicense, agreement,
or permission has repudiated any provision thereof;
4.13.5.5 with respect to each sublicense, the
representations and warranties set forth in subsections 4.13.5.1 through
4.13.5.4 above are true and correct with respect to the underlying license;
4.13.5.6 the underlying item of Intellectual Property is
not subject to any outstanding injunction, judgment, order, decree, ruling, or
charge and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the Knowledge of any the directors
and officers (and employees with responsibility for Intellectual Property
matters) of the Company and its Subsidiary, is threatened which challenges the
legality, validity, or enforceability of the underlying item of Intellectual
Property; and
4.13.5.7 none of the Company and its Subsidiary has
granted any sublicense or similar right with respect to the license, sublicense,
agreement, or permission.
4.13.6 To the Knowledge of any of the directors and officers (and
employees with responsibility for Intellectual Property matters) of the Company
and its Subsidiary, none of the Company and its Subsidiary will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of its businesses as presently conducted.
4.14 Tangible Assets. The Company and its Subsidiary own or lease all
buildings, machinery, equipment, and other tangible assets necessary for the
conduct of their businesses as presently conducted. Each such tangible asset is
free from defects (patent and latent), has been maintained in
accordance with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear), and is suitable for the purposes for
which it presently is used.
4.15 Contracts. Section 4.15 of the Disclosure Schedule lists the
following contracts and other agreements to which any of the Company and its
Subsidiary is a party which are in effect following the consummation of the
merger and are not terminable within 30 days without penalty:
4.15.1 any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease payments in
excess of $5,000 per annum;
4.15.2 any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or other
personal property, or for the furnishing or receipt of services, the performance
of which will extend over a period of more than one year, result in a material
loss to any of the Company and its Subsidiary, or involve consideration in
excess of $5,000;
4.15.3 any agreement concerning a partnership or joint venture;
4.15.4 any agreement (or group of related agreements) under which
it has created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease
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obligation, in excess of $20,000 or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
4.15.5 any agreement concerning confidentiality or noncompetition
(other than standard employment and option agreements);
4.15.6 any agreement (other than standard employment and option
agreements) with any of the Company Shareholders or their Affiliates (other than
the Company and its Subsidiary);
4.15.7 any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or arrangement for
the benefit of the Company's current or former directors, officers, and
employees;
4.15.8 any collective bargaining agreement;
4.15.9 any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual compensation
in excess of $20,000 or providing severance benefits;
4.15.10 any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the Ordinary
Course of Business;
4.15.11 any agreement under which the consequences of a default
or termination could have a material adverse effect on the business, financial
condition, operations, results of operations, or future prospects of any of the
Company and its Subsidiary; or
4.15.12 any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $20,000.
The Company has delivered to the Buyer a correct and complete copy of each
written agreement listed in Section 4.15 of the Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 4.15 of the Disclosure Schedule. With
respect to each such agreement, to the best knowledge of the Company's officers
and directors,: (i) the agreement is legal, valid, binding, enforceable, and in
full force and effect; (ii) the agreement will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) no party is in
breach or default, and no event has occurred which with notice or lapse of time
would constitute a breach or default, or permit termination, modification, or
acceleration, under the agreement; and (iv) no party has
repudiated any provision of the agreement.
4.16 Notes and Accounts Receivable. All notes and accounts receivable of
the Company and its Subsidiary are reflected properly on their books and
records, are valid receivables subject to no setoffs or counterclaims, are
current and collectible, and will be collected in accordance with their terms at
their recorded amounts, subject only to the reserve for bad debts set forth on
the face of the Most Recent Balance Sheet (rather than in any notes thereto) as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of the Company and its Subsidiary.
4.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of any of the Company and its Subsidiary.
4.18 Insurance. The Company has provided Buyer with each current
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) to which
any of the Company and its Subsidiary has been a party, a named insured, or
otherwise the beneficiary of coverage at any time within the past three years.
With respect
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to each such insurance policy: (i) the policy is legal, valid, binding,
enforceable, and in full force and effect; (ii) the policy will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (iii)
neither any of the Company and its Subsidiary nor any other party to the policy
is in breach or default (including with respect to the payment of premiums or
the giving of notices), and no event has occurred which, with notice or the
lapse of time, would constitute such a breach or default, or permit termination,
modification, or acceleration, under the policy; and (iv) no party to the policy
has repudiated any provision thereof. Each of the Company and its Subsidiary has
been covered during the past three years by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during the
aforementioned period. Section 4.18 of the Disclosure Schedule describes any
self-insurance arrangements affecting any of the Company and its Subsidiary.
4.19 Litigation. Section 4.19 of the Disclosure Schedule sets forth each
instance in which any of the Company and its Subsidiary (i) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is a
party or, to the Knowledge of any of the directors and officers (and employees
with responsibility for litigation matters) of the Company and its Subsidiary,
is threatened to be made a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction or before any
arbitrator. None of the directors and officers (and employees with
responsibility for litigation matters) of the Company and its Subsidiary has any
reason to believe that any such action, suit, proceeding, hearing, or
investigation may be brought or threatened against any of the Company and its
Subsidiary.
4.20 Product Warranty. Each product manufactured, sold, leased, or
delivered by any of the Company and its Subsidiary has been in conformity with
all applicable contractual commitments and all express and implied warranties,
and none of the Company and its Subsidiary has any Liability (and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against any of them giving
rise to any Liability) for replacement or repair thereof or other damages in
connection therewith, subject only to the reserve for product warranty claims
set forth on the face of the Most Recent Balance Sheet (rather than in any notes
thereto) as adjusted for the passage of time through the Closing Date in
accordance with the past custom and practice of the Company and its Subsidiary.
No product manufactured, sold, leased, or delivered by any of the Company and
its Subsidiary is subject to any guaranty, warranty, or other indemnity beyond
the applicable standard terms and conditions of sale or lease. Section 4.20 of
the Disclosure Schedule describes the standard terms and conditions of sale or
lease for each of the Company and its Subsidiary (containing applicable
guaranty, warranty, and indemnity provisions).
4.21 Product Liability. As of the date of this Agreement and to the best
knowledge of the officers and directors of the Company, none of the Company and
its Subsidiary has any Liability (and there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against any of them giving rise to any Liability) arising out
of any injury to individuals or property as a result of the ownership,
possession, or use of any product manufactured, sold, leased, or delivered by
any of the Company and its Subsidiary.
4.22 Employee Benefits.
4.22.1 Definitions. For the purpose of this Section 4.22, the
following terms shall have the meanings set forth below:
i. "Employee Benefit Plan" means any (i) nonqualified
deferred compensation or retirement plan or
arrangement, (ii) qualified defined contribution
retirement plan or arrangement which is an Employee
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Pension Benefit Plan, (iii) qualified defined
benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any
Multiemployer Plan), or (iv) Employee Welfare
Benefit Plan or material fringe benefit or other
retirement, bonus, or incentive plan or program.
ii. "Employee Pension Benefit Plan" has the meaning set
forth in ERISA Section3(2).
iii. "Employee Welfare Benefit Plan" has the meaning set
forth in ERISA Section3(1).
iv. "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
v. "ERISA Affiliate" means each entity which is
treated as a single employer with Seller for
purposes of Code Section414.
vi. "Multiemployer Plan" has the meaning set forth in
ERISA Section3(37).
vii. "PBGC" means the Pension Benefit Guaranty
Corporation.
4.22.2 Section 4.23 of the Disclosure Schedule lists each
Employee Benefit Plan that the Company maintains or to which the Company
contributes.
4.22.2.1 Each such Employee Benefit Plan (and each related
trust, insurance contract, or fund) complies in form and in operation in all
respects with the applicable requirements of ERISA and the Code.
4.22.2.2 All contributions (including all employer
contributions and employee salary reduction contributions) which are due have
been paid to each such Employee Benefit Plan which is an Employee Pension
Benefit Plan.
4.22.2.3 Each such Employee Benefit Plan which is an
Employee Pension Benefit Plan has received a determination letter from the
Internal Revenue Service to the effect that it meets the requirements of Code
Section401(a).
4.22.2.4 As of the last day of the most recent prior plan
year, the market value of assets under each such Employee Benefit Plan which is
an Employee Pension Benefit Plan (other than any Multiemployer Plan) equaled or
exceeded the present value of liabilities thereunder (determined in accordance
with then current funding assumptions).
4.22.2.5 The Seller has delivered to the Buyer correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each such Employee
Benefit Plan.
4.22.3 With respect to each Employee Benefit Plan that the
Company or any ERISA Affiliate maintains or has maintained during the prior six
years or to which any of them contributes, or has been required to contribute
during the prior six years:
4.22.3.1 No action, suit, proceeding, hearing, or
investigation with respect to the administration or the investment of the assets
of any such Employee Benefit Plan (other than routine claims for benefits) is
pending.
4.22.3.2 The Company has not incurred any liability to the
PBGC (other
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<PAGE> 20
than PBGC premium payments) or otherwise under Title IV of ERISA (including any
withdrawal liability) with respect to any such Employee Benefit Plan which is an
Employee Pension Benefit Plan.
4.23 Guaranties. None of the Company and its Subsidiary is a guarantor
or otherwise is liable for any Liability or obligation (including indebtedness)
of any other Person.
4.24 Environmental, Health, and Safety Matters. To the best Knowledge of
the Company's officers and directors, the Company at its Santa Cruz Facility and
its Santa Clara Facility has complied and is in compliance with all
Environmental, Health, and Safety Requirements during the period of occupancy of
such properties.
4.25 Certain Business Relationships with the Company and Its Subsidiary.
None of the Company Shareholders or their Affiliates has been involved in any
business arrangement or relationship with any of the Company and its Subsidiary
within the past 12 months, and none of the Company Shareholders or their
Affiliates owns any asset, tangible or intangible, which is used in the business
of any of the Company and its Subsidiary.
4.26 Customer Data Base. The Company has provided the Buyer with all
copies of its sales information data and contact information for customers and
prospective customers for the Licensing Technology Products (the "Customer Data
Base"), including all copies of the Customer Data Base in whatever form. The
Company has not provided a copy of the Customer Data Base, or any of the
information contained within the Customer Data Base, to any third party,
including any Company Shareholder, except for the copy provided to William Ames.
4.27 Disclosure. The representations and warranties contained in this
Section 4 do not contain any untrue statement of any fact or omit to state any
fact necessary in order to make the statements and information contained in this
Section 4 not misleading.
5 Post-Closing Covenants. The Parties agree as follows with respect to the
period following the Closing.
5.1 General. In case at any time after the Closing any further action is
necessary to carry out the purposes of this Agreement, each of the Parties will
take such further action (including the execution and delivery of such further
instruments and documents) as any other Party reasonably may request, all at the
sole cost and expense of the requesting Party (unless the requesting Party is
entitled to indemnification therefor under the Indemnification and Escrow
Agreements).
5.2 Management Transition Support. The Company Shareholders and William
Ames agree to cause the former members of the Company's management to be
available for a period of six months following the Closing Date at no expense to
Buyer for reasonable periods of time (not to exceed 10 hours per week) on
reasonable notice and during normal business hours, to provide such support,
information and access to their books and records as may be necessary to aide
the Buyer in assuming the management and control of the day to day operations
and administration of the Company. In the event the Buyer requests services of
William Ames beyond the scope of this provision, the Buyer will enter into a
consulting relationship with William Ames on mutually acceptable terms and
conditions.
5.3 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving any of the Company and its Subsidiary, each of the
other Parties will cooperate with him or it and his or its counsel in the
contest or defense, make available their personnel, and provide such testimony
and access to their books and
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<PAGE> 21
records as shall be necessary in connection with the contest or defense, all
at the sole cost and expense of the contesting or defending Party (unless the
requesting Party is entitled to indemnification therefor under the
Indemnification and Escrow Agreements).
5.4 Confidentiality. Each of the Parties will treat and hold as such all
of the Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
the Buyer or destroy, at the request and option of the Buyer, all tangible
embodiments (and all copies) of the Confidential Information which are in his or
its possession. In the event that any of the Parties is requested or required
(by oral question or request for information or documents in any legal
proceeding, interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, that Party will notify the
Buyer promptly of the request or requirement so that the Buyer may seek an
appropriate protective order or waive compliance with the provisions of this
Section 5.3. If, in the absence of a protective order or the receipt of a waiver
hereunder, any of the Parties is, on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, that Party may disclose the Confidential Information to the tribunal;
provided, however, that the disclosing Party shall use his or its best efforts
to obtain, at the request of the Buyer, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the Buyer shall designate. The foregoing
provisions shall not apply to any Confidential Information which is generally
available to the public immediately prior to the time of disclosure.
5.5 Option Grants. Buyer intends to issue approximately 150,000-200,000
options to purchase shares of its common stock pursuant to its incentive stock
option plan to employees of the Surviving Corporation within a reasonable time
following the Effective Date, subject to the approval of the Stock Option
Committee of the Buyer's Board of Directors.
5.6 Immediate Payables. Buyer agrees to pay the creditors of the Company
set forth on Schedule 5.6 as soon as practicable following the Effective Date.
6 Conditions to Obligation to Close.
6.1 Conditions to Obligation of the Buyer and the Transitory Subsidiary.
The obligation of each of the Buyer and the Transitory Subsidiary to consummate
the transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
6.1.1 this Agreement and the Merger shall have received the Requisite
Shareholder Approval;
6.1.2 William Ames and Vikram Duvoori (employees of the Company
and a Company Shareholder) will have delivered to the Buyer a Non-Competition
and Confidentiality Agreement in the form reasonably acceptable to counsel to
each of the Company and Buyer;
6.1.3 the Company will have delivered the General Indemnification
and Escrow Agreement and the Litigation Escrow and Indemnification Agreement in
the form reasonably acceptable to counsel to each of the Company and Buyer;
6.1.4 the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at and as of the
Closing Date;
6.1.5 each of the Company and its Subsidiary shall have performed
and complied with all of his or its covenants hereunder in all material respects
through the Closing;
6.1.6 the Company and its Subsidiary shall have procured all of
the third party consents and have given all third party notices that the Buyer
reasonably may request in connection
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<PAGE> 22
with the matters referred to in Section 4.3 above;
6.1.7 no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement,
(ii) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation, (iii) affect adversely the right of the Buyer
to own the capital stock of the Surviving Corporation and to control the
Surviving Corporation and its Subsidiary, or (iv) affect adversely the right of
any of the Surviving Corporation and its Subsidiary to own its assets and to
operate its businesses (and no such injunction, judgment, order, decree, ruling,
or charge shall be in effect);
6.1.8 the Company shall have delivered to the Buyer a certificate
to the effect that each of the conditions specified above in Section 6.1.1--
6.1.5 is satisfied in all respects;
6.1.9 the Company will have delivered to the Buyer evidence in a
form acceptable to the Buyer and its counsel a letter from the landlord of the
Santa Clara Facility to the effect that the landlord has agreed to consent to
the assignment of the Company's leasehold Santa Clara Facility to William Ames,
or to an entity he controls; and the form of the assignment willl be in a form
reasonably acceptable to Buyer and stating that neither Buyer nor the Surviving
Corporation shall have any further obligation or liability with regard to such
leasehold;
6.1.10 the Buyer and the Transitory Subsidiary shall have
received from counsel to the Company an opinion in form and substance as set
forth in Exhibit ____ attached hereto, addressed to the Buyer and the Transitory
Subsidiary, and dated as of the Closing Date;
6.1.11 the Buyer and the Transitory Subsidiary shall have
received the resignations, effective as of the Closing, of each director and
officer of the Company and its Subsidiary other than those whom the Buyer shall
have specified in writing prior to the Closing; and
6.1.12 all actions to be taken by the Company in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Buyer and the Transitory Subsidiary.
The Buyer and the Transitory Subsidiary may waive any condition specified in
this Section 6.1 if it executes a writing so stating at or prior to the Closing.
6.2 Conditions to Obligation of the Company. The obligation of the
Company to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
6.2.1 the representations and warranties set forth in Section 3
above shall be true and correct in all material respects at and as of the
Closing Date;
6.2.2 each of the Buyer and the Transitory Subsidiary shall have
performed and complied with all of its covenants hereunder in all material
respects through the Closing;
6.2.3 no action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement
or (ii) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);
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<PAGE> 23
6.2.4 the Buyer shall have delivered to the Company a certificate
to the effect that each of the conditions specified above in Section 6.2.1--
6.2.3 is satisfied in all respects;
6.2.5 this Agreement and the Merger shall have received the
Requisite Shareholder Approval;
6.2.6 the Company shall have received from counsel to the Buyer
and the Transitory Subsidiary an opinion in form and substance as set forth in
Exhibit ____ attached hereto, addressed to the Company, and dated as of the
Closing Date; and
6.2.7 all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to the
Company.
The Company may waive any condition specified in this Section 6.2 if they
execute a writing so stating at or prior to the Closing.
7 Survival of Representations and Warranties. All of the representations
and warranties of the Company contained in Section 4 above shall survive the
Closing hereunder and continue in full force and effect for a period ending on
the first anniversary of the Closing Date.
8 Resolution of Conflicts Regarding Balance Sheet and Earn-Up
8.1 In case the Company Shareholder Agent shall object in writing to (i)
the Audited Closing Balance Sheet based upon the Alternative Closing Balance
Sheet, or (ii) the calculation of the Earn-Up Consideration after the issuance
of the Earn-Up Audit, the Company Shareholder Agent and Buyer shall follow the
following dispute resolution procedure (the "Dispute Resolution Procedure"): the
Company Shareholder Agent and the Buyer shall attempt in good faith to agree
upon the rights of the respective parties with respect to each such claim. If
the Company Shareholder Agent and Buyer should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and shall
serve as the agreement by which the parties settle the dispute. The parties
shall each be entitled to rely on any such memorandum in accordance with the
terms thereof.
8.2 If no such agreement can be reached after good faith negotiation,
either Buyer or the Company Shareholder Agent may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by one arbitrator in
accordance with the rules of the American Arbitration Association. Buyer and the
Company Shareholder Agent shall agree on such arbitrator; provided that if Buyer
and the Company Shareholder Agent cannot agree on such arbitrator, either Buyer
or the Company Shareholder Agent can request that the American Arbitration
Association select the arbitrator. The arbitrator selected shall determine the
dispute in accordance with the provisions of this Agreement. The arbitrator
shall set a limited time period and establish procedures designed to reduce the
cost and time for discovery while allowing the parties an opportunity, adequate
in the sole judgment of the arbitrator, to discover relevant information from
the opposing parties about the subject matter of the dispute. The arbitrator
shall rule upon motions to compel or limit discovery and shall have the
authority to impose sanctions, including attorneys' fees and costs, to the same
extent as a court of competent law or equity, should the arbitrator determine
that discovery was sought without substantial justification or that discovery
was refused or objected to without substantial justification. The decision of
the arbitrator as to the validity and amount of any claim shall be binding and
conclusive upon the parties to this Agreement. Such decision shall be written
and shall be supported by written findings of fact and conclusions which shall
set forth the award, judgment, decree or order awarded by the arbitrator.
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<PAGE> 24
8.3 Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. The arbitration will be held in Orange County,
California, in the event the arbitration is commenced by the Company Shareholder
Agent, or Santa Clara County, California. For purposes of this Section 8, in any
arbitration hereunder in which any claim or the amount thereof is at issue,
Buyer shall be deemed to be the Non-Prevailing Party in the event that the
arbitrator awards Buyer less than one-half (1/2) of the disputed amount, or
disagrees with Buyer's claim; otherwise, the Company Shareholders as represented
by the Company Shareholder Agent shall be deemed to be the Non- Prevailing
Party. The Non-Prevailing Party to an arbitration shall pay its own expenses,
the fees of each arbitrator, the administrative costs of the arbitration and the
expenses, including without limitation, reasonable attorneys' fees and costs,
incurred by the other party to the arbitration.
9 Miscellaneous.
9.1 Press Releases and Public Announcements. The Company shall not issue
any press release or make any public announcement relating to the subject matter
of this Agreement without the prior written approval of the Buyer.
9.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions of
Section 2 above concerning payment of the Closing Consideration are intended for
the benefit of the Company Shareholders.
9.3 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
9.4 Curative Actions. Notwithstanding anything in this Agreement to the
contrary, the obligations of the Parties hereunder shall not be affected by a
breach of any representation or warranty pursuant to this Agreement if any such
party takes any curative action or causes any person or entity to take any
curative action which results in a state of facts or conditions which, if in
existence on the date or during the period of such breach, would have corrected
or eliminated such breach and the consequences thereof (a "Curative Action");
provided, however, that such Curative Action must be taken on or before the
closing for breaches occurring on or prior thereto. For the purposes of this
Section, a Curative Action shall be deemed taken only if after giving effect to
such Curative Action the parties are in a position substantially the same as the
position they would have been in had such breach not occurred, and a Curative
Action shall not be deemed to have been taken until such correction or
elimination is effected as aforesaid or, if the same takes time to cure, then
when a Curative Action is commenced and continues to be diligently pursued and
adequate provision is made to protect the other party with respect to any
potential existing damage or liability from such breach, either by right of
offset, adequate escrows or other adequate arrangements.
9.5 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of the other Parties; provided, however, that the Buyer may (i) assign
any or all of its rights and interests hereunder to one or more of its
Affiliates and (ii) designate one or more of its Affiliates to perform its
obligations hereunder (in any or all of which cases the Buyer nonetheless shall
remain responsible for the performance of all of its obligations hereunder).
9.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE> 25
9.7 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.8 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Company Shareholder: Copy to:
William Ames Rich Scudellari, Esq.
1705 Wyatt Drive Jackson tufts Cole & Black, LLP
Santa Clara, CA 95054 650 California Street
San Francisco, CA 94108-2613
If to the Buyer: Copy to:
Rainbow Technologies, Inc. Moskowitz Altman & Hughes LLP
Attn: Patrick Fevery, CFO Attn: John J. Hughes, Jr.
50 Technology Drive 11 East 44th Street, Suite 504
Irvine, CA 93618 New York, NY 10017
If to the Transitory Subsidiary: Copy to:
WRS Acquisition Corp. Moskowitz Altman & Hughes LLP
Attn: Patrick Fevery Attn: John J. Hughes, Jr.
50 Technology Drive 11 East 44th Street, Suite 504
Irvine, CA 93618 New York, NY 10017
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until the earlier of (i) actual receipt by the intended
recipient or (ii) one business day following delivery to a reputable overnight
courier service, five business days following deposit with the U.S. Mail or upon
receipt of electronic confirmation of delivery following delivery by facsimile
or electronic mail. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of California without giving
effect to any choice or conflict of law provision or rule.
9.10 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Company. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
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<PAGE> 26
9.11 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
9.12 Expenses. Each of the Parties shall bear his or its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby. The Company agrees that none
of the Company and its Subsidiary has borne or will bear any of the Company
Shareholders' costs and expenses (including any of their legal fees and
expenses) in connection with this Agreement or any of the transactions
contemplated hereby.
9.13 Construction. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
9.14 Incorporation of Exhibits, Annexes, and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
Rainbow Technologies, Inc. Wyatt River Software, Inc.
By:___________________ By:___________________
WRS Acquisition Corp.
By:___________________
26
<PAGE> 1
EXHIBIT 4
--------------------------------------------
RAINBOW TECHNOLOGIES, INC.
AND
U.S. STOCK TRANSFER CORPORATION
AS RIGHTS AGENT
--------------------------------------------
RIGHTS AGREEMENT
DATED AS OF JULY 29, 1997
<PAGE> 2
TABLE OF CONTENT
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Certain Definitions.......................................................3
Section 2. Appointment of Rights Agent...............................................7
Section 3. Issuance of Rights Certificates...........................................8
Section 4. Form of Rights Certificates...............................................9
Section 5. Countersignature and Registration.........................................9
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates..................9
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights............10
Section 8. Cancellation and Destruction of Rights Certificates......................12
Section 9. Reservation and Availability of Common Shares............................12
Section 10. Common Shares Record Date................................................14
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights.........................................................15
Section 12. Certificate of Adjusted Purchase Price or Number of Shares...............21
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.....21
Section 14. Fractional Rights and Fractional Shares..................................23
Section 15. Rights of Action.........................................................24
Section 16. Agreement of Right Holders...............................................24
Section 17. Rights Certificate Holder Not Deemed a Shareholder.......................25
Section 18. Concerning the Rights Agent..............................................25
Section 19. Merger or Consolidation or Change of Name of Rights Agent................26
Section 20. Duties of Rights Agent...................................................26
Section 21. Change of Rights Agent...................................................28
Section 22. Issuance of New Rights Certificates......................................29
Section 23. Redemption and Termination...............................................30
Section 24. Exchange.................................................................30
Section 25. Notice of Certain Events.................................................31
Section 26. Notices..................................................................32
Section 27. Supplements and Amendments...............................................33
Section 28. Successors...............................................................33
Section 29. Determinations and Actions by the Board of Directors, etc................34
Section 30. Benefits of this Agreement...............................................34
Section 31. Severability.............................................................34
Section 32. Governing Law............................................................34
Section 33. Counterparts.............................................................35
Section 34. Descriptive Headings.....................................................35
</TABLE>
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<PAGE> 3
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of July 29, 1997, between Rainbow
Technologies, Inc., a Delaware corporation with a principal place of business
located at 50 Technology Drive, Irvine, California 92618 (the "Company"), and
U.S. Stock Transfer Corporation, a California corporation with a principal place
of business located at 1745 Gardena Avenue, Suite 200, Glendale, California
91204 (the "Rights Agent").
WHEREAS, the Board of Directors of the Company has authorized and
declared a dividend (the "Rights Dividend") of one right (a "Right") for each
Common Share (as hereinafter defined) of the Company outstanding immediately
before the close of business on August 5, 1997 (the "Record Date"), each Right
representing the right to purchase one one-thousandth of a Common Share upon the
terms and subject to the conditions herein set forth, and, subject to such terms
and conditions, has further authorized the issuance of one Right (as such number
may hereafter be adjusted pursuant to the provisions hereof) with respect to
each Common Share that shall become outstanding (i) between the Record Date and
the earliest of the Distribution Date, the Redemption Date and the Final
Expiration Date (as such terms are defined in Sections 3 and 7 hereof) or (ii)
after the Distribution Date but before the earlier of the Redemption Date or the
Final Expiration Date, if such Common Share became outstanding (A) upon the
exercise of a stock option, (B) pursuant to any employee plan or arrangement, or
(C) upon the conversion or exchange of a security which option, plan,
arrangement or security was granted, established or issued, as the case may be,
by the Company before the Distribution Date.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
a. "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 15% or more of the Common Shares then
outstanding, but shall not include (i) the Company, any wholly-owned Subsidiary
(as such term is hereinafter defined) of the Company or any employee benefit
plan of the Company or any Subsidiary of the Company, or any Person or entity
holding Common Shares for or pursuant to the terms of any such plan or (ii) a
Person (A) who or which, together with all Affiliates and Associates of such
Person, inadvertently becomes Beneficial Owner of 15% or more of the Common
Shares, (B) delivers to the Company an Undertaking (as such term is hereinafter
defined) within five days of the first public announcement (which, for purposes
of this definition, shall include, without limitation, a report filed pursuant
to Section 13(d) under the Exchange Act) by the Company or such Person, that
such Person, together with all Affiliates or Associates of such Person, has
become Beneficial Owner of 15% or more of the outstanding Common Shares, and (C)
who or which, together with all Affiliates and Associates of such Person, has
not delivered another Undertaking within the preceding two years; provided that,
a Person described in clause (ii) shall cease to be subject to such clause and
shall be an Acquiring Person if (X) such Person, together with all Affiliates
and Associates
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<PAGE> 4
of such Person does not, pursuant to such Undertaking, reduce the number of
Common Shares Beneficially Owned by such Person to less than 15% of the
outstanding Common Shares within the 30 day period specified in the Undertaking
or (Y) if, in the sole opinion of the Board of Directors of the Company, such
Person has breached any representation or covenant contained in the Undertaking
delivered by such Person.
b. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
c. A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
i. which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
ii. which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire (whether such
right is exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (whether or not in writing), or upon
the exercise of conversion rights, exchange rights, rights (other than these
Rights), warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own, (1)
securities tendered pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, (2) securities
issuable upon exercise of Rights at any time prior to the occurrence of a
Triggering Event (as hereinafter defined), or (3) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering Event which
Rights were acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section 3(a) or Section
22 hereof (the "Original Rights") or pursuant to Section 11(i) hereof in
connection with an adjustment made with respect to any Original Rights; or (B)
the right to vote or dispose of or has "beneficial ownership" of (as determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), including pursuant to any agreement, arrangement or understanding (whether
or not in writing); provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from a
revocable proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the applicable
rules and regulations of the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor report); or
iii. which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person (or
any of such Person's Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section
1(c)(ii)(B)), or disposing of any securities of the Company; provided, however,
that nothing in this paragraph (iii) shall cause a person engaged in business as
an underwriter of securities to be the "Beneficial Owner" of, or to
"beneficially own," any securities acquired
4
<PAGE> 5
through such person's participation in good faith in a firm commitment
underwriting until the expiration of forty days after the date of such
acquisition.
d. "Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
e. "Close of Business" on any given date shall mean 5:00 P.M., New York,
New York time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., New York, New York time, on the next
succeeding Business Day.
f. "Common Shares" when used with reference to the Company shall mean
shares of the Company's common stock, par value $.001 per share, and any other
class or classes or series of common stock of the Company resulting from any
subdivision, combination, recapitalization or reclassification of shares of such
common stock. "Common Shares" when used with reference to any Person other than
the Company shall mean the capital stock (or equity interest) with the greatest
voting power, or having power to control or direct the management, of such other
Person or, if such other Person is a Subsidiary of another Person, of the Person
or Persons which ultimately control such first mentioned Person.
g. "Continuing Director" shall mean a director who was a member of the
Board of Directors of the Company on the Distribution Date or who subsequently
became a director and whose election, or nomination for election by the
Company's shareholders, was approved by a vote of a majority of Continuing
Directors on the Board of Directors of the Company on the date of such election
or nomination.
h. "Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
i. "Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
j. "Final Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
k. "NASDAQ" shall have the meaning set forth in Section 11(d) hereof.
l. "Person" shall mean any individual, firm, corporation, partnership,
association, trust, joint venture or other entity, and shall include any
successor (by merger or otherwise) of such entity.
m. "Principal Party" shall have the meaning set forth in Section 13(b)
hereof.
n. "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
o. "Record Date" shall have the meaning set forth in the recitals to
this Agreement.
p. "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
5
<PAGE> 6
q. "Section 11(a)(ii) Event" shall mean the event described in Section
11(a)(ii) hereof.
r. "Section 13 Event" shall mean any event described in clauses (i),
(ii) or (iii) of Section 13(a) hereof.
s. "Share Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
t. "Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
u. "Triggering Event" shall mean the Section 11(a)(ii) Event or any
Section 13 Event.
v. "Undertaking" shall mean a binding and enforceable written
undertaking to the Company of any Person, in form reasonably satisfactory to the
Company, containing the following provisions and covenants:
i. a representation that the acquisition of Common Shares which
results in such Person, together with all Affiliates and Associates of such
Person, becoming a Beneficial Owner of 15% or more of the Common Shares was
inadvertent,
ii. an agreement to reduce such Person's beneficial ownership to
less than 15% of the outstanding Common Shares within 30 days,
iii. an agreement not to acquire additional Common Shares while
such Person is Beneficial Owner of 15% or more of the Common Shares (except as a
result of corporate action not caused, directly or indirectly, by such Person),
and
iv. an agreement that such Person will not, while such Person is
the Beneficial Owner of 15% of the Common Shares to which the Undertaking
relates, directly or indirectly, singly or as part of a "partnership, limited
partnership, syndicate or other group" (within the meaning of Section 13(d)(3)
of the Exchange Act), seek to acquire or affect the control of the Company.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
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<PAGE> 7
Section 3. Issuance of Rights Certificates.
a. The Rights in respect of the issued and outstanding Common Shares
will be issued and become effective on the Record Date. A Common Share and the
Right or Rights issued or to be issued hereunder in respect thereof will not be
separately transferable until the date (the "Distribution Date") which is the
earlier of (i) the close of business on the tenth day after the Share
Acquisition Date (or, if the tenth day after the Share Acquisition Date occurs
before the Record Date, the close of business on the Record Date) or (ii) the
close of business on the tenth Business Day after the date of the commencement
of, or first public announcement of the intent of any Person (other than the
Company, any wholly-owned Subsidiary of the Company or any employee benefit plan
of the Company or of any Subsidiary of the Company or any entity holding Common
Shares for or pursuant to the terms of any such plan) to commence, a tender or
exchange offer the consummation of which would result in beneficial ownership by
a Person of 15% or more of the outstanding Common Shares (including any such
date which is after the date of this Agreement and prior to the issuance of the
Rights). Prior to the Distribution Date, each holder of Common Shares will be
the holder of the Rights associated with each such share so held, except as
otherwise provided in Section 7(e). (A Common Share and its associated Right or
Rights before the Distribution Date shall be collectively referred to as the
"Unit".) Until the Distribution Date, the Rights issued from time to time
hereunder shall be evidenced collectively by one or more certificates (the
"Rights Certificates") delivered to and registered in the name of the Rights
Agent, as Rights Agent under this Agreement; but the issuance of the Rights
hereunder shall not be affected by any failure to deliver a new or replacement
Rights Certificate to the Rights Agent in respect thereof. The initial Rights
Certificate and any additional or replacement Rights Certificates delivered to
the Rights Agent shall, prior to the Distribution Date, have a legend set forth
on the face thereof to the effect that the Rights represented thereby shall not
be exercisable until the Distribution Date. As soon as practicable after the
Company has notified the Rights Agent of the occurrence of the Distribution
Date, the Rights Agent will send, by first-class, insured, postage prepaid mail,
to each record holder of Common Shares as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Company, a Rights Certificate, in substantially the form of Exhibit A hereto,
evidencing one Right for each Common Share so held. As of the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates. The failure to
mail any such Rights Certificate shall not affect the legality or validity of
the Rights.
b. On the Record Date or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Common Shares, in
substantially the form attached hereto as Exhibit B (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of the Units as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. The failure to send a copy of a Summary of Rights
shall not affect the legality or validity of the Rights.
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<PAGE> 8
c. Certificates for Common Shares issued after the Record Date but prior
to the earliest of the Distribution Date or the Redemption Date or the Final
Expiration Date shall have impressed on, printed on, written on or otherwise
affixed to them the following legend:
"THE HOLDER OF THIS CERTIFICATE IS ENTITLED TO CERTAIN RIGHTS AS
SET FORTH IN A RIGHTS AGREEMENT BETWEEN RAINBOW TECHNOLOGIES,
INC. AND U.S. STOCK TRANSFER CORPORATION, DATED AS OF JULY 29,
1997, AS THE SAME MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO
TIME HEREAFTER (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE
HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF RAINBOW TECHNOLOGIES,
INC. ONE OR MORE CERTIFICATES EVIDENCING SUCH RIGHTS HAVE BEEN
DELIVERED TO AND REGISTERED IN THE NAME OF U.S. STOCK TRANSFER
CORPORATION, AS RIGHTS AGENT UNDER THE RIGHTS AGREEMENT. RAINBOW
TECHNOLOGIES, INC. WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A
COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A
WRITTEN REQUEST THEREFOR. AS DESCRIBED IN THE RIGHTS AGREEMENT,
RIGHTS ISSUED TO ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS
DEFINED IN THE RIGHTS AGREEMENT) SHALL BECOME NULL AND VOID."
Section 4. Form of Rights Certificates.
a. The Rights Certificates (and the forms of election to purchase Common
Shares and of assignment to be printed on the reverse thereof) shall be
substantially the same as Exhibit A hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever issued, that are issued
in respect of Common Shares which were issued and outstanding as of the
Distribution Date, shall be dated as of the Distribution Date, and all Rights
Certificates that are issued in respect of other Common Shares shall be dated as
of the respective dates of issuance of such Common Shares, and in each such case
on their face shall entitle the holders thereof to purchase such number of one
one-thousandths of a Common Share as shall be set forth therein at the price per
one one-thousandth of a Common Share set forth therein (the "Purchase Price"),
but the amount and type of securities purchasable upon the exercise of each
Right and the Purchase Price thereof shall be subject to adjustment as provided
herein.
b. Any Rights Certificate issued pursuant to Section 3(a) or Section 22
that represents Rights beneficially owned by: (i) an Acquiring Person or any
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring
Person (or of any such Associate or Affiliate) who becomes a transferee after
the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee before or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring
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<PAGE> 9
Person to holders of equity interest in such Acquiring Person or to any Person
with whom such Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the Board
of Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of Section
7(e), and any Rights Certificate issued pursuant to Section 6 or Section 11 upon
transfer, exchange, replacement or adjustment of any other Rights Certificate
referred to in this sentence, shall contain (to the extent feasible) the
following legend:
"THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR
AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE
AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE
CIRCUMSTANCE SPECIFIED IN SECTION 7(E) OF SUCH AGREEMENT."
Section 5. Countersignature and Registration. The Rights Certificates
shall be executed on behalf of the Company by its President, any Executive Vice
President, and by the Secretary, an Assistant Secretary, Treasurer or an
Assistant Treasurer of the Company, either manually or by facsimile signature,
and have affixed thereto the Company's seal or a facsimile thereof. The Rights
Certificates shall not be valid for any purpose unless manually countersigned by
an authorized signatory of the Rights Agent. In case any officer of the Company
who shall have signed any of the Rights Certificates shall cease to be such
officer of the Company before countersignature by the Rights Agent and issuance
and delivery by the Company, such Rights Certificates, nevertheless, may be
countersigned by the Rights Agent, and issued and delivered by the Company with
the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
The Rights Agent will keep or cause to be kept, at its principal
offices, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. Subject
to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at or
prior to the close of business on the earlier of the Redemption Date or the
Final Expiration Date (as such terms are defined in Section 7 hereof), any
Rights Certificate or Rights Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 7(e)) may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of one one-thousandths of a Common Share (or, following a Triggering Event,
Common Shares, other securities, cash or other assets, as the case may be) as
the Rights Certificate or Rights Certificates surrendered then entitled such
holder (or former holder
9
<PAGE> 10
in the case of a transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate shall make such
request in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Rights Certificates to be transferred, split up, combined or
exchanged at the principal office or offices of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall request. Thereupon the Rights Agent
shall, subject to Section 4(b), Section 7(e) and Section 14 hereof, countersign
and deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will execute and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
a. Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c) and Section 11(a)(iii) hereof) in whole
or in part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-thousandths of a Common Share (or other securities, cash or other assets, as
the case may be) as to which such surrendered Rights are then exercisable, at or
prior to the earlier of (i) the close of business on August 5, 2002 (the "Final
Expiration Date"), (ii) the time at which the Rights are redeemed as provided in
Section 23 hereof (the "Redemption Date"), or (iii) the time at which the Board
of Directors takes action ordering the exchange of such Rights as provided in
Section 24 hereof.
b. The Purchase Price for each one one-thousandth of a Common Share
pursuant to the exercise of a Right shall initially be $90, shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in accordance with paragraph (c) below.
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<PAGE> 11
c. Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one one- thousandth of a Common Share (or other shares, securities,
cash or other assets, as the case may be) to be purchased as set forth below and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Rights Certificate in accordance with Section 9, the Rights Agent shall,
subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any
transfer agent of the Common Shares (or make available, if the Rights Agent is
the transfer agent for such shares) certificates for the total number of one
one-thousandths of a Common Share to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests, or
(B) if the Company shall have elected to deposit the total number of Common
Shares issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one one-thousandths of a Common Share as are to be purchased (in which
case certificates for the Common Shares represented by such receipts shall be
deposited by the transfer agent with the depositary agent) and the Company
hereby directs the depositary agent to comply with such request, (ii) when
appropriate, requisition from the Company the amount of cash, if any, to be paid
in lieu of issuance of fractional shares in accordance with Section 14, (iii)
promptly after receipt of such certificates or depositary receipts, cause the
same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt, promptly deliver such
cash, if any, to or upon the order of the registered holder of such Rights
Certificate. The payment of the Purchase Price (as such amount may be reduced
pursuant to Section 11(a)(iii) hereof) shall be made (x) in cash or by certified
bank check or bank draft payable to the order of the Company, or (y) at the
election of the Company with respect to all exercisable Rights by delivery of a
certificate or certificates (with appropriate stock powers executed in blank
attached thereto) evidencing a number of Common Shares equal to the then
Purchase Price divided by the closing price (as determined pursuant to Section
11(d) hereof) per Common Share on the Trading Day (as hereinafter defined)
immediately preceding the date of such exercise, or (z) in the event the Company
permits payment with Common Shares, a combination thereof. In the event the
Company elects to accept Common Shares in payment of the Purchase Price, it
shall notify the Rights Agent of such election and of the closing price per
Common Share on the Trading Date immediately preceding the date of exercise to
which such election relates. In the event that the Company is obligated to issue
other securities of the Company, pay cash and/or distribute other property
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such other securities, cash and/or other property are
available for distribution by the Rights Agent, if and when appropriate.
d. In case the registered holder of any Rights Certificate shall
exercise fewer than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his duly authorized assigns, subject to the provisions of Section 14 hereof.
e. Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of the Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring
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<PAGE> 12
Person (or of any such Associate or Affiliate) who becomes a transferee after
the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person
(or of any such Associate or Affiliate) who becomes a transferee before or
concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
that the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e), shall be void without any further action and any
holder of such Rights shall thereafter have no right whatsoever with respect to
such Rights (including, without limitation, the right to exercise such Rights)
under any provision of this Agreement or otherwise. No Rights Certificate shall
be issued pursuant to Section 3 that represents Rights beneficially owned by an
Acquiring Person whose Rights would be void pursuant to the preceding sentence
or any Associate or Affiliate thereof; no Rights Certificate shall be issued at
any time upon the transfer of any Rights to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence or any Associate or Affiliate
thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and
any Rights Certificate delivered to the Rights Agent for transfer to an
Acquiring Person whose Rights would be void pursuant to the preceding sentence
shall be canceled. The Company shall use all reasonable efforts to insure that
the provisions of this Section 7(e) and Section 4(b) are complied with, but
shall have no liability to any holder of Rights Certificates or any other Person
as a result of its failure to make any determinations with respect to an
Acquiring Person or its Affiliates, Associates or transferees hereunder.
f. Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Rights Certificates to the Company.
Section 9. Reservation and Availability of Common Shares.
a. Subject to Section 11(a)(iii) of this Agreement, the Company
covenants and agrees that it will cause to be reserved and kept available out of
its authorized and unissued
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Common Shares or any authorized and issued Common Shares held in treasury (and,
following the occurrence of a Triggering Event, out of any other securities) the
number of Common Shares (and, following the occurrence of a Triggering Event,
out of any other securities) that, as provided in this Agreement, will be
sufficient to permit the exercise in full of all outstanding Rights.
b. In the event the Common Shares (and, following the occurrence of a
Triggering Event, any other securities) issuable and deliverable upon the
exercise of Rights are listed on any national securities exchange, the Company
shall use its best efforts to cause, from and after such time as the Rights
become exercisable (but only to the extent that it is reasonably likely that the
Rights will be exercised), all shares reserved for such issuance to be listed on
such exchange upon official notice of issuance upon such exercise.
c. The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of the
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined pursuant to this
Agreement (including in accordance with Section 11(a)(iii) hereof), a
registration statement under the Securities Act of 1933 (the "Act"), with
respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, (iii) cause such registration statement
to remain effective (with a prospectus at all times meeting the requirements of
the Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the Final Expiration Date, and (iv)
obtain such regulatory approvals as may be necessary for it to issue securities
purchasable upon the exercise of the Rights. The Company will also take such
action as may be appropriate under, or to ensure compliance with, the securities
or "blue sky" laws of the various states in connection with the exercisability
of the Rights. The Company may temporarily suspend, for a period of time not to
exceed 90 days after the date set forth in clause (i) of the first sentence of
this Section 9(c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective or to obtain any
other required regulatory approval in connection with the exercisability of the
Rights. Upon any such suspension, the Company shall issue a public announcement
stating, and notify the Rights Agent, that the exercisability of the Rights has
been temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. In addition, if the Company shall determine
that a registration statement is required following the Distribution Date, the
Company may temporarily suspend the exercisability of the Rights until such time
as a registration statement has been declared effective. In the event any Right
is exercised prior to the occurrence of the Section 11(a)(ii) Event or a Section
13 Event, the Company may defer for up to 90 days the issuance of Common Shares
upon such exercise in order to obtain any necessary regulatory approval. If,
within 90 days after such exercise of any Right, the Company is unable to obtain
any required regulatory approval for the issuance of the Common Shares, or if
the Company is otherwise unable to issue the Common Shares under the terms of
its Certificate of Incorporation or for any other reason, then the Company shall
substitute for the Common Shares otherwise issuable upon exercise of the Right
(1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of
the Company, except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, (4) debt securities of the
Company, except to the extent that the Company has not obtained any necessary
regulatory approval for such
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<PAGE> 14
issuance, (5) other assets, or (6) any combination of the foregoing, having an
aggregate value equal to the Current Market Price (as defined in Section 11(d))
of the Common Shares for which such Right is exercisable, where such aggregate
value has been determined by the Board of Directors of the Company based upon
the advice of a nationally recognized investment banking firm selected by the
Board of Directors of the Company. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction if the requisite qualification in such jurisdiction shall not have
been obtained or the exercise thereof shall not be permitted under applicable
law.
d. The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all one one-thousandths of a Common Share (and,
following the occurrence of a Triggering Event, any other securities) delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable shares.
e. The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates and
of any certificate for a number of one one-thousandths of a Common Share (other
securities, as the case may be) upon the exercise of Rights. The Company shall
not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Rights Certificates to a person other
than, or the issuance or delivery of certificates or depositary receipts for a
number of one one-thousandths of a Common Share (or other securities, as the
case may be) in respect of a name other than that of, the registered holder of
the Rights Certificate evidencing Rights surrendered for exercise or to issue or
deliver any certificates or depositary receipts for a number of one
one-thousandths of a Common Share (or other securities, as the case may be) upon
the exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Rights Certificate at the time of surrender)
or until it has been established to the Company's satisfaction that no such tax
is due.
Section 10. Common Shares Record Date. Each person in whose name any
certificate for a number of one one-thousandths of a Common Share is issued upon
the exercise of Rights shall for all purposes be deemed to have become the
holder of record of the Common Shares (or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and any applicable transfer taxes) was made; provided,
however, that if the date of such surrender and payment is a date upon which the
Common Shares (or other securities, as the case may be) transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Common Shares (or other
securities, as the case may be) transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a shareholder of the Company with respect
to shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
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<PAGE> 15
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
a. i. In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Common Shares payable in Common Shares,
(B) subdivide the outstanding Common Shares, (C) combine the outstanding Common
Shares into a smaller number of Common Shares or (D) issue any shares of its
capital stock in a reclassification of the Common Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive, upon payment of the Purchase Price then in effect, the aggregate number
and kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the Common Shares transfer
books of the Company were open, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
If an event occurs which would require an adjustment under both Section 11(a)(i)
and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
ii. Subject to Section 24 of this Agreement, in the event any
Person shall become an Acquiring Person (except pursuant to a tender offer made
in the manner prescribed by Section 14(d) of the Exchange Act and the rules and
regulations promulgated thereunder; provided, however, that (a) such tender
offer shall provide for the acquisition of all of the outstanding Common Shares
held by any Person other than such Acquiring Person and its Associates or
Affiliates for cash and (b) a majority of the Continuing Directors shall have
determined that such tender offer is fair), then proper provision shall be made
so that each holder of a Right, except as provided below and in Section 7(e),
shall thereafter have the right to receive, upon exercise thereof at the then
current Purchase Price, in accordance with the terms of this Agreement, in lieu
of a number of one one-thousandths of a Common Share, such number of Common
Shares as shall equal the result obtained by multiplying
(A) the then current Purchase Price by the then number
of one one-thousandths of a Common Share for which a Right was exercisable
immediately prior to the occurrence of the Section 11(a)(ii) Event, and dividing
that product (which product, following such occurrence, shall thereafter be
referred to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by
(B) 50% of the Current Market Price (as determined
pursuant to Section 11(d) hereof) per share of the Common Shares (determined
pursuant to Section 11(d))
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<PAGE> 16
on the date of such occurrence (such number of shares, the "Adjustment Shares");
provided, that the Purchase Price and the number of Adjustment Shares shall be
further adjusted as provided in this Agreement to reflect any events occurring
after the date of such occurrence. Notwithstanding this Section 11(a)(ii), if
the transaction that would otherwise give rise to the forgoing adjustment is
also subject to the provisions of Section 13 hereof, then only the provisions of
Section 13 hereof shall apply and no adjustment shall be made pursuant to this
Section 11(a)(ii).
iii. In the event that the number of Common Shares authorized by
the Company's Certificate of Incorporation but not outstanding or reserved for
issuance for purposes other than upon exercise of the Rights and the authorized
and issued shares held in its treasury and not reserved for issuance for
purposes other than upon exercise of the Rights is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing subparagraph
(ii) of this Section 11(a), or if any necessary regulatory approval for such
issuance has not been obtained by the Company, the Company shall: (A) determine
the excess of (1) the value of the Adjustment Shares issuable upon the exercise
of a Right (the "Current Value") over (2) the Purchase Price (such excess, the
"Spread"), and (B) with respect to each Right, make adequate provision to
substitute for the Adjustment Shares, upon exercise of the Rights, (1) cash, (2)
a reduction in the Purchase Price, (3) Common Shares or other equity securities
of the Company (including, without limitation, shares or units of shares of
preferred stock (if then authorized by the Company's Certificate of
Incorporation) which the Board of Directors of the Company has deemed to have
the same value as Common Shares (such shares or units of shares of preferred
stock are herein called "common stock equivalents")), except to the extent that
the Company has not obtained any necessary regulatory approval for such
issuance, (4) debt securities of the Company, except to the extent that the
Company has not obtained any necessary regulatory approval for such issuance,
(5) other assets, or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Board of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of the
Company; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within 30 days following
the later of (x) the first occurrence of the Section 11(a)(ii) Event and (y) the
date on which the Company's right of redemption pursuant to Section 23(a)
expires (the later of (x) and (y) being referred to herein as the "Section
11(a)(ii) Trigger Date"), then the Company shall be obligated, subject to
Section 7(e), to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, Common Shares (to the extent
available), except to the extent that the Company has not obtained any necessary
regulatory approval for such issuance, and then, if necessary, cash, which
shares and/or cash have an aggregate value equal to the Spread. If the Board of
Directors of the Company shall determine in good faith that it is likely that
sufficient additional Common Shares could be authorized for issuance upon
exercise in full of the Rights or that any necessary regulatory approval for
such issuance will be obtained, the 30-day period set forth above may be
extended to the extent necessary, but not more than 90 days after the Section
11(a)(ii) Trigger Date, in order that the Company may seek shareholder approval
for the authorization of such additional shares or take action to obtain such
regulatory approval (such period, as it may be extended, the "Substitution
Period"). To the extent that the Company determines that some action need to be
taken pursuant to the first and/or second sentences of this Section 11(a)(iii),
the Company (x) shall provide, subject to Section 7(e) hereof, that such
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<PAGE> 17
action shall apply uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares, to take any action to
obtain any required regulatory approval and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the
value of the Common Shares shall be the Current Market Price (as determined
pursuant to Section 11(d) hereof) per share of the Common Shares on the Section
11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be
deemed to have the same value as the Common Shares on such date.
b. In the event the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Common Shares entitling them (for
a period expiring within 45 calendar days after such record date) to subscribe
for or purchase Common Shares (or securities convertible into Common Shares) at
a price per Common Share (or having a conversion price per share, if a security
convertible into Common Shares) less than the Current Market Price per share of
the Common Shares (as defined in Section 11(d)) on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Common Shares
outstanding on such record date plus the number of Common Shares which the
aggregate offering price of the total number of Common Shares so to be offered
(or the aggregate initial conversion price of the convertible securities so to
be offered) would purchase at such Current Market Price and the denominator of
which shall be the number of Common Shares outstanding on such record date plus
the number of additional Common Shares to be offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible); provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which may be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Common Shares owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed;
and in the event that such rights or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.
c. In the event the Company shall fix a record date for the making of a
distribution to all holders of the Common Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of indebtedness or assets
(other than a cash dividend (provided if such cash dividend occurs after the
Distribution Date, only if such cash dividend is approved by a majority of
Continuing Directors) or a dividend payable in Common Shares) or subscription
rights or warrants (excluding those referred to in Section 11(b)), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to
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<PAGE> 18
such record date by a fraction, the numerator of which shall be the Current
Market Price per share of the Common Shares (as defined in Section 11(d)) on
such record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants applicable to one Common Share and the denominator of which shall be
such Current Market Price per share of the Common Shares; provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of the
Company to be issued upon exercise of one Right. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price which would then be in effect if such record date had not
been fixed.
d. For the purpose of any computation hereunder (other than computations
made pursuant to Section 11(a)(iii) hereof), the "Current Market Price" per
share of the Common Shares on any date shall be deemed to be the average of the
daily closing prices per share of such Common Shares for the 30 consecutive
Trading Days (as such term is hereinafter defined) immediately prior to such
date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the "Current Market Price" per share of the Common Shares on any date
shall be deemed to be the average of the daily closing prices per share of such
Common Shares for the ten consecutive Trading Days immediately following such
date; provided, however, that in the event that the Current Market Price per
share of the Common Shares is determined during a period following the
announcement by the issuer of such Common Shares of (A) a dividend or
distribution on such Common Shares payable in such Common Shares or securities
convertible into such Common Shares (other than the Rights), or (B) any
subdivision, combination or reclassification of such Common Shares, and prior to
the expiration of the requisite 30 Trading Days or ten Trading Days, as set
forth above, after the ex-dividend date for such dividend or distribution or the
record date for such subdivision, combination or reclassification, then, and in
each such event, the Current Market Price shall be appropriately adjusted to
reflect the Current Market Price per Common Share equivalent. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Shares are not listed
or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Common Shares
are listed or admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then
in use, or, if on any such date the Common Shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Shares selected by the
Board of Directors of the Company. If on any such date no market maker is making
a market in the Common Shares, the fair value of such shares on such date as
determined in good faith by the Board of Directors of the Company shall be used.
The term "Trading Day" shall mean a day on which the principal national
securities exchange
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<PAGE> 19
on which the Common Shares are listed or admitted to trading is open for the
transaction of business or, if the Common Shares are not listed or admitted to
trading on any national securities exchange, a Business Day.
e. Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a Common Share or other share, as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
f. If, as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock of the Company other than
Common Shares, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Shares contained in
Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Common Shares
shall apply on like terms to any such other shares.
g. All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
Common Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
h. Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Section 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price per one one-thousandth of a Common
Share, that number of one one-thousandths of a Common Share (calculated to the
nearest one one-millionth of a Common Share) obtained by (i) multiplying (x) the
number of one one-thousandths of a share covered by a Right immediately prior to
this adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
i. The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-thousandths of a Common Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment in the number of Rights shall be exercisable for the number of one
one-thousandths of a Common Share for which a Right was exercisable immediately
prior to such adjustment. Each Right held of record prior to such adjustment of
the number of Rights shall become that number of Rights (calculated to the
nearest one
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<PAGE> 20
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement, and notify the Rights Agent, of its election to adjust the
number of Rights, indicating the record date for the adjustment, and, if known
at the time, the amount of the adjustment to be made. This record date may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Rights Certificates have been issued, shall be at least ten days later than
the date of the public announcement. If Rights Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders of
record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
j. Irrespective of any adjustment or change in the Purchase Price or the
number of one one-thousandths of a Common Share issuable upon the exercise of
the Rights, the Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per one one-thousandth of a share and the
number of one-thousandths of a share which were expressed in the initial Rights
Certificates issued hereunder.
k. Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-thousandth of the then par value, if any, of the
number of one one-thousandths of a Common Share issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable Common Shares at such adjusted Purchase
Price.
l. In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date of the
number of one one-thousandths of a Common Share and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of one one-thousandths of a Common Share and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
m. Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments
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<PAGE> 21
expressly required by this Section 11, as and to the extent that in their good
faith judgment the Board of Directors of the Company shall determine to be
advisable in order that any consolidation or subdivision of the Common Shares,
issuance wholly for cash of any of the Common Shares at less than the Current
Market Price, issuance wholly for cash of Common Shares or securities which by
their terms are convertible into or exchangeable for Common Shares, stock
dividends or issuance of rights, options or warrants referred to in this Section
11, hereafter made by the Company to holders of its Common Shares shall not be
taxable to such shareholders.
n. Anything herein to the contrary notwithstanding, in the event that at
any time after the date of this Agreement and prior to the Distribution Date,
the Company shall (i) declare or pay any dividend on the Common Shares payable
in Common Shares or (ii) effect a subdivision, combination or consolidation of
the Common Shares (by reclassification or otherwise than by payment of dividends
in Common Shares) into a greater or lesser number of Common Shares, then in any
such case (A) the number of one one-thousandths of a Common Share purchasable
after such event upon proper exercise of each Right shall be determined by
multiplying the number of one one-thousandths of a Common Share so purchasable
immediately prior to such event by a fraction, the numerator of which is the
number of Common Shares outstanding immediately before such event and the
denominator of which is the number of Common Shares outstanding immediately
after such event, and (B) each Common Share outstanding immediately after such
event shall have issued with respect to it that number of Rights which each
Common Share outstanding immediately prior to such event has issued with respect
to it. The adjustments provided for in this Section 11(n) shall be made
successively whenever such a dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall (a) promptly prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Rights Agent and with the transfer agent for the Common Shares a
copy of such certificate and (c) mail a brief summary thereof to each holder of
a Rights Certificate in accordance with Section 25 hereof. The Rights Agent
shall be fully protected in relying on any such certificate and on any
adjustment therein and shall not be deemed to have knowledge of any such
adjustment unless and until it shall have received such a certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
a. In the event that, following the Share Acquisition Date, directly or
indirectly, (i) the Company shall consolidate with, or merge with and into, any
other Person and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) any Person shall consolidate
with the Company, or merge with and into the Company, and the Company shall be
the continuing or surviving corporation of such consolidation or merger and, in
connection with such merger, all or part of the outstanding Common Shares shall
be changed into or exchanged for stock or other securities of any other Person
(or the Company) or cash or any other property, or (iii) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or more transactions, assets or
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earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Person or Persons, then,
and in each such case, proper provision shall be made so that (A) each holder of
a Right (except as otherwise provided in Section 7(e) hereof) shall thereafter
have the right to receive, upon the exercise thereof at the then current
Purchase Price, in accordance with the terms of this Agreement, such number of
validly authorized and issued, fully paid, nonassessable and freely tradeable
shares of Common Shares of the Principal Party (as such term is hereinafter
defined), not subject to any liens, encumbrances, rights of first refusal or
other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one one-thousandths
of a Common Share for which a Right is then exercisable (without taking into
account any adjustment previously made pursuant to Section 11(a)(ii)) and
dividing that product (which, following the first occurrence of a Section 13
Event, shall be referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement) by (2) 50% of the Current Market Price per share of
the Common Shares of such Principal Party on the date of consummation of such
Section 13 Event; (B) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement; (C) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13 Event; (D) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Shares in accordance
with Section 9) in connection with the consummation of any such transaction as
may be necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its Common Shares
thereafter deliverable upon the exercise of the Rights; and (E) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first occurrence
of any Section 13 Event.
b. "Principal Party" shall mean
i. in the case of any transaction described in clause (i) or (ii)
of the first sentence of Section 13(a), the Person that is the issuer of any
securities into which Common Shares of the Company are converted in such merger
or consolidation, and if no securities are so issued, the Person that is the
other party to such merger or consolidation; and
ii. in the case of any transaction described in clause (iii) of
the first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions; provided, however, that in any such case, (1) if
the Common Shares of such Person are not at such time and have not been
continuously over the preceding 12-month period registered under Section 12 of
the Exchange Act, and such Person is a direct or indirect Subsidiary of another
Person the Common Shares of which is and has been so registered, "Principal
Party" shall refer to such other Person; and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Shares
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Shares having the
greatest aggregate market value.
c. The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized shares of its
Common Shares which have not
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been issued or reserved for issuance to permit the exercise in full of the
Rights in accordance with this Section 13 and unless prior thereto the Company
and such Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any Section 13 Event, the Principal Party will
i. prepare and file a registration statement under the Act, with
respect to the Rights and the securities purchasable upon exercise of the Rights
on an appropriate form, and will use its best efforts to cause such registration
statement to (A) become effective as soon as practicable after such filing and
(B) remain effective (with a prospectus at all times meeting the requirements of
the Act) until the Final Expiration Date; and
ii. will deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply in
all respects with the requirements for registration on Form 10 under the
Exchange Act. The foregoing provisions set forth in this Section 13 shall
similarly apply to successive mergers or consolidations or sales or other
transfers. In the event that a Section 13 Event shall occur at any time after
the occurrence of a Section 11(a)(ii) Event, the Rights which have not
theretofore been exercised shall thereafter become exercisable in the manner
described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares.
a. The Company shall not be required to issue fractions of Rights or to
distribute Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
b. The Company shall not be required to issue fractions of Common Shares
(other than fractions which are integral multiples of one one-thousandths of a
Common Share) upon
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exercise of the Rights or to distribute certificates which evidence fractional
Common Shares (other than fractions which are integral multiples of one
one-thousandths of a Common Share). Fractions of Common Shares in integral
multiples of one one-thousandths of a Common Share may, at the election of the
Company, be evidenced by depositary receipts, pursuant to an appropriate
agreement between the Company and a depositary selected by it, provided that
such agreement shall provide that the holders of such depositary receipts shall
have all the rights, privileges and preferences to which they are entitled as
Beneficial Owners of the Common Shares. In lieu of fractional Common Shares the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Common Share. For purposes of this
Section 14(b), the current market value of a Common Share shall be the closing
price of a Common Share (as determined pursuant to the second sentence of
Section 11(d)) for the Trading Day immediately prior to the date of such
exercise.
c. The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right.
Section 15. Rights of Action. All rights of action in respect to this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, on his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of, the obligations of any Person subject to this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
a. prior to the Distribution Date, the Rights will be transferable only
in connection with the transfer of the Common Shares;
b. after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
c. subject to Section 6 and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute
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owner thereof and of the Rights evidenced thereby (notwithstanding any notations
of ownership or writing on the Rights Certificates or the associated Common
Shares certificate made by anyone other than the Company or the Rights Agent)
for all purposes whatsoever, and neither the Company nor the Rights Agent,
subject to the last sentence of Section 7(e) hereof, shall be required to be
affected by any notice to the contrary; and
d. notwithstanding anything in this Agreement to the contrary, neither
the Company nor the Rights Agent shall have any liability to any holder of a
Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Common Shares or any
other securities of the Company which may at any time be issuable upon the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a shareholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Rights Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the acceptance, exercise and performance of
its duties hereunder. The Company also agrees to indemnify the Rights Agent, its
officers, directors, employees and agents for, and to hold each of them harmless
against, any loss, liability, or expense, incurred without gross negligence, bad
faith or willful misconduct on the part of the Rights Agent or such other
indemnified party, for anything done, suffered or omitted by the Rights Agent or
such other indemnified party in connection with the acceptance and
administration of this Agreement or the exercise or performance of its duties
hereunder, including the costs and expenses of defending against any claim of
liability in the premises (including reasonable counsel fees and expenses).
The Rights Agent shall be protected and shall incur no liability for, or
in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement or the exercise or performance of its
duties hereunder in reliance upon any Rights Certificate or certificate for the
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to
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be signed, executed and, where necessary, verified or acknowledged, by the
proper person or persons, or otherwise upon the advice of its counsel as set
forth in Section 20 hereof.
Anything in this Agreement to the contrary notwithstanding, in no event
shall the Rights Agent be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Rights Agent has been advised of the likelihood of such loss or damage
and regardless of the form of the action.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the corporate trust
business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a successor
Rights Agent under the provisions of Section 21. In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement,
any of the Rights Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, a successor Rights Agent may countersign such Rights Certificates
either in the name of the predecessor Rights Agent or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Rights Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Rights Certificates so countersigned; and in case at that time any
of the Rights Certificates shall not have been countersigned, the Rights Agent
may countersign such Rights Certificates either in its prior name or in its
changed name; and in all such cases such Rights Certificates shall have the full
force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
a. The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the written advice or opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent as
to any action taken, suffered or omitted in good faith by it under the
provisions of this Agreement in reliance upon such written advice or opinion.
b. Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation,
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the identity of any Acquiring Person and the determination of "Current Market
Price") be proved or established by the Company prior to taking, suffering or
omitting any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by a person
reasonably believed by the Rights Agent to be any one of the President or any
Executive Vice President or the Chief Financial Officer of the Company and
delivered to the Rights Agent; and such certificate shall be full and complete
authorization to the Rights Agent for any action taken, suffered or omitted in
good faith by it under the provisions of this Agreement in reliance upon such
certificate.
c. The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct.
d. The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement, the Summary of
Rights or in the Rights Certificates (except its countersignature thereof) or be
required to verify the same, but all such statements and recitals are and shall
be deemed to have been made by the Company only.
e. The Rights Agent shall not be under any responsibility in respect of
the validity of any provision of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
or any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in this Agreement, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Common Shares or other securities to be
issued pursuant to this Agreement or any Rights Certificate or as to whether any
Common Shares or other securities will, when issued, be validly authorized and
issued, fully paid and nonassessable.
f. The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
g. The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person reasonably believed by the Rights Agent to be any one of the President or
any Executive Vice President of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken, suffered or omitted to be taken in good faith by it under
the provisions of this Agreement in reliance upon instructions of any such
officer. At any time the Rights Agent may apply to the Company for written
instructions with respect to any matter arising in connection with the Rights
Agent's duties and obligations arising under this Agreement. Such application by
the Rights Agent for written instructions from the Company
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may, at the option of the Rights Agent, set forth in writing any action proposed
to be taken or omitted by the Rights Agent with respect to its duties or
obligations under this Agreement and the date on and/or after which such action
shall be taken and the Rights Agent shall not be liable for any action taken or
omitted in accordance with a proposal included in any such application on or
after the date specified therein (which date shall not be less than three
Business Days after the Company receives such application, without the Company's
consent) unless, prior to taking or initiating such action, the Rights Agent has
received written instructions in response to such application specifying the
action to be taken or omitted.
h. The Rights Agent and any shareholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
i. The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
j. No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
k. If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
l. The Rights Agent undertakes only the express duties and obligations
imposed on it by this Agreement and no implied duties or obligations shall be
read into this Agreement against the Rights Agent.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days notice in writing mailed to the Company and to the transfer agent
of the Common Shares by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. The Company may remove the Rights Agent
or any successor Rights Agent upon 30 days notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to the transfer
agent of the Common Shares by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise
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become incapable of acting, the Company shall appoint a successor to the Rights
Agent. If the Company shall fail to make such appointment within a period of 30
days after giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Rights Agent or by the holder of a Rights Certificate (who shall, with such
notice, submit his Rights Certificate for inspection by the Company), then the
registered holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the States of New York or California (or of any other state of the United
States so long as such corporation is authorized to do business as a banking
institution in the States of New York or California), in good standing, having
an office in the States of New York or California, which is authorized under
such laws to exercise corporate trust powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and the transfer agent of the Common Shares,
and mail a notice thereof in writing to the registered holders of the Rights
Certificates. Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of the successor
Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement (so long as such options, plan
or arrangement were granted or established, as the case may be, prior to the
Distribution Date), or upon the exercise, conversion or exchange of securities
issued by the Company after the date hereof and prior to the Distribution Date,
and (b) may, in any other case, if deemed necessary or appropriate by the Board
of Directors of the Company, issue Rights Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Rights Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the Persons to whom such Rights Certificate would be issued, and (ii) no such
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
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Section 23. Redemption and Termination.
a. The Board of Directors of the Company may, at its option, at any time
prior to the earlier of (i) the close of business on the tenth day following the
Share Acquisition Date (or, if the Share Acquisition Date shall have occurred
prior to the Record Date, the close of business on the fifteenth day following
the Record Date), or (ii) the Final Expiration Date, redeem all but not less
than all the then outstanding Rights at a redemption price of $.01 per Right, as
such amount may be appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price") and the Company
may, at its option, pay the Redemption Price either in Common Shares (based on
the "Current Market Price," as defined in Section 11(d)(i) hereof, of the Common
Shares at the time of redemption) or cash; provided, however, if the Board of
Directors of the Company authorizes redemption of the Rights in either of the
circumstances set forth in clauses (i) and (ii) below, then there must be
Continuing Directors then in office and such authorization shall require the
concurrence of a majority of such Continuing Directors: (i) such authorization
occurs on or after the time a Person becomes an Acquiring Person, or (ii) such
authorization occurs on or after the date of a change (resulting from a proxy or
consent solicitation) in a majority of the directors in office at the
commencement of such solicitation if any Person who is a participant in such
solicitation has stated (or, if upon the commencement of such solicitation, a
majority of the Board of Directors of the Company has determined in good faith)
that such Person (or any of its Affiliates or Associates) intends to take, or
may consider taking, any action which would result in such Person becoming an
Acquiring Person or which would cause the occurrence of a Triggering Event.
b. Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights (such action being adopted in the manner
required by paragraph (a) above), evidence of which shall have been filed with
the Rights Agent and without any further action and without any notice, the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. Promptly after
the action of the Board of Directors ordering the redemption of the Rights, the
Company shall give notice of such redemption to the Rights Agent and the holders
of the then outstanding Rights by mailing such notice to all such holders at
each holder's last address as it appears upon the registry books of the Rights
Agent or, prior to the Distribution Date, on the registry books of the transfer
agent for the Common Shares. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of redemption will state the method by which the payment of the
Redemption Price will be made.
Section 24. Exchange.
a. With the affirmative vote of a majority of the Continuing Directors,
the Company may at any time after any Person becomes an Acquiring Person,
exchange all or part of the then outstanding and exercisable Rights for Common
Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Company shall
not be empowered to effect such exchange at any time after any Person (other
than the Company,
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any Subsidiary of the Company, any employee benefit plan of the Company or any
such Subsidiary, or any entity holding Common Shares for or pursuant to the
terms of any such plan), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
b. Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to subsection (a) of this Section
24 and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied by the Exchange Ratio. The Company
shall promptly give public notice of any such exchange; provided, however, that
the failure to give, or any defect in, such notice shall not affect the validity
of such exchange. The Company promptly shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights held by each holder of
Rights.
c. In any exchange pursuant to this Section 24, the Company, at its
option, may substitute preferred shares (if then authorized by the Company's
Certificate of Incorporation), with dividend, liquidation and voting rights per
share comparable to a Common Share, for Common Shares exchangeable for Rights,
at the initial rate of such preferred share for each Common Share.
d. In the event that there shall not be sufficient Common Shares
authorized but unissued to permit any exchange of Rights as contemplated in
accordance with this Section 24, the Company shall take all such action as may
be necessary to authorize additional Common Shares for issuance upon exchange of
the Rights.
e. The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
subsection (e), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately after the public
announcement by the Company that an exchange is to be effected pursuant to this
Section 24.
Section 25. Notice of Certain Events. In case the Company shall propose
(a) to pay any dividend payable in stock of any class to the holders of its
Common Shares or to make any other distribution to the holders of its Common
Shares (other than a cash dividend (provided if such cash dividend occurs after
the Distribution Date, only if such cash dividend is approved by a majority of
Continuing Directors), or (b) to offer to the holders of its Common Shares
rights or warrants to subscribe for or to purchase any additional Common Shares
or shares of stock of
31
<PAGE> 32
any class or any other securities, rights or options, or (c) to effect any
reclassification of its Common Shares (other than a reclassification involving
only the subdivision of outstanding Common Shares), or (d) to effect any
consolidation or merger into or with any other Person, or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one or more transactions, of 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to, any
other Person, or (e) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to each holder of a
Rights Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares, if any such date is to be fixed,
and such notice shall be so given in the case of any action covered by clause
(a) or (b) above at least 10 days prior to the record date for determining
holders of the Common Shares for purposes of such action, and in the case of any
such other action, at least 10 days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of the
Common Shares, whichever shall be the earlier.
In case the Section 11(a)(ii) Event shall occur, then, in any such case,
the Company shall as soon as practicable thereafter give to each holder of a
Rights Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof, and all
references in the preceding paragraph to Common Shares shall be deemed
thereafter references to other securities, if appropriate.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Rainbow Technologies, Inc.
50 Technology Drive
Irvine, California 92618
Attention: Walter W. Straub, President
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Rights Certificate to or on the Rights Agent shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
U.S. Stock Transfer Corporation
1745 Gardena Avenue
Suite 200
Glendale, California 91204-2991
Attention: Enrique (Henry) Artaza, Vice President
32
<PAGE> 33
Notices or demands authorized by this Agreement to be given or made by
the Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 27, the Company may and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing Common Shares. From and after the Distribution Date and subject to
the penultimate sentence of this Section 27, the Company may and the Rights
Agent shall, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
shorten or lengthen any time period hereunder (which lengthening or shortening,
following the first occurrence of an event set forth in clauses (i) and (ii) of
the proviso to Section 23(a) hereof, shall be effective only if there are
Continuing Directors and shall require the concurrence of a majority of such
Continuing Directors), or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, this Agreement may not be supplemented or amended to lengthen,
pursuant to clause (iii) of this sentence,
a. a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable, or
b. any other time period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of, and/or the benefits to, the
holders of Rights (other than any Acquiring Person and its Affiliates and
Associates). Upon the delivery of a certificate from an appropriate officer of
the Company which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price, the Final Expiration Date, the Purchase Price or
the number of one-thousandths of a Common Share for which a Right is
exercisable. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares (other than an Acquiring Person). Notwithstanding anything contained in
this Agreement to the contrary, no supplement or amendment that changes the
rights and duties of the Rights Agent under this Agreement shall be effective
without the consent of the Rights Agent.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
33
<PAGE> 34
Section 29. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act.
The Board of Directors of the Company (with, where specifically provided for
herein, the consent of a majority of the Continuing Directors) shall have the
exclusive power and authority to administer this Agreement and to exercise all
rights and powers specifically granted to the Board (with, where specifically
provided for herein, the consent of a majority of the Continuing Directors) or
to the Company, or as may be necessary or advisable in the administration of
this Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement, (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend the Agreement) and
(iii) make all factual determinations deemed necessary or advisable for the
administration of this Agreement. All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement, or any portion thereof, is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement, including any portions of any thereof which are not held to be
invalid, void or unenforceable, shall remain in full force and effect and shall
in no way be affected, impaired or invalidated; provided, however, that
notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board of Directors of the Company, with
the consent of a majority of the Continuing Directors after the Distribution
Date, determines in its good faith business judgment that severing the invalid
language from this Agreement would adversely affect the purpose or effect of
this Agreement, the right of redemption set forth in Section 23 hereof shall be
reinstated and shall not expire until the close of business on the tenth day
following the date of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement, each Right, and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such state.
34
<PAGE> 35
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
RAINBOW TECHNOLOGIES, INC.
By: _________________________________
Walter W. Straub, President
U.S. STOCK TRANSFER CORPORATION
By: _________________________________
Enrique (Henry) Artaza,
Vice President
35
<PAGE> 1
Exhibit 10(o)
EMPLOYMENT AGREEMENT between Rainbow Technologies, Inc., a Delaware corporation
(the "Corporation"), and Dr. Aviram Margalith (the "Executive"), dated this
seventh day of April 1997.
W I T N E S S E T H :
WHEREAS, the Corporation desires to engage Executive to perform services
for the Corporation, and the Executive desires to perform such services, on the
terms and conditions herein set forth.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a period
commencing April 7, 1997 and terminating December 31, 1998 or such shorter
period as provided for herein. The term shall be automatically renewed for
successive one year periods thereafter, unless terminated pursuant to the
provisions of this Employment Agreement (the "Agreement"). The period during
which Executive is employed hereunder is hereinafter referred to as the "Term."
2. Position and Duties. The Executive shall be employed in the business
of the Corporation. As of the date of this Agreement, Executive's duties include
those duties Executive is currently performing as Senior Vice President of the
Corporation. Notwithstanding the duties as described above, Executive agrees
that his duties may be, from time to time, revised or modified by the President
of the Corporation. The Executive agrees to devote his full business time during
normal business hours to the business and affairs of the Corporation and to use
his best efforts to perform faithfully and efficiently the responsibilities
assigned to him hereunder, to the extent necessary to discharge such
responsibilities, except for (i) service on corporate, civic or charitable
boards or committees not significantly interfering with the performance of such
responsibilities and (ii) periods of vacation and sick leave to which he is
entitled. It is expressly understood and agreed that the Executive's continuing
to serve on any boards and committees with which he is currently connected, as a
member or otherwise, shall be deemed not to interfere with the performance of
the Executive's services to the Corporation.
3. Compensation and Benefits.
3.1 Base Salary. The Corporation will pay Executive a base salary ("Base
Salary") of $3655 per week which will be paid in accordance with the payroll
practices of the Corporation. The Base Salary shall be reviewed at least once
each year starting in 1999 and shall be increased at any time and from time to
time by action of the President, Board of Directors (the "Board") or any
committee thereof.
3.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus"), in cash, as established from time to time by the
Board. Each such Annual Bonus shall be payable no later than 60 days subsequent
to the end of the Corporation's fiscal year. In the event of the termination of
this
<PAGE> 2
Agreement for any reason, the Executive shall receive the Annual Bonus prorated
to the date of such termination.
3.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, the Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established from time to time by the Corporation provided Executive meets the
eligibility requirements therefor.
3.4 Benefit Plans. The Executive and/or his spouse and dependents, as
the case may be, shall be entitled to all benefits under all medical, dental,
vision, disability, executive life, group life, accidental death and travel
accident insurance plans and programs ("Benefit Plans"), if any, and as
established from time to time by the Corporation provided the Executive meets
the eligibility requirements therefor.
3.5 Fringe Benefits. The Executive and/or his spouse and dependents, as
the case may be, shall be entitled to fringe benefits ("Fringe Benefits"),
including, but not limited to, golf club and luncheon club dues and expenses, an
automobile allowance, parking, personal income tax preparation services and
financial counseling services, if any, and as established from time to time by
the Corporation provided the Executive meets the eligibility requirements
therefor.
3.6 Office and Support Staff. The Executive shall be entitled to an
office and to administrative assistance commensurate with his responsibilities
and title and consistent with the Corporation's policies.
3.7 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies established from time to time by the Corporation.
4. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. Executive shall provide documentation of
such expenses in accordance with the procedures established from time to time by
the Corporation.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as defined
below), by giving to the Executive notice of its intention to terminate his
employment effective on the 90th day after such notice (the "Disability
Effective Date") if within such 90-day period the Executive fails to return to
full-time performance of his duties. For purposes of this Agreement,
"Disability" means a disability which, after the expiration of more than 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Corporation or the insurers providing disability
insurance to the Company and consented to by the Executive or his legal
representative (such consent not to be withheld unreasonably).
<PAGE> 3
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in his substantial personal enrichment at the expense of the Corporation
or (ii) repeated violations by the Executive of his obligations under Article 2
of this Agreement, which violations are demonstrably willful and deliberate on
the Executive's part and which were intended to result in or have resulted in
material injury to the Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his employment for Good
Reason ("Good Reason"). For purposes of this Agreement, "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.4 below.
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 2 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 3 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.4 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
5.5.5 Determination of Good Reason. For the purposes of this
Agreement, any final determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
5.5.6 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated at
the date of the giving of such purported Notice of Termination. In such event,
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.3 of this Agreement.
<PAGE> 4
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Failure to Relocate. The Executive's employment shall terminate if
executive and his family do not relocate to Southern California by September 30,
1998.
5.8 Change of Control. In the event of a Change of Control, this
Agreement shall automatically terminate, and a separate Change of Control
Agreement shall become effective. For purposes of this Agreement, "Change of
Control" shall be deemed to have occurred if (i) a third person, including a
"group" as defined in Article 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the Corporation having (a) 30% or more
of the total number of votes that may be cast for the election of directors of
the Corporation in 1997; (b) 25% or more of the total number of votes that may
be cast for the election of directors of the Corporation in 1998 and thereafter;
or (ii) as the result of, or in connection with, any cash tender or exchange
offer, merger of other business combination, sale of assets or contested
election, or any combination of the foregoing transactions (a "Transaction"),
the persons who were members of the Board before the Transaction shall cease to
constitute a majority of the Board or of the members of the board of directors
of any successor to the Corporation.
5.9 Notice of Termination. Any termination by the Corporation for Cause,
Without Cause or Failure to Relocate, or by the Executive for Good Reason or
election of Voluntary Retirement shall be communicated by Notice of Termination
to the other party hereto given in accordance with Article 12. For purposes of
this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provision so
indicated and (iii) if the termination date is other than the date of receipt of
such notice, specifies the termination date of this Agreement which date shall
be in accordance with the specific termination provision in this Agreement
relied upon.
5.10 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause or for
Failure to Relocate, the Date of Termination shall not be the date of receipt of
such Notice of Termination but shall be a date specified therein, which date
shall be not less than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
<PAGE> 5
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of his death. Anything in this Agreement to the contrary
notwithstanding, the Executive's spouse and dependents shall be entitled to
continue to receive the benefits under Benefit Plans and Fringe Benefits for 12
months subsequent to the Date of Termination.
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his Base Salary and any other accrued
obligations through the Date of Termination. The Corporation shall have no
further obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement on or after the Early Retirement Date, the Corporation
shall pay the Executive his Base Salary and any other accrued obligations
through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the President shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1 (i) and
6.4.1(ii):
(i) if not already paid, the Executive's Base Salary and accrued
obligations through the Date of Termination, to be paid within 30 days after the
Date of Termination;
(ii) 100% of the Executive's "Base Amount". Base Amount is the
aggregate of the Executive's Base Salary and Annual Bonus paid or due to
Executive in the fiscal year prior to the year in which termination occurred.
Said 100% of the Base Amount shall be paid to the Executive in 12 equal monthly
installments commencing within 30 days after the Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights, if any, granted to the Executive which are not exercisable at the Date
of Termination, shall become fully exercisable as of the Date of Termination.
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or his spouse and dependents.
6.5 Change of Control. Notwithstanding anything in this Agreement to the
contrary, if the Executive's employment shall be terminated due to a Change of
Control, the Corporation shall have no further obligation to the Executive under
this Agreement.
6.6 Failure to Relocate. If the Executive's employment is terminated due
to Failure to Relocate, the Corporation shall have no further obligation to the
Executive under this Agreement. The
<PAGE> 6
Corporation shall pay the Executive his Base Salary and accrued Annual Bonus and
any other accrued obligations through the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. The Corporation agrees
to pay, to the full extent permitted by law, all legal fees and expenses
including costs of litigation which the Executive may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the Corporation or
others of the validity or enforceability of, or liability under, any provision
of this Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during his employment by the Corporation or any of its
affiliated companies and which shall not be public knowledge. After termination
of the Executive's employment with the Corporation, he shall not, without the
prior written consent of the Corporation, communicate or divulge any such
information, knowledge or data to anyone other than the Corporation and those
designated by it. In no event shall an asserted violation of the provisions of
this Article 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) compete with or be engaged in the same business or "participate in"
any other business or organization which during such
<PAGE> 7
one year period competes with or is engaged in the same business as the
Corporation, which business, for the purposes of this Agreement, will be limited
to the area of "software execution control," "network license management
control," "information security" and "data access control" within the computer
industry, in any geographical area in which the Corporation conducts such
business except that in each case the provisions of this Article 10 will not be
deemed to be breached merely because Executive owns not more than 5% of the
outstanding common stock of a publicly owned corporation, or by membership upon
any board of directors of a publicly owned corporation where Executive attained
such position during the Term and such position was deemed not to interfere with
the terms of this Agreement. The term "participate in" shall mean: "directly or
indirectly, for his 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, or 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." Executive will not
directly or indirectly reveal the name of, solicit or interfere with, or
endeavor to entice away from the Corporation any of its customers or employees.
Executive will not directly or indirectly employ any person who, at any time up
to such cessation, was an employee of the Corporation, within a period of one
year after such person leaves the employ of such Corporation. Executive agrees
that the provisions of this Article 10 are necessary and reasonable to protect
the Corporation in the conduct of its business. If any restriction contained in
this Article 10 shall be deemed to be invalid, illegal, or unenforceable by
reason of the extent, duration, or geographical scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, geographical scope, or other provisions hereof, and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in
<PAGE> 8
same manner and to the same extent as the Corporation would be required to
perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, and is supplemented by
the offer letter dated February 28, 1997. This agreement may be modified only by
a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Dr. Aviram Margalith
- -------------------------------
- -------------------------------
If to the Corporation:
Walter Straub, President
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the President in order to enable Executive to fulfill the obligations set
forth in this Agreement, nothing contained in this Agreement shall authorize,
empower, or constitute Executive the agent of the Corporation in any manner;
authorize or empower Executive to assume or create any obligation or
responsibility whatsoever, express or implied, on behalf of or in the name of
the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon
<PAGE> 9
strict adherence to any term of this Agreement on one or more occasions shall
not be a waiver or deprive the party of the right hereunder to insist upon
strict adherence to that term or any other term of this Agreement. Any waiver
must be in writing and signed by the waiving party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its Secretary all as of
the day and year first above written.
- -----------------------------------------------
Dr. Aviram Margalith
ATTEST:
- -----------------------------------------------
Walter W. Straub
President
Rainbow Technologies, Inc.
<PAGE> 1
Exhibit 10(p)
CHANGE OF CONTROL AGREEMENT between Rainbow Technologies, Inc., a
Delaware corporation (the "Corporation"), and Dr. Aviram Margalith (the
"Executive"), dated this seventh day of April, 1997.
W I T N E S S E T H :
WHEREAS, the Corporation and the Executive have entered into an
Employment Agreement; and
WHEREAS, the Corporation wishes to assure both itself and the Executive
of continuity of management in the event of any actual or threatened "Change of
Control" (as defined in Article 2) of the Corporation;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a one year period
commencing on the effective date of the Change in Control (as defined in Article
2 and hereinafter defined as the "Change Date") said period to be automatically
renewed for successive one year periods thereafter and ending on the earlier to
occur of (a) termination pursuant to the provisions of this Change of Control
Agreement (the "Agreement") or (b) the first day of the month coinciding with or
next following the Executive's 60th birthday.
2. Change of Control. For the purposes of this Agreement a "Change of
Control" shall be deemed to have occurred if: (i) a third person, including a
"group" as defined in Article 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the Corporation having (a) having 30%
or more of the total number of votes that may be cast for the election of
directors of the Corporation in 1997; and (b) having 25% or more of the total
number of votes that may be cast for the election of directors of the
Corporation in 1998 and thereafter; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger of other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were directors of the
Corporation before the Transaction shall cease to constitute a majority of the
Board of Directors (the "Board") of the Corporation or any successor to the
Corporation.
3. Position and Duties. The Executive's position (including titles),
authority and responsibilities shall be at least commensurate with the most
significant of those held, exercised and assigned during the 90-day period
immediately preceding the Change Date. The Executive shall be based and the
Executive's services shall be performed at the location at which the Executive
was based immediately preceding the Change Date, except for travel reasonably
required in the performance of the Executive's responsibilities. It is
understood that such position, authority and responsibilities shall not be
regarded as not commensurate merely by virtue of the fact that a successor shall
have acquired all or substantially all of the business and/or assets of the
Corporation as contemplated by Article 11 hereof and that the Executive shall
continue to have a position and authority and responsibilities with respect to
<PAGE> 2
such successor or affiliated company substantially corresponding to that of the
Executive with respect to the Corporation prior to such acquisition. As used in
this Agreement, the term "affiliated companies" means any company controlling,
controlled by or under common control with the Corporation. Notwithstanding the
duties as described above, Executive agrees that his duties may be, from time to
time, revised or modified by the President of the Corporation. The Executive
agrees to devote his full business time during normal business hours to the
business and affairs of the Corporation and to use his best efforts to perform
faithfully and efficiently the responsibilities assigned to him hereunder, to
the extent necessary to discharge such responsibilities, except for (i) service
on corporate, civic or charitable boards or committees not significantly
interfering with the performance of such responsibilities and (ii) periods of
vacation and sick leave to which he is entitled. It is expressly understood and
agreed that the Executive's continuing to serve on any boards and committees
with which he is connected, as a member or otherwise, shall be deemed not to
interfere with the performance of the Executive's services to the Corporation.
4. Compensation and Benefits.
4.1 Base Salary. The Executive shall receive a base salary (the "Base
Salary") at least equal to the Base Salary paid to the Executive by the
Corporation within one year prior to the Change Date. The Base Salary shall be
reviewed at least once each year and shall be increased at any time and from
time to time by action of the President, Board or any committee thereof. The
Base Salary shall be paid in accordance with the Corporation's regular
practices.
4.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus") in cash. The Annual Bonus shall be at least equal
to the Annual Bonus, if any, paid or payable to the Executive during the fiscal
year prior to the Change Date or, if the Annual Bonus has been in effect for two
fiscal years prior to the Change Date, then to the average of the two years
immediately prior to the Change Date or, if the Annual Bonus has been in effect
for three or more fiscal years, then to the quotient obtained when the sum of
the bonuses for the three fiscal years immediately prior to the Change Date is
divided by three. Each such Annual Bonus shall be payable no later than 60 days
subsequent to the end of the Corporation's fiscal year. In the event of the
termination of this Agreement for any reason, the Executive shall receive the
Annual Bonus prorated to the date of such termination.
4.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established by the Corporation from time to time provided Executive meets the
eligibility requirements therefore. All Incentives, provided for the Executive
shall be at least equal to those provided by the Corporation for the Executive
under such plans and programs if and as in effect at any time during the 90-day
period immediately preceding the Change Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to executives with
comparable responsibilities.
4.4 Benefit Plans. The Executive and/or his spouse and dependants, as
the case may be, shall be entitled to all benefits under
<PAGE> 3
all medical, dental, vision, disability, executive life, group life, accidental
death and travel accident insurance plans and programs ("Benefit Plans") if any,
and as established from time to time by the Corporation provided the Executive
meets the eligibility requirements therefor. All Benefit Plans shall be at least
equal to those in effect at any time during the 90-day period immediately
preceding the Change Date or, if more favorable to the Executive, as in effect
at any time thereafter with respect to executives with comparable
responsibilities.
4.5 Fringe Benefits. The Executive and/or his spouse and dependants, as
the case may be, shall be entitled to fringe benefits ("Fringe Benefits"),
including, but not limited to, country club and luncheon club dues and expenses,
an automobile and related expenses, parking, personal income tax preparation
services and financial counselling services, if any, and as established from
time to time by the Corporation provided the executive meets the eligibility
requirements therefor. The Executive is entitled to Fringe Benefits as in effect
during the 90-day period immediately preceding the Change Date or, if more
favorable to the Executive, as in effect at any time thereafter with respect to
executives with comparable responsibilities.
4.6 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. The Executive shall provide
documentation of such expenses and be reimbursed in accordance with the policies
and procedures of the Corporation as in effect during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
4.7 Office and Support Staff. The Executive shall be entitled to an
office and to secretarial and other assistance commensurate with his
responsibilities and title. The Executive shall be entitled to office and
support staff at least equal to those provided to the Executive during the
90-day period immediately preceding the Change Date or, if more favorable to the
Executive, as provided at any time thereafter with respect to executives with
comparable responsibilities.
4.8 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies of the Corporation, if any, and as established from
time to time by the Corporation. The Executive shall be entitled to vacation in
accordance with the policies of the Corporation as in effect during the 90-day
period immediately preceding the Change Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to executives with
comparable responsibilities.
4.9. Benefit Amendments. Nothing herein shall be construed to prevent
the Corporation from amending or altering any plans or programs as long as the
Executive continues to have the opportunity to receive compensation and
benefits, on a before-tax basis, consistent with paragraphs 4.1 through 4.8.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as
<PAGE> 4
defined below), by giving to the Executive notice of its intention to terminate
his employment effective on the 90th day after such notice (the "Disability
Effective Date") if within such 90-day period the Executive fails to return to
full-time performance of his duties. For purposes of this Agreement,
"Disability" means disability which after the expiration of more than 26 weeks
after its commencement is determined to be total and permanent by a physician
selected by the Corporation or its insurers providing disability insurance to
the Company and consented to by the Executive or his legal representative (such
consent not to be withheld unreasonably).
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in his substantial personal enrichment at the expense of the Corporation
or (ii) repeated violations by the Executive of his obligations under Article 3
of this Agreement, which violations are demonstrably willful and deliberate on
the Executive's part and which were intended to result in or have resulted in
material injury to the Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his employment for Good
Reason ("Good Reason"). For purposes of this Agreement "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.5 below:
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 3 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 4 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Change of Location. The Corporation's requiring the Executive
to be based or to perform services at any office or location other than that at
which the Executive is based immediately prior to the Change Date, except for
travel reasonably required in the performance of the Executive's
responsibilities.
5.5.4 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.5 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
<PAGE> 5
5.5.6 Determination of Good Reason. For the purposes of this
Article 5.5, any determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
5.5.7 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated, at
the date of the giving of such purported Notice of Termination. In such event
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.4 of this Agreement.
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Notice of Termination. Any termination by the Corporation for Cause,
or by the Executive for Good Reason or election of Voluntary Retirement shall be
communicated by Notice of Termination to the other party hereto given in
accordance with Article 12. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
termination date is other than the date of receipt of such notice, specifies the
termination date of this Agreement which date shall be in accordance with the
specific termination provision of this Agreement relied upon.
5.8 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause, the
Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of his death. Anything in this Agreement to the contrary
notwithstanding, the Executive's spouse and dependants
<PAGE> 6
shall be entitled to continue to receive the benefits under Benefit Plans and
Fringe Benefits for 18 months subsequent to the Date of Termination.
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his Base Salary and any other accrued
obligations through the Date of Termination. Corporation shall have no further
obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement, the Corporation shall pay the Executive his Base Salary
and any accrued obligations through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the Board shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1(i) and 6.4.1(ii):
(i) if not theretofore paid, the Base Salary and any accrued
obligations through the Date of Termination to be paid within 30 days after the
Date of Termination;
(ii) 150% of the Executive's "Base Amount". Base Amount is the
aggregate of the Base Salary and Annual Bonus paid or due to Executive in the
fiscal year prior to the year in which the termination occurred. Said 150% of
the Base Amount shall be paid to the Executive as follows: (a) 100% in 12 equal
monthly installments commencing within 30 days after the Date of Termination;
and (b) 50% in a lump sum payment in cash on the one year anniversary of the
Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights granted to the Executive which are not exercisable at the Date of
Termination, shall become fully exercisable as of the Date of Termination, with
the exercise terms per the termination of employment section of the stock option
plan(s).
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or his spouse and dependants. For COBRA purposes, the Date of
Termination will be the qualifying event and the Corporation will pay 12 months
of insurance premiums.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
<PAGE> 7
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment by way of litigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
The Corporation agrees to pay, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the Corporation or others of the
validity or enforceability of, or liability under, any provision of this
Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during his employment by the Corporation or any of its
affiliated companies and which shall not be public knowledge. After termination
of the Executive's employment with the Corporation, he shall not, without the
prior written consent of the Corporation, communicate or divulge any such
information, knowledge or data to anyone other than the Corporation and those
designated by it. In no event shall an asserted violation of the provisions of
this Article 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) Compete with or be engaged in the same business or "participate in"
any other business or organization which during such one year period competes
with or is engaged in the same business as the Corporation, which business, for
the purposes of this Agreement, will be limited to the area of "software
execution control," "network license management control," and "data access
control" within the computer industry, in any geographical area in which the
Corporation conducts such business except that in each case the provisions of
this Article 10 will not be deemed to be breached merely because Executive owns
not more than 5% of the outstanding common stock of a publicly owned
corporation, or by membership upon any board of directors of a publicly owned
corporation where Executive attained such position during the Term and such
position was deemed not to interfere with the terms of this Agreement. The term
"participate in" shall mean: "directly or indirectly, for his 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, or control
<PAGE> 8
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." Executive will not directly or indirectly reveal the name of, solicit or
interfere with, or endeavor to entice away from Corporation any of its customers
or employees. Executive will not directly or indirectly employ any person who,
at any time up to such cessation, was an employee of the Corporation, within a
period of one year after such person leaves the employ of such Corporation.
Executive agrees that the provisions of this Article 10 are necessary and
reasonable to protect the Corporation in the conduct of its business. If any
restriction contained in this Article 10 shall be deemed to be invalid, illegal,
or unenforceable by reason of the extent, duration, or geographical scope
thereof, or otherwise, then the court making such determination shall have the
right to reduce such extent, duration, geographical scope, or other provisions
hereof, and in its reduced form such restriction shall then be enforceable in
the manner contemplated hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in same manner and to the same extent as the Corporation would be
required to perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, and may be modified
only by a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement
<PAGE> 9
executed by the parties hereto or their respective successors and legal
representatives.
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Dr. Aviram Margalith
-------------------------
-------------------------
If to the Corporation:
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the Board in order to enable Executive to fulfill the obligations set forth
in this Agreement, nothing contained in this Agreement shall authorize, empower,
or constitute Executive the agent of the Corporation in any manner; authorize or
empower Executive to assume or create any obligation or responsibility
whatsoever, express or implied, on behalf of or in the name of the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on one or more occasions shall not be a waiver or deprive the party of
the right hereunder to insist upon strict adherence to that term or any other
term of this Agreement. Any waiver must be in writing and signed by the waiving
party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
<PAGE> 10
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its Secretary all as of
the day and year first above written.
- ---------------------------------
Dr. Aviram Margalith
ATTEST:
- ---------------------------------
Rainbow Technologies, Inc.
Walter W. Straub
President
<PAGE> 1
Exhibit 10(q)
EMPLOYMENT AGREEMENT between Rainbow Technologies, Inc., a Delaware corporation
(the "Corporation"), and Laurie Casey (the "Executive"), dated this first day of
January 1998.
W I T N E S S E T H :
WHEREAS, the Corporation desires to engage Executive to perform services
for the Corporation, and the Executive desires to perform such services, on the
terms and conditions herein set forth.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a period
commencing January 1, 1998 and terminating December 31, 1998 or such shorter
period as provided for herein. The term shall be automatically renewed for
successive one year periods thereafter, unless terminated pursuant to the
provisions of this Employment Agreement (the "Agreement"). The period during
which Executive is employed hereunder is hereinafter referred to as the "Term."
2. Position and Duties. The Executive shall be employed in the business
of the Corporation. As of the date of this Agreement, Executive's duties include
those duties Executive is currently performing as Vice President of the
Corporation. Notwithstanding the duties as described above, Executive agrees
that his/her duties may be, from time to time, revised or modified by the
President of the Corporation. The Executive agrees to devote his/her full
business time during normal business hours to the business and affairs of the
Corporation and to use his/her best efforts to perform faithfully and
efficiently the assigned responsibilities hereunder, to the extent necessary to
discharge such responsibilities, except for (i) service on corporate, civic or
charitable boards or committees not significantly interfering with the
performance of such responsibilities and (ii) periods of vacation and sick leave
to which he is entitled. It is expressly understood and agreed that the
Executive's continuing to serve on any boards and committees with which he is
currently connected, as a member or otherwise, shall be deemed not to interfere
with the performance of the Executive's services to the Corporation.
3. Compensation and Benefits.
3.1 Base Salary. The Corporation will pay Executive a base salary ("Base
Salary") of $2115 per week which will be paid in accordance with the payroll
practices of the Corporation. The Base Salary shall be reviewed at least once
each year starting in 1999 and shall be increased at any time and from time to
time by action of the President, Board of Directors (the "Board") or any
committee thereof.
3.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus"), in cash, as established from time to time by the
Board. Each such Annual Bonus shall be payable no later than 60 days subsequent
to the end of the Corporation's fiscal year. In the event of the termination of
this
<PAGE> 2
Agreement for any reason, the Executive shall receive the Annual Bonus prorated
to the date of such termination.
3.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, the Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established from time to time by the Corporation provided Executive meets the
eligibility requirements.
3.4 Benefit Plans. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to all benefits under all
medical, dental, vision, disability, executive life, group life, accidental
death and travel accident insurance plans and programs ("Benefit Plans"), if
any, and as established from time to time by the Corporation provided the
Executive meets the eligibility requirements.
3.5 Fringe Benefits. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to fringe benefits ("Fringe
Benefits"), if any, and as established from time to time by the Corporation
provided the Executive meets the eligibility requirements.
3.6 Office. The Executive shall be entitled to an office and to
administrative assistance commensurate with Executive's responsibilities and
title and consistent with the Corporation's policies.
3.7 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies established from time to time by the Corporation.
4. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. Executive shall provide documentation of
such expenses in accordance with the procedures established from time to time by
the Corporation.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as defined
below), by giving to the Executive notice of its intention to terminate
Executive's employment effective on the 90th day after such notice (the
"Disability Effective Date") if within such 90-day period the Executive fails to
return to full-time performance of his/her duties. For purposes of this
Agreement, "Disability" means a disability which, after the expiration of more
than 26 weeks after its commencement, is determined to be total and permanent by
a physician selected by the Corporation or the insurers providing disability
insurance to the Company and consented to by the Executive or Executive's legal
representative (such consent not to be withheld unreasonably).
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in Executive's substantial personal enrichment at the expense of the
Corporation or (ii) repeated violations
<PAGE> 3
by the Executive of Executive's obligations under Article 2 of this Agreement,
which violations are demonstrably willful and deliberate on the Executive's part
and which were intended to result in or have resulted in material injury to the
Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his/her employment for Good
Reason ("Good Reason"). For purposes of this Agreement, "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.4 below.
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 2 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 3 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.4 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
5.5.5 Determination of Good Reason. For the purposes of this
Agreement, any final determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
5.5.6 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated at
the date of the giving of such purported Notice of Termination. In such event,
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.3 of this Agreement.
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his/her employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Change of Control. In the event of a Change of Control, this
Agreement shall automatically terminate, and a separate Change of Control
Agreement shall become effective. For purposes of this Agreement, "Change of
Control" shall be deemed to have occurred if (i)
<PAGE> 4
a third person, including a "group" as defined in Article 13(d)(3) of the
Securities Exchange Act of 1934, becomes the beneficial owner of shares of the
Corporation having (a) 30% or more of the total number of votes that may be cast
for the election of directors of the Corporation in 1998; (b) 25% or more of the
total number of votes that may be cast for the election of directors of the
Corporation in 1999 and thereafter; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger of other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were members of the Board before
the Transaction shall cease to constitute a majority of the Board or of the
members of the board of directors of any successor to the Corporation.
5.8 Notice of Termination. Any termination by the Corporation for Cause,
Without Cause or by the Executive for Good Reason or election of Voluntary
Retirement shall be communicated by Notice of Termination to the other party
hereto given in accordance with Article 12. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated and
(iii) if the termination date is other than the date of receipt of such notice,
specifies the termination date of this Agreement which date shall be in
accordance with the specific termination provision in this Agreement relied
upon.
5.9 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause or for
Failure to Relocate, the Date of Termination shall not be the date of receipt of
such Notice of Termination but shall be a date specified therein, which date
shall be not less than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of Executive's death. Anything in this Agreement to the
contrary notwithstanding, the Executive's spouse and dependents shall be
entitled to continue to receive the benefits under Benefit Plans and Fringe
Benefits for 12 months subsequent to the Date of Termination.
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his/her Base Salary and
<PAGE> 5
any other accrued obligations through the Date of Termination. The Corporation
shall have no further obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement on or after the Early Retirement Date, the Corporation
shall pay the Executive his/her Base Salary and any other accrued obligations
through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the President shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his/her employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1 (i) and
6.4.1(ii):
(i) if not already paid, the Executive's Base Salary and accrued
obligations through the Date of Termination, to be paid within 30 days after the
Date of Termination;
(ii) 100% of the Executive's "Base Amount." Base Amount is the
aggregate of the Executive's Base Salary and Annual Bonus paid or due to
Executive in the fiscal year prior to the year in which termination occurred.
Said 100% of the Base Amount shall be paid to the Executive in 12 equal monthly
installments commencing within 30 days after the Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights, if any, granted to the Executive which are not exercisable at the Date
of Termination, shall become fully exercisable as of the Date of Termination.
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or Executive's spouse and dependents. For COBRA purposes, the
Date of Termination will be the qualifying event and the Corporation will pay 12
months of insurance premiums.
6.5 Change of Control. Notwithstanding anything in this Agreement to the
contrary, if the Executive's employment shall be terminated due to a Change of
Control, the Corporation shall have no further obligation to the Executive under
this Agreement.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
<PAGE> 6
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. The Corporation agrees
to pay, to the full extent permitted by law, all legal fees and expenses
including costs of litigation which the Executive may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the Corporation or
others of the validity or enforceability of, or liability under, any provision
of this Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during his/her employment by the Corporation or any of
its affiliated companies and which shall not be public knowledge. After
termination of the Executive's employment with the Corporation, he/she shall
not, without the prior written consent of the Corporation, communicate or
divulge any such information, knowledge or data to anyone other than the
Corporation and those designated by it. In no event shall an asserted violation
of the provisions of this Article 9 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) compete with or be engaged in the same business or "participate in"
any other business or organization which during such one year period competes
with or is engaged in the same business as the Corporation, which business, for
the purposes of this Agreement, will be limited to the area of "software
execution control," "digital rights and license management control,"
"information security" and "data access control" within the computer industry,
in any geographical area in which the Corporation conducts such business except
that in each case the provisions of this Article 10 will not be deemed to be
breached merely because Executive owns not more than 5% of the outstanding
common stock of a publicly owned corporation, or by membership upon any board of
directors of a publicly owned corporation where Executive attained such position
during the Term and such position was deemed not to interfere with the terms of
this Agreement. The term "participate in" shall mean: "directly or indirectly,
for Executive'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, or control of, or be connected as a director,
officer,
<PAGE> 7
employee, partner, consultant, agent, independent contractor, or otherwise with,
or acquiesce in the use of Executive's name." Executive will not directly or
indirectly reveal the name of, solicit or interfere with, or endeavor to entice
away from the Corporation any of its customers or employees. Executive will not
directly or indirectly employ any person who, at any time up to such cessation,
was an employee of the Corporation, within a period of one year after such
person leaves the employ of such Corporation. Executive agrees that the
provisions of this Article 10 are necessary and reasonable to protect the
Corporation in the conduct of its business. If any restriction contained in this
Article 10 shall be deemed to be invalid, illegal, or unenforceable by reason of
the extent, duration, or geographical scope thereof, or otherwise, then the
court making such determination shall have the right to reduce such extent,
duration, geographical scope, or other provisions hereof, and in its reduced
form such restriction shall then be enforceable in the manner contemplated
hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in same manner and to the same extent as the Corporation would be
required to perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof. This agreement may be
modified only by a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
<PAGE> 8
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Laurie Casey
- ---------------------------
- ---------------------------
If to the Corporation:
Walter Straub, President
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the President in order to enable Executive to fulfill the obligations set
forth in this Agreement, nothing contained in this Agreement shall authorize,
empower, or constitute Executive the agent of the Corporation in any manner;
authorize or empower Executive to assume or create any obligation or
responsibility whatsoever, express or implied, on behalf of or in the name of
the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on one or more occasions shall not be a waiver or deprive the party of
the right hereunder to insist upon strict adherence to that term or any other
term of this Agreement. Any waiver must be in writing and signed by the waiving
party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
<PAGE> 9
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf all as of the day
and year first above written.
- -----------------------------------------------
Laurie Casey
ATTEST:
- -----------------------------------------------
Walter W. Straub
President
Rainbow Technologies, Inc.
<PAGE> 1
Exhibit 10(r)
CHANGE OF CONTROL AGREEMENT between Rainbow Technologies, Inc., a
Delaware corporation (the "Corporation"), and Laurie Casey (the "Executive"),
dated this first day of January 1998.
W I T N E S S E T H :
WHEREAS, the Corporation and the Executive have entered into an
Employment Agreement; and
WHEREAS, the Corporation wishes to assure both itself and the Executive
of continuity of management in the event of any actual or threatened "Change of
Control" (as defined in Article 2) of the Corporation;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a one year period
commencing on the effective date of the Change in Control (as defined in Article
2 and hereinafter defined as the "Change Date") said period to be automatically
renewed for successive one year periods thereafter and ending on the earlier to
occur of (a) termination pursuant to the provisions of this Change of Control
Agreement (the "Agreement") or (b) the first day of the month coinciding with or
next following the Executive's 60th birthday.
2. Change of Control. For the purposes of this Agreement a "Change of
Control" shall be deemed to have occurred if: (i) a third person, including a
"group" as defined in Article 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the Corporation having (a) having 30%
or more of the total number of votes that may be cast for the election of
directors of the Corporation in 1998; and (b) having 25% or more of the total
number of votes that may be cast for the election of directors of the
Corporation in 1999 and thereafter; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger of other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were directors of the
Corporation before the Transaction shall cease to constitute a majority of the
Board of Directors (the "Board") of the Corporation or any successor to the
Corporation.
3. Position and Duties. The Executive's position (including titles),
authority and responsibilities shall be at least commensurate with the most
significant of those held, exercised and assigned during the 90-day period
immediately preceding the Change Date. The Executive shall be based and the
Executive's services shall be performed at the location at which the Executive
was based immediately preceding the Change Date, except for travel reasonably
required in the performance of the Executive's responsibilities. It is
understood that such position, authority and responsibilities shall not be
regarded as not commensurate merely by virtue of the fact that a successor shall
have acquired all or substantially all of the business and/or assets of the
Corporation as contemplated by Article 11 hereof and that the Executive shall
continue to have a position and authority and responsibilities with respect to
<PAGE> 2
such successor or affiliated company substantially corresponding to that of the
Executive with respect to the Corporation prior to such acquisition. As used in
this Agreement, the term "affiliated companies" means any company controlling,
controlled by or under common control with the Corporation. Notwithstanding the
duties as described above, Executive agrees that his/her duties may be, from
time to time, revised or modified by the President of the Corporation. The
Executive agrees to devote his/her full business time during normal business
hours to the business and affairs of the Corporation and to use his/her best
efforts to perform faithfully and efficiently the responsibilities assigned to
him hereunder, to the extent necessary to discharge such responsibilities,
except for (i) service on corporate, civic or charitable boards or committees
not significantly interfering with the performance of such responsibilities and
(ii) periods of vacation and sick leave to which Executive is entitled. It is
expressly understood and agreed that the Executive's continuing to serve on any
boards and committees with which Executive is connected, as a member or
otherwise, shall be deemed not to interfere with the performance of the
Executive's services to the Corporation.
4. Compensation and Benefits.
4.1 Base Salary. The Executive shall receive a base salary (the "Base
Salary") at least equal to the Base Salary paid to the Executive by the
Corporation within one year prior to the Change Date. The Base Salary shall be
reviewed at least once each year and shall be increased at any time and from
time to time by action of the President, Board or any committee thereof. The
Base Salary shall be paid in accordance with the Corporation's regular
practices.
4.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus") in cash. The Annual Bonus shall be at least equal
to the Annual Bonus, if any, paid or payable to the Executive during the fiscal
year prior to the Change Date or, if the Annual Bonus has been in effect for two
fiscal years prior to the Change Date, then to the average of the two years
immediately prior to the Change Date or, if the Annual Bonus has been in effect
for three or more fiscal years, then to the quotient obtained when the sum of
the bonuses for the three fiscal years immediately prior to the Change Date is
divided by three. Each such Annual Bonus shall be payable no later than 60 days
subsequent to the end of the Corporation's fiscal year. In the event of the
termination of this Agreement for any reason, the Executive shall receive the
Annual Bonus prorated to the date of such termination.
4.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established by the Corporation from time to time provided Executive meets the
eligibility requirements. All Incentives, provided for the Executive shall be at
least equal to those provided by the Corporation for the Executive under such
plans and programs if and as in effect at any time during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
<PAGE> 3
4.4 Benefit Plans. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to all benefits under all
medical, dental, vision, disability, executive life, group life, accidental
death and travel accident insurance plans and programs ("Benefit Plans") if any,
and as established from time to time by the Corporation provided the Executive
meets the eligibility requirements therefor. All Benefit Plans shall be at least
equal to those in effect at any time during the 90-day period immediately
preceding the Change Date or, if more favorable to the Executive, as in effect
at any time thereafter with respect to executives with comparable
responsibilities.
4.5 Fringe Benefits. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to fringe benefits ("Fringe
Benefits"), if any, and as established from time to time by the Corporation
provided the executive meets the eligibility requirements therefor. The
Executive is entitled to Fringe Benefits as in effect during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
4.6 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. The Executive shall provide
documentation of such expenses and be reimbursed in accordance with the policies
and procedures of the Corporation as in effect during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
4.7 Office . The Executive shall be entitled to an office and to
administrative assistance commensurate with Executive's responsibilities and
title. The Executive shall be entitled to office and support staff at least
equal to those provided to the Executive during the 90-day period immediately
preceding the Change Date or, if more favorable to the Executive, as provided at
any time thereafter with respect to executives with comparable responsibilities.
4.8 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies of the Corporation, if any, and as established from
time to time by the Corporation. The Executive shall be entitled to vacation in
accordance with the policies of the Corporation as in effect during the 90-day
period immediately preceding the Change Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to executives with
comparable responsibilities.
4.9. Benefit Amendments. Nothing herein shall be construed to prevent
the Corporation from amending or altering any plans or programs as long as the
Executive continues to have the opportunity to receive compensation and
benefits, on a before-tax basis, consistent with paragraphs 4.1 through 4.8.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as defined
below), by giving to the Executive notice of its intention to
<PAGE> 4
terminate Executive's employment effective on the 90th day after such notice
(the "Disability Effective Date") if within such 90-day period the Executive
fails to return to full-time performance of Executive's duties. For purposes of
this Agreement, "Disability" means disability which after the expiration of more
than 26 weeks after its commencement is determined to be total and permanent by
a physician selected by the Corporation or its insurers providing disability
insurance to the Company and consented to by the Executive or Executive's legal
representative (such consent not to be withheld unreasonably).
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in Executive's substantial personal enrichment at the expense of the
Corporation or (ii) repeated violations by the Executive of Executive's
obligations under Article 3 of this Agreement, which violations are demonstrably
willful and deliberate on the Executive's part and which were intended to result
in or have resulted in material injury to the Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his/her employment for Good
Reason ("Good Reason"). For purposes of this Agreement "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.5 below:
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 3 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 4 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Change of Location. The Corporation's requiring the Executive
to be based or to perform services at any office or location other than that at
which the Executive is based immediately prior to the Change Date, except for
travel reasonably required in the performance of the Executive's
responsibilities.
5.5.4 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.5 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
5.5.6 Determination of Good Reason. For the purposes of this
Article 5.5, any determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
<PAGE> 5
5.5.7 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated, at
the date of the giving of such purported Notice of Termination. In such event
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.4 of this Agreement.
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his/her employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Notice of Termination. Any termination by the Corporation for Cause,
or by the Executive for Good Reason or election of Voluntary Retirement shall be
communicated by Notice of Termination to the other party hereto given in
accordance with Article 12. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
termination date is other than the date of receipt of such notice, specifies the
termination date of this Agreement which date shall be in accordance with the
specific termination provision of this Agreement relied upon.
5.8 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause, the
Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of his/her death. Anything in this Agreement to the
contrary notwithstanding, the Executive's spouse and dependents shall be
entitled to continue to receive the benefits under Benefit Plans and Fringe
Benefits for 18 months subsequent to the Date of Termination.
<PAGE> 6
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his/her Base Salary and any other
accrued obligations through the Date of Termination. Corporation shall have no
further obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement, the Corporation shall pay the Executive his/her Base
Salary and any accrued obligations through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the Board shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his/her employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1(i) and 6.4.1(ii):
(i) if not therefore paid, the Base Salary and any accrued
obligations through the Date of Termination to be paid within 30 days after the
Date of Termination;
(ii) 150% of the Executive's "Base Amount". Base Amount is the
aggregate of the Base Salary and Annual Bonus paid or due to Executive in the
fiscal year prior to the year in which the termination occurred. Said 150% of
the Base Amount shall be paid to the Executive as follows: (a) 100% in 12 equal
monthly installments commencing within 30 days after the Date of Termination;
and (b) 50% in a lump sum payment in cash on the one year anniversary of the
Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights granted to the Executive which are not exercisable at the Date of
Termination, shall become fully exercisable as of the Date of Termination, with
the exercise terms per the termination of employment section of the stock option
plan(s).
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or Executive's spouse and dependents. For COBRA purposes, the
Date of Termination will be the qualifying event and the Corporation will pay 12
months of insurance premiums.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
<PAGE> 7
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment by way of litigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
The Corporation agrees to pay, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the Corporation or others of the
validity or enforceability of, or liability under, any provision of this
Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during Executive's employment by the Corporation or
any of its affiliated companies and which shall not be public knowledge. After
termination of the Executive's employment with the Corporation, he shall not,
without the prior written consent of the Corporation, communicate or divulge any
such information, knowledge or data to anyone other than the Corporation and
those designated by it. In no event shall an asserted violation of the
provisions of this Article 9 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) Compete with or be engaged in the same business or "participate in"
any other business or organization which during such one year period competes
with or is engaged in the same business as the Corporation, which business, for
the purposes of this Agreement, will be limited to the area of "software
execution control," "network license management control," and "data access
control" within the computer industry, in any geographical area in which the
Corporation conducts such business except that in each case the provisions of
this Article 10 will not be deemed to be breached merely because Executive owns
not more than 5% of the outstanding common stock of a publicly owned
corporation, or by membership upon any board of directors of a publicly owned
corporation where Executive attained such position during the Term and such
position was deemed not to interfere with the terms of this Agreement. The term
"participate in" shall mean: "directly or indirectly, for Executive's own
benefit or for, with, or through any other person, firm, or corporation, own,
manage, operate, control, loan
<PAGE> 8
money to, or participate in the ownership, management, operation, or control of,
or be connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of
Executive's name." Executive will not directly or indirectly reveal the name of,
solicit or interfere with, or endeavor to entice away from Corporation any of
its customers or employees. Executive will not directly or indirectly employ any
person who, at any time up to such cessation, was an employee of the
Corporation, within a period of one year after such person leaves the employ of
such Corporation. Executive agrees that the provisions of this Article 10 are
necessary and reasonable to protect the Corporation in the conduct of its
business. If any restriction contained in this Article 10 shall be deemed to be
invalid, illegal, or unenforceable by reason of the extent, duration, or
geographical scope thereof, or otherwise, then the court making such
determination shall have the right to reduce such extent, duration, geographical
scope, or other provisions hereof, and in its reduced form such restriction
shall then be enforceable in the manner contemplated hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in same manner and to the same extent as the Corporation would be
required to perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, and may be modified
only by a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement
<PAGE> 9
executed by the parties hereto or their respective successors and legal
representatives.
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Laurie Casey
--------------------------
--------------------------
If to the Corporation:
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the Board in order to enable Executive to fulfill the obligations set forth
in this Agreement, nothing contained in this Agreement shall authorize, empower,
or constitute Executive the agent of the Corporation in any manner; authorize or
empower Executive to assume or create any obligation or responsibility
whatsoever, express or implied, on behalf of or in the name of the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on one or more occasions shall not be a waiver or deprive the party of
the right hereunder to insist upon strict adherence to that term or any other
term of this Agreement. Any waiver must be in writing and signed by the waiving
party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
<PAGE> 10
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf as of the day and
year first above written.
- ------------------------------
Laurie Casey
ATTEST:
- ------------------------------
Rainbow Technologies, Inc.
Walter W. Straub
President
<PAGE> 1
Exhibit 10(s)
EMPLOYMENT AGREEMENT between Rainbow Technologies, Inc., a Delaware corporation
(the "Corporation"), and Richard Burris (the "Executive"), dated this first day
of January 1998.
W I T N E S S E T H :
WHEREAS, the Corporation desires to engage Executive to perform services
for the Corporation, and the Executive desires to perform such services, on the
terms and conditions herein set forth.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a period
commencing January 1, 1998 and terminating December 31, 1998 or such shorter
period as provided for herein. The term shall be automatically renewed for
successive one year periods thereafter, unless terminated pursuant to the
provisions of this Employment Agreement (the "Agreement"). The period during
which Executive is employed hereunder is hereinafter referred to as the "Term."
2. Position and Duties. The Executive shall be employed in the business
of the Corporation. As of the date of this Agreement, Executive's duties include
those duties Executive is currently performing as Vice President of the
Corporation. Notwithstanding the duties as described above, Executive agrees
that his/her duties may be, from time to time, revised or modified by the
President of the Corporation. The Executive agrees to devote his/her full
business time during normal business hours to the business and affairs of the
Corporation and to use his/her best efforts to perform faithfully and
efficiently the assigned responsibilities hereunder, to the extent necessary to
discharge such responsibilities, except for (i) service on corporate, civic or
charitable boards or committees not significantly interfering with the
performance of such responsibilities and (ii) periods of vacation and sick leave
to which he is entitled. It is expressly understood and agreed that the
Executive's continuing to serve on any boards and committees with which he is
currently connected, as a member or otherwise, shall be deemed not to interfere
with the performance of the Executive's services to the Corporation.
3. Compensation and Benefits.
3.1 Base Salary. The Corporation will pay Executive a base salary ("Base
Salary") of $2115 per week which will be paid in accordance with the payroll
practices of the Corporation. The Base Salary shall be reviewed at least once
each year starting in 1999 and shall be increased at any time and from time to
time by action of the President, Board of Directors (the "Board") or any
committee thereof.
3.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus"), in cash, as established from time to time by the
Board. Each such Annual Bonus shall be payable no later than 60 days subsequent
to the end of the Corporation's fiscal year. In the event of the termination of
this
<PAGE> 2
Agreement for any reason, the Executive shall receive the Annual Bonus prorated
to the date of such termination.
3.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, the Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established from time to time by the Corporation provided Executive meets the
eligibility requirements.
3.4 Benefit Plans. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to all benefits under all
medical, dental, vision, disability, executive life, group life, accidental
death and travel accident insurance plans and programs ("Benefit Plans"), if
any, and as established from time to time by the Corporation provided the
Executive meets the eligibility requirements.
3.5 Fringe Benefits. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to fringe benefits ("Fringe
Benefits"), if any, and as established from time to time by the Corporation
provided the Executive meets the eligibility requirements.
3.6 Office. The Executive shall be entitled to an office and to
administrative assistance commensurate with Executive's responsibilities and
title and consistent with the Corporation's policies.
3.7 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies established from time to time by the Corporation.
4. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. Executive shall provide documentation of
such expenses in accordance with the procedures established from time to time by
the Corporation.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as defined
below), by giving to the Executive notice of its intention to terminate
Executive's employment effective on the 90th day after such notice (the
"Disability Effective Date") if within such 90-day period the Executive fails to
return to full-time performance of his/her duties. For purposes of this
Agreement, "Disability" means a disability which, after the expiration of more
than 26 weeks after its commencement, is determined to be total and permanent by
a physician selected by the Corporation or the insurers providing disability
insurance to the Company and consented to by the Executive or Executive's legal
representative (such consent not to be withheld unreasonably).
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in Executive's substantial personal enrichment at the expense of the
Corporation or (ii) repeated violations
<PAGE> 3
by the Executive of Executive's obligations under Article 2 of this Agreement,
which violations are demonstrably willful and deliberate on the Executive's part
and which were intended to result in or have resulted in material injury to the
Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his/her employment for Good
Reason ("Good Reason"). For purposes of this Agreement, "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.4 below.
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 2 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 3 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.4 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
5.5.5 Determination of Good Reason. For the purposes of this
Agreement, any final determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
5.5.6 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated at
the date of the giving of such purported Notice of Termination. In such event,
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.3 of this Agreement.
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his/her employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Change of Control. In the event of a Change of Control, this
Agreement shall automatically terminate, and a separate Change of Control
Agreement shall become effective. For purposes of this Agreement, "Change of
Control" shall be deemed to have occurred if (i)
<PAGE> 4
a third person, including a "group" as defined in Article 13(d)(3) of the
Securities Exchange Act of 1934, becomes the beneficial owner of shares of the
Corporation having (a) 30% or more of the total number of votes that may be cast
for the election of directors of the Corporation in 1998; (b) 25% or more of the
total number of votes that may be cast for the election of directors of the
Corporation in 1999 and thereafter; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger of other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were members of the Board before
the Transaction shall cease to constitute a majority of the Board or of the
members of the board of directors of any successor to the Corporation.
5.8 Notice of Termination. Any termination by the Corporation for Cause,
Without Cause or by the Executive for Good Reason or election of Voluntary
Retirement shall be communicated by Notice of Termination to the other party
hereto given in accordance with Article 12. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated and
(iii) if the termination date is other than the date of receipt of such notice,
specifies the termination date of this Agreement which date shall be in
accordance with the specific termination provision in this Agreement relied
upon.
5.9 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause or for
Failure to Relocate, the Date of Termination shall not be the date of receipt of
such Notice of Termination but shall be a date specified therein, which date
shall be not less than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of Executive's death. Anything in this Agreement to the
contrary notwithstanding, the Executive's spouse and dependents shall be
entitled to continue to receive the benefits under Benefit Plans and Fringe
Benefits for 12 months subsequent to the Date of Termination.
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his/her Base Salary and
<PAGE> 5
any other accrued obligations through the Date of Termination. The Corporation
shall have no further obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement on or after the Early Retirement Date, the Corporation
shall pay the Executive his/her Base Salary and any other accrued obligations
through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the President shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his/her employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1 (i) and
6.4.1(ii):
(i) if not already paid, the Executive's Base Salary and accrued
obligations through the Date of Termination, to be paid within 30 days after the
Date of Termination;
(ii) 100% of the Executive's "Base Amount." Base Amount is the
aggregate of the Executive's Base Salary and Annual Bonus paid or due to
Executive in the fiscal year prior to the year in which termination occurred.
Said 100% of the Base Amount shall be paid to the Executive in 12 equal monthly
installments commencing within 30 days after the Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights, if any, granted to the Executive which are not exercisable at the Date
of Termination, shall become fully exercisable as of the Date of Termination.
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or Executive's spouse and dependents. For COBRA purposes, the
Date of Termination will be the qualifying event and the Corporation will pay 12
months of insurance premiums.
6.5 Change of Control. Notwithstanding anything in this Agreement to the
contrary, if the Executive's employment shall be terminated due to a Change of
Control, the Corporation shall have no further obligation to the Executive under
this Agreement.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
<PAGE> 6
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. The Corporation agrees
to pay, to the full extent permitted by law, all legal fees and expenses
including costs of litigation which the Executive may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the Corporation or
others of the validity or enforceability of, or liability under, any provision
of this Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during his/her employment by the Corporation or any of
its affiliated companies and which shall not be public knowledge. After
termination of the Executive's employment with the Corporation, he/she shall
not, without the prior written consent of the Corporation, communicate or
divulge any such information, knowledge or data to anyone other than the
Corporation and those designated by it. In no event shall an asserted violation
of the provisions of this Article 9 constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) compete with or be engaged in the same business or "participate in"
any other business or organization which during such one year period competes
with or is engaged in the same business as the Corporation, which business, for
the purposes of this Agreement, will be limited to the area of "software
execution control," "digital rights and license management control,"
"information security" and "data access control" within the computer industry,
in any geographical area in which the Corporation conducts such business except
that in each case the provisions of this Article 10 will not be deemed to be
breached merely because Executive owns not more than 5% of the outstanding
common stock of a publicly owned corporation, or by membership upon any board of
directors of a publicly owned corporation where Executive attained such position
during the Term and such position was deemed not to interfere with the terms of
this Agreement. The term "participate in" shall mean: "directly or indirectly,
for Executive'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, or control of, or be connected as a director,
officer,
<PAGE> 7
employee, partner, consultant, agent, independent contractor, or otherwise with,
or acquiesce in the use of Executive's name." Executive will not directly or
indirectly reveal the name of, solicit or interfere with, or endeavor to entice
away from the Corporation any of its customers or employees. Executive will not
directly or indirectly employ any person who, at any time up to such cessation,
was an employee of the Corporation, within a period of one year after such
person leaves the employ of such Corporation. Executive agrees that the
provisions of this Article 10 are necessary and reasonable to protect the
Corporation in the conduct of its business. If any restriction contained in this
Article 10 shall be deemed to be invalid, illegal, or unenforceable by reason of
the extent, duration, or geographical scope thereof, or otherwise, then the
court making such determination shall have the right to reduce such extent,
duration, geographical scope, or other provisions hereof, and in its reduced
form such restriction shall then be enforceable in the manner contemplated
hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in same manner and to the same extent as the Corporation would be
required to perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof. This agreement may be
modified only by a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
<PAGE> 8
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Richard Burris
- --------------------------
- --------------------------
If to the Corporation:
Walter Straub, President
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the President in order to enable Executive to fulfill the obligations set
forth in this Agreement, nothing contained in this Agreement shall authorize,
empower, or constitute Executive the agent of the Corporation in any manner;
authorize or empower Executive to assume or create any obligation or
responsibility whatsoever, express or implied, on behalf of or in the name of
the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on one or more occasions shall not be a waiver or deprive the party of
the right hereunder to insist upon strict adherence to that term or any other
term of this Agreement. Any waiver must be in writing and signed by the waiving
party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
<PAGE> 9
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf all as of the day
and year first above written.
- -----------------------------------------------
Richard Burris
ATTEST:
- -----------------------------------------------
Walter W. Straub
President
Rainbow Technologies, Inc.
<PAGE> 1
Exhibit 10(t)
CHANGE OF CONTROL AGREEMENT between Rainbow Technologies, Inc., a
Delaware corporation (the "Corporation"), and Richard Burris (the "Executive"),
dated this first day of January 1998.
W I T N E S S E T H :
WHEREAS, the Corporation and the Executive have entered into an
Employment Agreement; and
WHEREAS, the Corporation wishes to assure both itself and the Executive
of continuity of management in the event of any actual or threatened "Change of
Control" (as defined in Article 2) of the Corporation;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is hereby agreed by and between the Corporation and the
Executive as follows:
1. Term. The Corporation agrees to employ Executive, and Executive
agrees to serve, on the terms and conditions stated herein for a one year period
commencing on the effective date of the Change in Control (as defined in Article
2 and hereinafter defined as the "Change Date") said period to be automatically
renewed for successive one year periods thereafter and ending on the earlier to
occur of (a) termination pursuant to the provisions of this Change of Control
Agreement (the "Agreement") or (b) the first day of the month coinciding with or
next following the Executive's 60th birthday.
2. Change of Control. For the purposes of this Agreement a "Change of
Control" shall be deemed to have occurred if: (i) a third person, including a
"group" as defined in Article 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of the Corporation having (a) having 30%
or more of the total number of votes that may be cast for the election of
directors of the Corporation in 1998; and (b) having 25% or more of the total
number of votes that may be cast for the election of directors of the
Corporation in 1999 and thereafter; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger of other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were directors of the
Corporation before the Transaction shall cease to constitute a majority of the
Board of Directors (the "Board") of the Corporation or any successor to the
Corporation.
3. Position and Duties. The Executive's position (including titles),
authority and responsibilities shall be at least commensurate with the most
significant of those held, exercised and assigned during the 90-day period
immediately preceding the Change Date. The Executive shall be based and the
Executive's services shall be performed at the location at which the Executive
was based immediately preceding the Change Date, except for travel reasonably
required in the performance of the Executive's responsibilities. It is
understood that such position, authority and responsibilities shall not be
regarded as not commensurate merely by virtue of the fact that a successor shall
have acquired all or substantially all of the business and/or assets of the
Corporation as contemplated by Article 11 hereof and that the Executive shall
continue to have a position and authority and responsibilities with respect to
<PAGE> 2
such successor or affiliated company substantially corresponding to that of the
Executive with respect to the Corporation prior to such acquisition. As used in
this Agreement, the term "affiliated companies" means any company controlling,
controlled by or under common control with the Corporation. Notwithstanding the
duties as described above, Executive agrees that his/her duties may be, from
time to time, revised or modified by the President of the Corporation. The
Executive agrees to devote his/her full business time during normal business
hours to the business and affairs of the Corporation and to use his/her best
efforts to perform faithfully and efficiently the responsibilities assigned to
him hereunder, to the extent necessary to discharge such responsibilities,
except for (i) service on corporate, civic or charitable boards or committees
not significantly interfering with the performance of such responsibilities and
(ii) periods of vacation and sick leave to which Executive is entitled. It is
expressly understood and agreed that the Executive's continuing to serve on any
boards and committees with which Executive is connected, as a member or
otherwise, shall be deemed not to interfere with the performance of the
Executive's services to the Corporation.
4. Compensation and Benefits.
4.1 Base Salary. The Executive shall receive a base salary (the "Base
Salary") at least equal to the Base Salary paid to the Executive by the
Corporation within one year prior to the Change Date. The Base Salary shall be
reviewed at least once each year and shall be increased at any time and from
time to time by action of the President, Board or any committee thereof. The
Base Salary shall be paid in accordance with the Corporation's regular
practices.
4.2 Annual Bonus. In addition to Base Salary, the Executive shall have
an opportunity to earn or be awarded, for each fiscal year during the Term, an
annual bonus ("Annual Bonus") in cash. The Annual Bonus shall be at least equal
to the Annual Bonus, if any, paid or payable to the Executive during the fiscal
year prior to the Change Date or, if the Annual Bonus has been in effect for two
fiscal years prior to the Change Date, then to the average of the two years
immediately prior to the Change Date or, if the Annual Bonus has been in effect
for three or more fiscal years, then to the quotient obtained when the sum of
the bonuses for the three fiscal years immediately prior to the Change Date is
divided by three. Each such Annual Bonus shall be payable no later than 60 days
subsequent to the end of the Corporation's fiscal year. In the event of the
termination of this Agreement for any reason, the Executive shall receive the
Annual Bonus prorated to the date of such termination.
4.3 Incentive, Retirement and Savings Plan. In addition to the Base
Salary and Annual Bonus, Executive shall be entitled to participate in all
incentive, retirement and savings plans and programs ("Incentives"), if any, and
as established by the Corporation from time to time provided Executive meets the
eligibility requirements. All Incentives, provided for the Executive shall be at
least equal to those provided by the Corporation for the Executive under such
plans and programs if and as in effect at any time during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
<PAGE> 3
4.4 Benefit Plans. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to all benefits under all
medical, dental, vision, disability, executive life, group life, accidental
death and travel accident insurance plans and programs ("Benefit Plans") if any,
and as established from time to time by the Corporation provided the Executive
meets the eligibility requirements therefor. All Benefit Plans shall be at least
equal to those in effect at any time during the 90-day period immediately
preceding the Change Date or, if more favorable to the Executive, as in effect
at any time thereafter with respect to executives with comparable
responsibilities.
4.5 Fringe Benefits. The Executive and/or Executive's spouse and
dependents, as the case may be, shall be entitled to fringe benefits ("Fringe
Benefits"), if any, and as established from time to time by the Corporation
provided the executive meets the eligibility requirements therefor. The
Executive is entitled to Fringe Benefits as in effect during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
4.6 Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred or expended by the Executive
in fulfillment of the duties hereunder. The Executive shall provide
documentation of such expenses and be reimbursed in accordance with the policies
and procedures of the Corporation as in effect during the 90-day period
immediately preceding the Change Date or, if more favorable to the Executive, as
in effect at any time thereafter with respect to executives with comparable
responsibilities.
4.7 Office . The Executive shall be entitled to an office and to
administrative assistance commensurate with Executive's responsibilities and
title. The Executive shall be entitled to office and support staff at least
equal to those provided to the Executive during the 90-day period immediately
preceding the Change Date or, if more favorable to the Executive, as provided at
any time thereafter with respect to executives with comparable responsibilities.
4.8 Vacation. The Executive shall be entitled to paid vacation in
accordance with the policies of the Corporation, if any, and as established from
time to time by the Corporation. The Executive shall be entitled to vacation in
accordance with the policies of the Corporation as in effect during the 90-day
period immediately preceding the Change Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to executives with
comparable responsibilities.
4.9. Benefit Amendments. Nothing herein shall be construed to prevent
the Corporation from amending or altering any plans or programs as long as the
Executive continues to have the opportunity to receive compensation and
benefits, on a before-tax basis, consistent with paragraphs 4.1 through 4.8.
5. Termination.
5.1 Death. The Executive's employment shall terminate automatically upon
the Executive's death ("Death").
5.2 Disability. The Corporation may terminate the Executive's
employment, after having established the Executive's "Disability" (as defined
below), by giving to the Executive notice of its intention to
<PAGE> 4
terminate Executive's employment effective on the 90th day after such notice
(the "Disability Effective Date") if within such 90-day period the Executive
fails to return to full-time performance of Executive's duties. For purposes of
this Agreement, "Disability" means disability which after the expiration of more
than 26 weeks after its commencement is determined to be total and permanent by
a physician selected by the Corporation or its insurers providing disability
insurance to the Company and consented to by the Executive or Executive's legal
representative (such consent not to be withheld unreasonably).
5.3 Cause. The Corporation may terminate the Executive's employment for
Cause ("Cause"). For purposes of this Agreement, "Cause" means (i) an act or
acts of dishonesty on the Executive's part which result in or are intended to
result in Executive's substantial personal enrichment at the expense of the
Corporation or (ii) repeated violations by the Executive of Executive's
obligations under Article 3 of this Agreement, which violations are demonstrably
willful and deliberate on the Executive's part and which were intended to result
in or have resulted in material injury to the Corporation.
5.4 Without Cause. The President or the Board may terminate the
Executive's employment without cause ("Without Cause") upon 60 days notice.
5.5 Good Reason. The Executive may terminate his/her employment for Good
Reason ("Good Reason"). For purposes of this Agreement "Good Reason" is defined
as set forth in Articles 5.5.1 through 5.5.5 below:
5.5.1 Adverse Change. Without the express written consent of the
Executive, (i) the assignment to the Executive of any duties inconsistent in any
substantial respect with the Executive's position, authority or responsibilities
as contemplated by Article 3 of this Agreement, or (ii) any other substantial
adverse change in such position including titles, authority or responsibilities.
5.5.2 Failure to Comply. Any failure by the Corporation to comply
with any of the provisions of Article 4 of this Agreement, other than an
insubstantial and inadvertent failure remedied by the Corporation promptly after
receipt of notice thereof given by the Executive.
5.5.3 Change of Location. The Corporation's requiring the Executive
to be based or to perform services at any office or location other than that at
which the Executive is based immediately prior to the Change Date, except for
travel reasonably required in the performance of the Executive's
responsibilities.
5.5.4 Unpermitted Termination. Any purported termination by the
Corporation of the Executive's employment otherwise than as permitted by this
Agreement, it being understood that any such purported termination shall not be
effective for any purpose of this Agreement.
5.5.5 Failure to Assume. Any failure by the Corporation to obtain
the assumption and agreement to perform this Agreement by a successor as
contemplated by Article 11.
5.5.6 Determination of Good Reason. For the purposes of this
Article 5.5, any determination of "Good Reason" shall be made solely by the
Corporation's independent auditors.
<PAGE> 5
5.5.7 Good Faith. In the event that the Executive shall in good
faith give a "Notice of Termination," as hereinafter defined in paragraph 5.8
hereof, for Good Reason and it shall thereafter be determined that Good Reason
did not exist, the employment of the Executive shall, unless the Corporation and
the Executive shall otherwise mutually agree, be deemed to have terminated, at
the date of the giving of such purported Notice of Termination. In such event
the Executive shall be deemed to have elected Voluntary Retirement and shall be
entitled to receive only those payments and benefits which he would have been
entitled to receive at such date under Article 6.4 of this Agreement.
5.6 Voluntary Retirement. At any time after the effective date of the
Agreement, the Executive may terminate his/her employment by electing voluntary
retirement ("Voluntary Retirement").
5.7 Notice of Termination. Any termination by the Corporation for Cause,
or by the Executive for Good Reason or election of Voluntary Retirement shall be
communicated by Notice of Termination to the other party hereto given in
accordance with Article 12. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii) if the
termination date is other than the date of receipt of such notice, specifies the
termination date of this Agreement which date shall be in accordance with the
specific termination provision of this Agreement relied upon.
5.8 Date of Termination. For purposes of this Agreement, the "Date of
Termination" shall mean the date the President receives the Notice of
Termination or any later date specified therein, as the case may be.
Notwithstanding any contrary provision contained in this Agreement, (i) if the
Executive is terminating this Agreement in order to elect Voluntary Retirement,
the Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 120 days after giving such Notice of Termination; (ii) if the Executive's
employment is terminating due to Disability, the Date of Termination shall be
the Disability Effective Date; (iii) if the Executive's employment terminates
due to the Executive's death, the Date of Termination shall be the date of
death; and (iv) if the Executive's employment is terminated Without Cause, the
Date of Termination shall not be the date of receipt of such Notice of
Termination but shall be a date specified therein, which date shall be not less
than 60 days after giving such Notice of Termination.
6. Obligations of the Corporation upon Termination.
6.1 Death. If the Executive's employment is terminated by reason of the
Executive's death, except as described in the next sentence, this Agreement
shall terminate without further obligations to the Executive's legal
representatives under this Agreement other than those obligations accrued
hereunder at the date of his/her death. Anything in this Agreement to the
contrary notwithstanding, the Executive's spouse and dependents shall be
entitled to continue to receive the benefits under Benefit Plans and Fringe
Benefits for 18 months subsequent to the Date of Termination.
<PAGE> 6
6.2 Cause. If the Executive's employment shall be terminated for Cause,
the Corporation shall pay the Executive his/her Base Salary and any other
accrued obligations through the Date of Termination. Corporation shall have no
further obligations to the Executive under this Agreement.
6.3 Voluntary Retirement. The Corporation shall have no further
obligation to the Executive under this Agreement. If the Executive elects
Voluntary Retirement, the Corporation shall pay the Executive his/her Base
Salary and any accrued obligations through the Date of Termination.
6.4 Good Reason, Without Cause, and Disability. If the Board shall
terminate the Executive's employment either Without Cause or for Disability, or
if the Executive shall terminate his/her employment for Good Reason:
6.4.1 Payments. The Corporation shall pay to the Executive the
aggregate of the amounts determined pursuant to Articles 6.4.1(i) and 6.4.1(ii):
(i) if not therefore paid, the Base Salary and any accrued
obligations through the Date of Termination to be paid within 30 days after the
Date of Termination;
(ii) 150% of the Executive's "Base Amount". Base Amount is the
aggregate of the Base Salary and Annual Bonus paid or due to Executive in the
fiscal year prior to the year in which the termination occurred. Said 150% of
the Base Amount shall be paid to the Executive as follows: (a) 100% in 12 equal
monthly installments commencing within 30 days after the Date of Termination;
and (b) 50% in a lump sum payment in cash on the one year anniversary of the
Date of Termination.
6.4.2 Stock Options. All stock options and stock appreciation
rights granted to the Executive which are not exercisable at the Date of
Termination, shall become fully exercisable as of the Date of Termination, with
the exercise terms per the termination of employment section of the stock option
plan(s).
6.4.3 Benefits. For 12 months subsequent to the Date of
Termination, the Corporation shall continue Benefit Plans and Fringe Benefits to
the Executive and/or Executive's spouse and dependents. For COBRA purposes, the
Date of Termination will be the qualifying event and the Corporation will pay 12
months of insurance premiums.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Corporation or any of its
affiliated companies and for which the Executive may qualify, nor shall anything
herein limit or otherwise affect such rights as the Executive may have under any
stock option or other Agreements with the Corporation or any its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan or program of the Corporation or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan or program.
<PAGE> 7
8. Full Settlement. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment by way of litigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
The Corporation agrees to pay, to the full extent permitted by law, all legal
fees and expenses which the Executive may reasonably incur as a result of any
contest (regardless of the outcome thereof) by the Corporation or others of the
validity or enforceability of, or liability under, any provision of this
Agreement.
9. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during Executive's employment by the Corporation or
any of its affiliated companies and which shall not be public knowledge. After
termination of the Executive's employment with the Corporation, he shall not,
without the prior written consent of the Corporation, communicate or divulge any
such information, knowledge or data to anyone other than the Corporation and
those designated by it. In no event shall an asserted violation of the
provisions of this Article 9 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
10. Covenant Not to Compete. In view of the fulfillment of Executive's
obligations hereunder and (i) the unique and valuable services it is expected
Executive will render to the Corporation, (ii) Executive's knowledge of the
clients, trade secrets, and other proprietary information relating to the
business of the Corporation and its customers and suppliers, and (iii) similar
knowledge Executive has regarding the Corporation, and in consideration of the
compensation to be received hereunder and as a condition to the performance by
Corporation of its obligations under this Agreement, Executive agrees that if
this Agreement is terminated due to Disability, Good Reason, a Change of Control
or for Without Cause that for the period of one (l) year after the Date of
Termination the Executive shall not directly or indirectly through any other
person, firm or Corporation:
(i) Compete with or be engaged in the same business or "participate in"
any other business or organization which during such one year period competes
with or is engaged in the same business as the Corporation, which business, for
the purposes of this Agreement, will be limited to the area of "software
execution control," "network license management control," and "data access
control" within the computer industry, in any geographical area in which the
Corporation conducts such business except that in each case the provisions of
this Article 10 will not be deemed to be breached merely because Executive owns
not more than 5% of the outstanding common stock of a publicly owned
corporation, or by membership upon any board of directors of a publicly owned
corporation where Executive attained such position during the Term and such
position was deemed not to interfere with the terms of this Agreement. The term
"participate in" shall mean: "directly or indirectly, for Executive's own
benefit or for, with, or through any other person, firm, or corporation, own,
manage, operate, control, loan
<PAGE> 8
money to, or participate in the ownership, management, operation, or control of,
or be connected as a director, officer, employee, partner, consultant, agent,
independent contractor, or otherwise with, or acquiesce in the use of
Executive's name." Executive will not directly or indirectly reveal the name of,
solicit or interfere with, or endeavor to entice away from Corporation any of
its customers or employees. Executive will not directly or indirectly employ any
person who, at any time up to such cessation, was an employee of the
Corporation, within a period of one year after such person leaves the employ of
such Corporation. Executive agrees that the provisions of this Article 10 are
necessary and reasonable to protect the Corporation in the conduct of its
business. If any restriction contained in this Article 10 shall be deemed to be
invalid, illegal, or unenforceable by reason of the extent, duration, or
geographical scope thereof, or otherwise, then the court making such
determination shall have the right to reduce such extent, duration, geographical
scope, or other provisions hereof, and in its reduced form such restriction
shall then be enforceable in the manner contemplated hereby.
10.1 Breach. If Executive commits a breach of any of the provisions of
this Article 10, Corporation shall have the right and remedy to have such
provisions specifically enforced by any court having equity jurisdiction. The
foregoing right and remedy shall be in addition to any other remedy (including
without limitation damages) to which Corporation may be entitled.
11. Successors.
11.1 Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Corporation shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
11.2 Assignment by Corporation. Notwithstanding anything in this
Agreement, Executive agrees that this Agreement may be assigned by the
Corporation.
11.3 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the Corporation and its successors. The Corporation shall require
any successor to all or substantially all of the business and/or assets of the
Corporation, whether directly or indirectly, by purchase, merger, consolidation,
acquisition of stock, or otherwise, by an agreement in form and substance
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in same manner and to the same extent as the Corporation would be
required to perform if no such succession had taken place.
12. Miscellaneous.
12.1 Modifications. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, and may be modified
only by a written instrument duly executed by each party.
12.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to
principles of conflict of laws. This Agreement may not be amended or modified
otherwise than by a written agreement
<PAGE> 9
executed by the parties hereto or their respective successors and legal
representatives.
12.3 Notice. All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Richard Burris
-------------------------
-------------------------
If to the Corporation:
Rainbow Technologies, Inc.
50 Technology
Irvine, CA 92618
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressees.
12.4 Equitable Relief. Since a breach of the provisions of this
Agreement, particularly with respect to Article 10, could not adequately be
compensated by money damages, the Corporation shall be entitled, in addition to
any other right and remedy available to it, to an injunction restraining such
breach or a threatened breach, and in either case no bond or other security
shall be required in connection therewith, and Executive hereby consents to the
issuance of such injunction.
12.5 Relationship of Parties. Except for authority granted to Executive
by the Board in order to enable Executive to fulfill the obligations set forth
in this Agreement, nothing contained in this Agreement shall authorize, empower,
or constitute Executive the agent of the Corporation in any manner; authorize or
empower Executive to assume or create any obligation or responsibility
whatsoever, express or implied, on behalf of or in the name of the Corporation.
12.6 Waiver. Any waiver by any party of a breach of any provision of
this Agreement shall not operate as or be construed to be a waiver of any other
breach of such provision or any breach of any other provision of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on one or more occasions shall not be a waiver or deprive the party of
the right hereunder to insist upon strict adherence to that term or any other
term of this Agreement. Any waiver must be in writing and signed by the waiving
party.
12.7 Separability. If any provision of this Agreement is invalid,
illegal, or unenforceable, the balance of this Agreement shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
12.8 Headings. The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or interpretation
of this Agreement.
<PAGE> 10
12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Withholdings. The Executive agrees that the Corporation shall
withhold from any and all payments required to be made to Executive pursuant to
this Agreement all federal, state, local and/or other taxes or contributions
which the Corporation determines are required to be withheld in accordance with
applicable statutes and/or regulations from time to time in effect provided,
however, that such withholding shall be consistent with the calculations made by
the Corporation.
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Corporation has
caused these presents to be executed in its name on its behalf as of the day and
year first above written.
- ---------------------------------
Richard Burris
ATTEST:
- ---------------------------------
Rainbow Technologies, Inc.
Walter W. Straub
President
<PAGE> 1
EXHIBIT 21(a)
List of Wholly Owned Subsidiaries
Rainbow Technologies North America, Inc.
Mykotronx, Inc.
Software Security, Inc.
Rainbow Technologies, Ltd. (UK)
Rainbow Technologies, SARL
Rainbow Technologies, SA (France)
Rainbow Technologies, GmbH
Rainbow Technologies, BV (Netherlands)
<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, Form S-8 No. 33-60265 and Form S-8 No. 333-48699)
pertaining to the Assumed Options of Mykotronx, Inc., 1987 Non-qualified Stock
Option Plan, 1987 Incentive Stock Option Plan, 1990 Stock Option Plan of Rainbow
Technologies, Inc., and the Assumed Software Security, Inc. 1993 Employee Stock
Option Plan, of our report dated February 20, 1998, 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, 1997.
/s/ Ernst & Young LLP
Orange County, California
March 27, 1998
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