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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-16641
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RAINBOW TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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: (949) 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 16, 1999, 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
$134,532,314.81.
As at March 16, 1999, there were outstanding 11,761,874 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, 1999, 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, (the "Company") is a
leading developer and supplier of computer network security products that secure
the rights to software and other digital content, and that provide privacy and
security for computer network and Internet communications and commerce. The
Company's products include: (i) software protection products for (a)
anti-piracy, (b) license management and tracking, and (c) software distribution
over the Internet (the "Software Protection Products"); (ii) information
security products to protect network and satellite communications (the
"Information Security Products"); and (iii) Internet security products for: (a)
accelerated Internet commerce transaction capabilities in a secure environment,
and (b) access control for computer networks including Virtual Private Networks
(the "Internet Security Products").
The Company's principal offices and subsidiaries are located in North
America, Europe and Asia. Unless the context otherwise requires, the term
"Company" refers to Rainbow Technologies, Inc. and its subsidiaries.
Industry Background
Since its inception in 1984, the Company has been the leading developer and
supplier of proprietary security products that prevent unlicensed use and piracy
of software, and products that protect the confidentiality of digital content
transmitted over telecommunications systems. The Company applies "encryption"
technology in all of its security products. Encryption is the process of making
data indecipherable to anyone other than authorized users. The computer and
software industries have evolved from a market comprised primarily of stand
alone personal computers and single licensed software programs to a market where
computers are connected to networks, including the Internet, and software
licenses are purchased for multiple users within entire enterprises. The Company
has kept pace with the evolving market by applying its encryption expertise to
computer security products and solutions that correspond to market changes.
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The Company believes that the increased use and acceptance of computer
network and Internet communications to distribute Web-based content and conduct
electronic commerce have caused computer network security to become a paramount
business concern. The Company also believes that business needs for secure,
reliable and scalable computer network and Internet communications provide a
substantial market opportunity for the Company's security products and services.
A recent industry report from International Data Corporation (IDC) estimates
that the number of Internet users will grow from 97 million in 1998 to 320
million by 2002 with commensurate growth in electronic commerce from $32 billion
to $426 billion over that same period. In addition, the Company believes that
the market for the electronic delivery of digital content will continue to grow
rapidly. For example, IDC estimates that the worldwide market for Internet
software distribution will increase from approximately $200 million in 1997 to
approximately $5.9 billion by 2001, a 133% compound annual growth rate.
The Company expects to take advantage of the anticipated explosive growth
in Internet commerce and communications by expanding its market and product
focus to improve and broaden its encryption technology to offer new computer
network security products and services supporting Internet commerce and
communications.
Strategy
SOFTWARE PROTECTION PRODUCTS. The Company's strategy for its Software
Protection Products is to offer software and information publishers a suite of
products and services that prevent the unauthorized use of software and digital
content, such as Web-based content, and products that enable the secure delivery
of software over the Internet. The Company has continually expanded its offering
of Software Protection Products by focusing its research and development efforts
and strategic acquisition plans on software security protection solutions for
use on a variety of computer operating systems and hardware platforms. This
includes the Company's recent release of "license management," "license
tracking" and Internet license delivery products for software developers and
information technology managers. The Company also offers software and
information publishers professional consulting services to assist them in
assessing, designing and implementing software and digital content security
solutions.
INFORMATION SECURITY PRODUCTS. The Company's Information Security Products
strategy is to offer the U.S. Government, and other enterprises requiring the
highest level of security, products and development services to assist clients
with assessing, designing and implementing computer network security, access
control and secure communications solutions. In furtherance of this strategy,
the Company has built relationships with industry organizations to expand the
Company's sales opportunities. The Company has also invested significant
resources in pursuing opportunities to develop innovative network security
technology and products for U.S. Government and commercial applications. The
Company intends to utilize technology and products developed for the U.S.
Government to create and introduce new commercial network security products.
INTERNET SECURITY PRODUCTS. The Company's strategy for its Internet
Security Products is to offer companies involved in electronic commerce
industries, and manufacturers of Internet computer servers, firewalls, routers
and switching equipment, a suite of products that provide accelerated
transaction processing in a secure environment, and that provide access control
to computer networks, Internet Web sites and Virtual Private Networks ("VPNs").
A "VPN" is a network of interconnected computers where the privacy of the
communication between any two computers on the network is maintained through the
use of encryption technology. The Company's Internet Security Products include
proprietary technology that enables businesses offering Internet commerce and
communications accelerated transaction processing in a secure environment. The
Company also offers its customers a portable security hardware device, or
"token," that authenticates client access to VPNs, secured computer network
equipment and the Internet. The Company has invested significant resources in
marketing and building strategic relationships with leading Internet equipment
providers and electronic commerce industries such as financial and electronic
brokerage services and telecommunications. The Company intends to introduce new
Internet Security Products that combine high performance encryption,
acceleration and advanced telecommunication features. The Company also intends
to offer professional consulting services to assist clients in determining
computer network and Internet security requirements, and in designing and
implementing the appropriate network security solutions.
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SOFTWARE PROTECTION PRODUCTS
The Company's Software Protection Products combine sophisticated hardware
and software encryption technology to prevent the illegal distribution and use
of software. When software is protected by the Company's Sentinel suite of
hardware products (the "key"), the software program sends queries to the key
that is attached to the parallel port of the computer. The key immediately
evaluates each query and responds. The correct response ensures that standard
operation of the software will continue without interruption. If the key is not
present, the software will not operate. The keys incorporate the Company's
proprietary "algorithms" programmed into Company designed "ASIC" computer chips.
An algorithm is a mathematical procedure for manipulating digital information
with the intent of securing the information. An "ASIC" or "Application Specific
Integrated Circuit" is a logic circuit designed for a specific usage and
implemented in an integrated circuit. Once Sentinel protection is implemented,
developers need only include a Sentinel key with each software package shipped.
The end-user installs the software as usual, then simply plugs the enclosed
Sentinel key into the appropriate port on their computer.
The Company also offers software-based products that provide software
license management and that provide secure software distribution over the
Internet. These products offer software developers greater flexibility in how
their products are licensed and distributed.
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 and Windows NT based applications.
SENTINELPRO. An algorithm-based key utilizing the Company's proprietary
ASIC technology for the protection of DOS, Windows, Windows NT, OS/2, UNIX or
XENIX based applications.
SENTINELEVE3. Software protection for Apple Macintosh-based software.
Attaches to the ADB or USB port making it compatible with Apple PowerMac, iMac
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 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.
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.
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INFORMATION SECURITY PRODUCTS
The Company believes the importance of protecting the privacy and security
of satellite and computer network communications has increased in direct
proportion to technological advances, capabilities and overall growth in
telecommunications industries. Information security remains critical to
government and defense applications, and is increasingly valued by private
sector businesses to protect communications. The Company's Information Security
Products are comprised of ASIC circuits, electronic assemblies and equipment to
encrypt electronic communications, and are designed and developed by the Company
for use in government and commercial applications.
The Company sells its products to the U.S. Government, approved foreign
governments and other markets that require the highest level of security. 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 1998 accounted for approximately 67% of revenues
received by the Company from sales of its Information Security Products.
The Company's Information Security Products are currently categorized into
four general areas of customer applications:
SPACE-BASED PRODUCTS. These products are comprised of 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 are comprised of ASIC
circuits, electronic assemblies and equipment, encrypt and decrypt data or
digital information transmitted over communications networks or into storage
media.
INTERNET SECURITY PRODUCTS
The Company's Internet Security Products use patent-pending technology to
provide Internet commerce companies and manufacturers of Internet computer
servers, firewalls, routers and switching equipment with increased security and
accelerated Internet commerce transaction capabilities. A "firewall" is
technology used for preventing unwanted inbound or outbound data at the boundary
of a computer network based upon a set of established rules. A "router" is a
computer networking device that is responsible for directing the "route" data
will travel enroute to its final destination.
The Company's Internet Security Products also include portable security
tokens that offer a security solution to a variety of computer network, Internet
and information control issues, including secure access to Virtual Private
Networks.
The Company's Internet Security Products include:
CRYPTOSWIFT. A high performance security co-processor for Internet computer
transaction servers engaged in Internet 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" encryption. 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 a proprietary ASIC co-processor. Using
patent pending "wide integer" multipliers, it performs
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all the mathematics associated with public key encryption, allowing the server
CPU to perform less calculation intense tasks.
NETSWIFT. NetSwift is a PCI card that provides encrypted processing and
acceleration for original manufacturers of firewalls, routers and switching
equipment. NetSwift is an encryption processor that can either accept data and
return encrypted data, or accept encrypted data and return clear data. The
security processing performed by NetSwift is provided through the Company's
proprietary "FastMap" encryption processor. NetSwift also provides manufacturers
with a scaleable security solution. Multiple NetSwift cards can be added to
computer hardware equipment to increase "IPSec" performance. "IPSec" is a
computer network security protocol that provides for confidentiality and
integrity of data transmitted over a computer network using the Internet
protocol technology.
I-KEY. i-Key is a security token that can serve as a solution to a wide
variety of computer security and information control issues. The i-Key can be
plugged into any standard computer "USB port," and can serve to authenticate
users for ensuring secure access to Virtual Private Networks and computer
network equipment. A "USB port" is a standard connectivity technology included
on most new computers, servers and portable computer devices. Through user
identification data contained in each i-Key, the network is able to grant access
according to the user's authorization level.
I-GUARD. i-Guard is a technology that provides Web-based content developers
with a security framework that securely authenticates the user's computer as the
user seeks access to a Web site. The technology is based upon Intel's recently
introduced Pentium(TM) III processor serial number reference implementation. The
i-Guard enables Web developers to incorporate machine authentication into their
applications by transparently downloading a "secured agent" to the user's
computer to authenticate the identity of the user's computer where the user
seeks access to a Web site.
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 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 encryption
technology to design and develop new security products and the enhancement of
existing products.
In furtherance of this strategy, in January 1999, the Company entered into
an agreement with a processor developer to design and fabricate a new ASIC chip
which is intended to replace ASIC chips used in a number of the Company's
security products.
Expenditures for research and development related to Software Protection
Products for the years ended December 31, 1998, 1997 and 1996 were $5,905,000,
$5,830,000 and $5,423,000, respectively, or as a percentage of revenues, 10%,
10% and 9%, respectively. The Company believes that its technological
leadership, as a result of its development efforts, 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 unfunded research and development related
to Information Security Products for the years ended December 31, 1998, 1997 and
1996 were $115,000, $189,000 and $208,000, respectively.
Expenditures for research and development related to Internet Security
Products for the years ended December 31, 1998, 1997, 1996 were $2,838,000,
$1,460,000 and $616,000, respectively.
Expenditures for research and development related to QMT for the years
ended December 31, 1998 and 1997 were $1,323,000 and $945,000, respectively.
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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 1998, 1997 and 1996, 53%, 57% and 55%,
respectively, of the Company's Software Protection Product sales were made in
the United States and 47%, 43% and 45%, respectively, were made internationally.
Since its formation, the Company has shipped over 18,000,000 keys to more than
32,000 customers. Among the Company's major customers are Autodesk, Inc.,
Attachmate Corp., Intellution, Inc., Macromedia, NEC America Corp., Northern
Telecom, Inc., and Quark, Inc.
The Company has its own direct sales and marketing personnel for Software
Protection Products in North America, Europe and Asia Pacific. In addition, the
Company has over 50 distributors worldwide. During 1998, 1997 and 1996, the
Company had no single customer that 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 that 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 awarded to the Company in response to requests for proposal from
U.S. Government agencies and aerospace companies.
INTERNET SECURITY PRODUCTS
The Company markets its Internet Security Products directly to
manufacturers of Internet computer servers and Internet firewalls, routers and
switching equipment, and to industries involving electronic commerce such as
financial and electronic brokerage services and telecommunications. The Company
markets these products through its own direct sales and marketing personnel. The
Company's direct sales force calls on Fortune 1000 companies and companies
providing Internet related encrypted electronic commerce or secure Web server
environments.
MANUFACTURING
SOFTWARE PROTECTION PRODUCTS
The Company's Software Protection Product 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 current supplier has
multiple foundries available to produce the ASIC chip. However, in the event
that the primary supplier is unable to fulfill the Company's requirements, the
Company may
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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 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 encryption technology embedded into ASIC circuits
that are fabricated to the Company's specifications by ASIC circuit
manufacturers. The Company currently has relationships with three such ASIC
circuit manufacturers. 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.
The Company currently has a manufacturing relationship with Raytheon
Systems Company to manufacture the Company's principal Information Security
Products. Raytheon assumed the obligations of AlliedSignal, Inc. to manufacture
the Information Security Products in September 1998. Raytheon is the sole
supplier of the product. The manufacturing agreement expires in December 1999.
The Company is currently working with other companies to provide additional
manufacturing sources for product. Any interruption in the availability of the
product could have a material adverse effect on the operations of the Company.
Raytheon has also assumed the obligation to complete the development of an
enhanced version of the Company's principal Information Security Products.
INTERNET SECURITY PRODUCTS
The Company's Internet Security Products are manufactured by subcontractors
in the United States from components specified and approved by the Company. The
components include ASIC chips, standard computer related 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 products are delivered to the
Company's facilities in the United States where the products are inspected,
tested and configured.
The Company currently has one supplier of the ASIC chip used in the
Company's Internet Security Products. The Company currently has a relationship
with a chip supplier that has multiple foundries available to produce the ASIC
chip. If the supplier is unable to fulfill the Company's requirements, the
Company may experience an interruption in the production of its Internet
Security Products 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 six
months of such an interruption.
BACKLOG
The Company manufactures its Software Protection Products and Internet
Security 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, 1998, 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.
INTELLECTUAL PROPERTY
The Company believes that the value of its security products is dependent
upon its proprietary algorithms and encryption techniques remaining "trade
secrets." The Company has obtained copyright protection on
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certain of its products and trademark protection for certain of its trade names.
The Company also owns several patents for its Information Security Products, and
the Company has U.S. Patent applications for certain technology included in its
Internet Security 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 and information 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 30% worldwide market share. The Company's principal
competitors are Aladdin Knowledge Systems, Ltd., SCM Microsystems, Inc., and
Macrovision Corporation. 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 Motorola, Inc., VLSI Technology, Inc., Group Technologies, Inc., and Cylink
Corporation. The Company believes its unique products, encryption expertise and
large number of U.S. Government endorsed products are a significant competitive
advantage.
INTERNET SECURITY PRODUCTS
The Company's competitors for its current Internet Security Products are
hi/fn, inc., n-Cipher, Inc., Chrysalis Symbolic Design, Inc. and Information
Resource Engineering, Inc. The Company was first to deliver an encryption
accelerator product to improve the performance of Internet transaction servers.
The Company believes it is the leading supplier of accelerator products into the
Internet server market.
EMPLOYEES
The Company presently employs approximately 413 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.
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RECENT EVENTS
In February 1998, the Company acquired Wyatt River Software, Inc.
("Wyatt"), including its "LicenseServe" and "LicenseTrack" technology in a
transaction valued at $9 million. The Company may also be required to pay the
Wyatt shareholders an additional sum based upon sales of the Wyatt technology
through June 30, 1999.
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 that is
used primarily for northern European sales and administration. The Company also
owns an 8,000 square foot facility in Paris, France that is used primarily for
southern European sales and administration.
The Company leases a facility in Torrance, California, that 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 an office in Columbia, Maryland, that is used as a sales
and development facility. The lease is for 3,000 square feet, and expires in
1999.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, a patent infringement action was filed against the
Company by Globetrotter, Inc., alleging that certain of the Company's products
infringe patents owned by Globetrotter. The complaint seeks unspecified monetary
damages and a permanent injunction banning the use of the products alleged to
infringe the Globetrotter patents. The Company believes the claims are without
merit, and will vigorously defend against the claims made in the action. The
Company has filed a counter claim against Globetrotter alleging anti-trust and
unfair competition.
In July 1998, a patent infringement claim was filed against the Company by
Andrew Pickholtz, alleging that certain of the Company's products infringe
patents owned by Pickholtz. The complaint seeks unspecified monetary damages.
The Company believes the claims are without merit, and will vigorously defend
against the claims made in the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Neither the Board of Directors nor any security holder submitted any matter
during the fourth quarter of the fiscal year covered by this Report to a vote of
the security holders through solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the NASDAQ National Market
System under the symbol "RNBO". The following table sets forth high and low
"sales" prices of the shares of Common Stock of the Company for the periods
indicated (as reported by the National Quotation Bureau).
<TABLE>
<CAPTION>
SALES PRICE
------------------
HIGH LOW
------- -------
<S> <C> <C>
1999 First Quarter (through February 28, 1999)........... $26.375 $15.375
1998 First Quarter....................................... 19.583 15.000
1998 Second Quarter...................................... 19.333 13.333
1998 Third Quarter....................................... 16.000 10.438
1998 Fourth Quarter...................................... 20.125 11.875
1997 First Quarter....................................... 13.833 10.833
1997 Second Quarter...................................... 12.833 9.166
1997 Third Quarter....................................... 16.583 11.083
1997 Fourth Quarter...................................... 20.000 13.916
</TABLE>
All per share data reflect the Company's 3-for-2 stock split effective July
1, 1998.
As of February 28, 1999, there were approximately 4,500 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> 12
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, 1998 and reflects the impact of the acquisitions of Software
Security, Inc. ("SSI"), on October 4, 1996, and Mykotronx, Inc. ("Mykotronx"),
on June 1, 1995, which were both accounted for using the pooling-of-interests
method. Share amounts for all years presented have been adjusted to reflect the
impact of a 3-for-2 stock split effective July 1, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------
1998(1) 1997 1996 1995 1994
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
INCOME STATEMENT DATA:
Total revenues............................... $109,232 $ 94,724 $81,710 $72,584 $60,814
Income before taxes.......................... 8,922 19,202 17,936 16,790 12,478
Net income................................... 2,490 11,332 10,517 9,814 7,182
Net income per share:
Basic........................................ $ .21 $ .97 $ .91 $ .87 $ .65
Diluted...................................... .21 .95 .88 .84 .63
SHARES USED IN CALCULATING NET INCOME PER
SHARE:
Basic........................................ 11,699 11,653 11,615 11,267 11,114
Diluted...................................... 11,973 11,968 11,910 11,651 11,337
SELECTED CONSOLIDATED
BALANCE SHEET DATA:
Total assets................................. $109,753 $103,051 $93,364 $82,274 $67,259
Working capital.............................. 59,763 55,776 60,166 50,690 39,110
Long-term debt, net of current portion....... 1,458 1,616 2,145 2,616 2,695
Shareholders' equity......................... 92,201 86,359 79,076 68,251 56,231
</TABLE>
- ---------------
(1) The results of operations for the year ended December 31, 1998 reflects an
asset impairment charge of $3.9 million, a $1.5 million write-off of
acquired in-process research and development, and a $1.3 write-off of a
fully impaired investment.
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 Internet Security Products) and its consolidated results of operations and
financial condition during the periods included in the accompanying consolidated
financial statements. The results of operations and financial condition reflect
the impact of the acquisition of SSI which was accounted for using the pooling-
of-interests method. The following should be read in conjunction with the
consolidated financial statements and related notes.
1998 COMPARED WITH 1997
Software Protection Products revenue for the year ended December 31, 1998
decreased 5% to $57,238,000 as compared with 1997. The decline in revenue was
primarily due to the economic problems in Asia and other emerging markets.
Revenues in European markets increased 9% in 1998 as compared with 1997. The
average selling price per product for the year ended December 31, 1998 decreased
approximately 7% from the year ended December 31, 1997.
During the years ended December 31, 1998 and 1997, approximately 19% of the
Company's Software Protection Products revenue was subject to currency
fluctuations. Software Protection Products revenue in the future is expected to
continue to be affected by foreign currency rate fluctuations.
11
<PAGE> 13
Information Security Products revenue for the year ended December 31, 1998
increased 48% to $50,236,000, as compared with 1997. The revenue growth was
primarily due to increased shipments of secure network communication products.
Internet Security Products revenue for the year ended December 31, 1998
increased 661% to $1,690,000 as compared with 1997. The revenue growth was
primarily due to the adoption of Hewlett Packard and Watchguard as OEM's for the
Company's Internet products.
Gross profit for Software Protection Products for the year ended December
31, 1998 was 71% of revenues which was consistent with the year ended December
31, 1997. 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, 1998.
Gross profit from Information Security Products for the year ended December
31, 1998 was 22% of revenues compared with 20% of revenues for the year ended
December 31, 1997. The increase in gross profit was due to the change in mix
from less profitable research and development contracts to more profitable
product contracts.
Gross profit from Internet Security Products for the year ended December
31, 1998 was 54% of revenues compared with 51% of revenues for the year ended
December 31, 1997. The increase in gross profit was due to the decrease in
overall unit costs as a result of the increase in total sales.
Selling, general and administrative expenses for the year ended December
31, 1998 were 24% of revenues compared with 23% of revenues for the year ended
December 31, 1997. Selling, general and administrative expenses for the year
ended December 31, 1998 increased by $4,642,000 as compared with 1997. This
increase was primarily due to additional staff and higher marketing expenses for
new product introductions in software protection and internet security products
and subsidiary reorganization costs which were primarily related to the
Company's efforts to lower its future effective tax rate.
Research and development expenses for both years ended December 31, 1998
and 1997 were 9% of revenues. Current research and development activities are
primarily 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.
Goodwill amortization for the year ended December 31, 1998 increased
$1,002,000 as compared with 1997 due to an increase in goodwill resulting from
the 1998 Wyatt acquisition.
In the fourth quarter of 1998, the Company determined that the aggregate
estimated future undiscounted operating cash flows of Quantum Manufacturing
Technologies, Inc. ("QMT"), a majority owned subsidiary, were less than the
carrying amount of long-lived assets related to QMT. Based on its evaluation,
the Company determined the assets with a carrying value of $6,105,000 were
impaired and wrote them down by $3,942,000 to the estimated fair value. Fair
value was based on estimated discounted future operating cash flows of QMT. For
the year ended December 31, 1998, the Company recognized a minority interest
share in the loss of QMT.
During the year ended December 31, 1998, the Company wrote-off $1,500,000
of in-process research and development acquired in the Wyatt River Software,
Inc. ("Wyatt") acquisition.
Interest income for the year ended December 31, 1998 decreased by 14% to
$1,375,000, as compared with 1997, primarily due to lower average cash and cash
equivalent balances during 1998.
During the first quarter of 1998, the Company wrote-off a $1,320,000
investment which was determined to be fully impaired. This amount has been
included in other income (expense), net for the year ended December 31, 1998.
During the year ended December 31, 1998, the Company incurred foreign
currency losses of $90,000, primarily due to dollar denominated deposit accounts
maintained in Europe. During the year ended December 31, 1997, the Company
recognized foreign currency losses of $167,000, also primarily due to dollar
denominated deposit accounts maintained in Europe. Such foreign currency gains
and losses result from the
12
<PAGE> 14
movement in the value of the U.S. dollar against the functional currencies used
by the Company's foreign subsidiaries.
The effective tax rate was 72% for the year ended December 31, 1998
compared to 41% for the year ended December 31, 1997. The effective tax rate for
1998 was negatively affected due to non-deductibility of the charges related to
acquired in-process research and development, the non-deductibility of the
write-off of a long-term investment, and asset impairment charges related to
QMT. Excluding the effect of these charges, the effective tax rate was 43% for
the twelve months ended December 31, 1998.
1997 COMPARED WITH 1996
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 40% to $33,894,000, as compared with 1996. The revenue growth was
primarily due to increased shipments of secure network communication products.
Internet Security Products revenue for the year ended December 31, 1997
increased 616% to $222,000, as compared with 1996. Revenues in 1996 comprised of
approximately two months' sales, with the establishment of this segment in
October 1996.
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.
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.
Gross profit from Internet Security Products for the year ended December
31, 1997 was 51% of revenues.
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.
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.
Goodwill amortization for the year ended December 31, 1997 was consistent
with 1996.
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
13
<PAGE> 15
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.
For the year ended December 31, 1997, the Company recognized a minority
interest share in the loss of QMT, a majority owned subsidiary of the Company.
The effective tax rate was 41% for the year ended December 31, 1997
compared with 41.4% for the year ended December 31, 1996.
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 1998, 1997 and 1996 was $12,269,000,
$12,948,000, and $12,262,000, respectively. The impact of a higher accounts
receivable balance for 1998 was offset by the asset impairment charge related to
QMT. For 1997 the impact of higher accrued liabilities was offset by an increase
in accounts receivable and inventory. For 1996 the impact of higher inventory
and accounts receivable balances were partially offset by the increase in
accrued liabilities and the decrease in unbilled costs and fees.
Net cash used in investing activities for 1998 increased from 1997 due to
the acquisition of Wyatt and increased proceeds from the sales of marketable
securities during 1997. Net cash used in investing activities for 1997 increased
from 1996 due to the asset purchase from AlliedSignal and increased proceeds
from the sales of marketable securities.
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 $11,500,000
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 $59,763,000 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, 1999.
IMPACT OF YEAR 2000
The Year 2000 issue exists because many computer systems, applications and
embedded microprocessors use two rather than four digits to define the
applicable year. Because this issue has the potential to disrupt the Company's
business operations, a comprehensive, company wide, Year 2000 program was
initiated to identify and remediate the potential issues surrounding the Year
2000 problem. The Year 2000 program addresses the problems that may arise in
computer technologies, which include both information technology ("IT") and
non-IT systems, and those Year 2000 issues related to third parties with which
the Company has a material relationship.
One of the Company's first priorities was communicating to customers the
Year 2000 compliance status of the Company's products. To aid in this effort,
the Company developed an Internet web site that describes the type of
date-related processing in the products (if any), which products have been
tested for Year 2000 compliance, and the results of that testing. The site is
updated as new products and new information become available. In addition, the
Company's Year 2000 program includes a process for responding to customer
inquiries and for handling special customer requests.
14
<PAGE> 16
For the purposes of process management and progress reporting, the Year
2000 program activities are divided into 5 phases, some of which are being
conducted concurrently:
AWARENESS -- This phase included definition of the systems, project and
scope, overall approach, determination of teams, briefings, and setting of a
compliance standard. The awareness phase has been completed.
ASSESSMENT -- The assessment phase included the development of a
comprehensive inventory and assessment of the criticality of systems,
prioritization, determination of resource requirements, and estimation of costs.
General decisions were made about modification, re-engineering, replacement or
removal of systems and business partners. The validation approach and schedule
was determined.
RENOVATION -- The renovation phase includes the re-engineering,
replacement, or retirement of systems. Test plans are developed for revised and
replaced systems.
VALIDATION -- Tests are run in an isolated test environment to determine
functionality.
IMPLEMENTATION -- In this phase, the implementation dates are scheduled,
and the need for parallel processing, back-up, recovery and contingency plans
are determined. Following implementation, there is a review for effectiveness.
STATE OF READINESS
IT and Non-IT Systems
The Company's IT systems principally consist of business information
systems (such as shared computers and associated business application software)
and infrastructure (such as personal computers, operating systems, networks and
devices like switches and routers). As of March, 1999, the inventory of these
systems is complete and the assessment and validation of systems deemed
"business critical" is more than 75% complete. The implementation of upgraded,
renovated or replacement business critical systems is scheduled to be completed
by June, 1999. All of the remaining, non-critical, IT systems are being
evaluated on the basis of tests (if deemed necessary), and manufacturer
statements regarding Year 2000 compliance. The Company expects that the
assessment and, when required, renovation or replacement of all IT systems will
be completed in time to ensure no significant adverse effect on business
operations.
Non-IT systems are those business tools that may contain embedded
microprocessors, such as elevators, phones, security systems and climate control
systems. The inventory of these items is completed and the vendors have been
contacted to obtain Year 2000 compliance information. The decision to remediate,
replace or otherwise address equipment that poses a material Year 2000 impact is
based primarily upon analysis of the information received from the manufacturer.
To date, more than 75% of the manufacturers have responded and indicated that no
Year 2000 related problems will be experienced with the equipment as provided.
The Company anticipates completion, in all material respects, of the non-IT
infrastructure portion of its program by June 1999.
External Relationships
The Company also faces a potential risk should one or more of its principal
suppliers, service providers or other parties with whom the Company has a
material business relationship suffer a Year 2000 related problem. A
comprehensive inventory of business partners was made, and the Company has
initiated contact with them in an effort to determine their state of readiness.
Assessment of the risk posed to the Company will be based on the level of
criticality to the Company (the potential business impact, available
alternatives and resources required to replace) and the response received from
each party. A cut-off date has been assigned to each business critical third
party by which time that company must be assessed as "Year 2000 Ready" or a
contingency plan will be implemented to ensure the Company will suffer no
material impact to its ability to provide products and services to customers.
Approximately 1300 companies were contacted, about 100 of which are considered
business critical, and to date approximately 40% of the total have responded.
The Company anticipates that this evaluation will be ongoing through 1999.
15
<PAGE> 17
CONTINGENCY PLANNING
The Company recognizes the need for contingency planning in those areas
where it is known, or is reasonably likely that an event or an uncertainty will
create a Year 2000 system-related failure with a significant negative impact on
its business operations. The Company has identified the date by which each
business critical IT system, non-IT system, and business partner must be
validated for Year 2000 readiness, and by which a contingency plan must be
implemented to ensure uninterrupted business operations. Contingency planning is
expected to be completed for each of these systems no later than that date, and
in all cases, no later than October 1999.
COSTS
The Company has incurred approximately $500,000 as of December 31, 1998, to
address its Year 2000 issues. The Company presently estimates that the total
cost of addressing its Year 2000 issues will be approximately $750,000 to
$1,000,000. This estimate was derived utilizing numerous assumptions. First, the
current staff is adequate to finish the project. Second, the product is already
Year 2000 compliant. Next, to the best of its knowledge, the Company estimates
that approximately half of the work is already done and that no system changes
are anticipated. However, there can be no guarantee that these assumptions are
accurate, and actual results could differ materially from those anticipated.
RISKS
The Company's Year 2000 program is designed to discover and remediate or
reduce the risks associated with the Year 2000 issue. The Company anticipates
that it will complete the remediation, risk assessment and contingency planning
for its internal IT and non-IT systems, and immediate, business critical
third-party providers. The most reasonably likely worst case scenario involves
the disruption of operations caused by the Company's reliance upon a network of
critical suppliers (such as utility, telecommunications, and transportation
service providers) whose own systems unexpectedly fail. While such failures
could directly or indirectly affect important operations of the Company, in a
significant manner, the Company does not have sufficient information about or
control over its third party suppliers to determine either the likelihood or
potential costs of these failures. Accordingly, the costs and results of the
Company's Year 2000 program and the extent of the impact on operations could
materially differ from the Company's expectations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company is exposed to
changes in financial market conditions in the normal course of its business due
to its use of certain financial instruments as well as transacting in various
foreign currencies and translation of its foreign subsidiaries financial
statements to the U.S. dollar.
INTEREST RATE RISK
At December 31, 1998 and 1997, the Company's cash equivalents and
short-term investments included approximately $6.5 million and $6.8 million,
respectively, of fixed income securities. These securities are subject to
interest rate risk and may decline in value when interest rates change.
Approximately 87% of the December 31, 1998 fixed income securities portfolio
will mature during 1999 and approximately 44% of the December 31, 1997 portfolio
matured during 1998. An adverse change of 10% in interest rates would have an
immaterial effect on the fair value of these securities. These investments do
not represent a material market risk to the Company. The Company places
substantially all of its interest bearing investments with major financial
institutions and by policy limits the amount of credit exposure to any one
financial institution. Additionally, the Company does not hold or issue
financial instruments for trading, profit or speculative purposes.
16
<PAGE> 18
EQUITY PRICE RISK
The Company holds investments in various available-for-sale equity
securities which are subject to price risk. The fair value of such investments,
as of December 31, 1998 and 1997 was approximately $2 million, and $3 million,
respectively. The potential change in the fair value of these investments,
assuming a 10% decline in prices would be approximately $200,000, and $300,000
for 1998 and 1997, respectively.
FOREIGN EXCHANGE RATE RISK
The Company operates internationally and has adopted local currencies as
the functional currencies for its foreign subsidiaries because their principal
economic activities are most closely tied to the respective local currencies.
This exposes the Company to market risk from changes in foreign exchange rates
to the extent that transactions are not denominated in the U.S. dollar. In
consolidation, the Company converts the accounts of its foreign subsidiaries
from the functional currency to the U.S. dollar. As a result the Company faces
the risk that the foreign currencies will have declined in value as compared to
the U.S. dollar, resulting in a foreign currency translation loss. Assuming an
adverse 10% foreign exchange rate fluctuation, the Company would have
experienced translation losses of approximately $2 million for both 1998 and
1997.
The Company's earnings are affected by fluctuations in the value of the
U.S. dollar as compared to foreign currencies as a result of the sales of its
products in foreign markets. Assuming an adverse 10% foreign exchange rate
fluctuation, the Company would have had a decrease in net income of
approximately $200,000 for both the years ended December 31, 1998 and 1997. This
calculation assumes that each exchange rate would change in the same direction
relative to the U.S. dollar. In addition, to the direct effects of changes in
exchange rates, which are a changed dollar value of the resulting sales, changes
in exchange rates also affect the volume of sales or the foreign currency sales
price as competitors' products become more or less attractive. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels or local currency
prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Schedule of the Company are
listed in Item 14 (a) and included herein on pages F-1 through F-23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not had any disagreement with its independent auditors on
any matter of accounting principles or practices or financial statement
disclosure.
17
<PAGE> 19
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, 1999.
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, 1999.
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, 1999.
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, 1999.
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, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
II. Consolidated Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
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<PAGE> 20
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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. (incorporated by reference to
Exhibit 2(iii) of the Company's 1997 Annual Report on Form
10-K under the Securities Exchange Act of 1934 filed in
March 1998 (the "1997 10-K")).
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
(incorporated by reference to Exhibit 4(c) to the Company's
1997 10-K).
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 October 1996, between the Company and
National Semiconductor Corporation.
10(c) Agreement, dated December 1998, between the Company and EM
Microelectronic -- Marin S.A.
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>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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 (incorporated by reference to
Exhibit 10(o) of the 1997 10-K).
10(p) Change of Control Agreement, dated April 7, 1997, between
the Company and Aviram Margalith (incorporated by reference
to Exhibit 10(p) of the 1997 10-K).
10(q) Employment Agreement, dated January 1, 1998, between the
Company and Laurie Casey (incorporated by reference to
Exhibit 10(q) of the 1997 10-K).
10(r) Change of Control Agreement, dated January 1, 1998, between
the Company and Laurie Casey (incorporated by reference to
Exhibit 10(r) of the 1997 10-K).
10(s) Employment Agreement, dated January 1, 1998, between the
Company and Richard Burris (incorporated by reference to
Exhibit 10(s) of the 1997 10-K).
10(t) Change of Control Agreement, dated January 1, 1998, between
the Company and Richard Burris (incorporated by reference to
Exhibit 10(t) of the 1997 10-K).
10(u) Manufacturing Agreement, dated September 30, 1997, between
AlliedSignal, Inc. and Mykotronx, Inc.
10(v) Development Agreement, dated September 30, 1997, between
AlliedSignal, Inc. and Mykotronx, Inc.
10(w) Agreement for Design and Product Purchase, dated September
4, 1997, between IBM Microelectronics and Rainbow
Technologies, Inc. and Mykotronx, Inc.
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, 1998.
20
<PAGE> 22
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, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WALTER M. STRAUB President, Chief Executive March 27, 1999
- -------------------------------------------------------- Officer, and Chairman of the
Walter M. Straub Board
/s/ AVIRAM MARGALITH Chief Operating Officer March 27, 1999
- --------------------------------------------------------
Aviram Margalith
/s/ PETER M. CRAIG Vice Chairman, Executive Vice March 27, 1999
- -------------------------------------------------------- President, Secretary and
Peter M. Craig Director
/s/ PATRICK E. FEVERY Vice President and Chief March 27, 1999
- -------------------------------------------------------- Financial Officer
Patrick E. Fevery
/s/ ALAN K. JENNINGS Director March 27, 1999
- --------------------------------------------------------
Alan K. Jennings
/s/ RICHARD P. ABRAHAM Director March 27, 1999
- --------------------------------------------------------
Richard P. Abraham
/s/ MARVIN HOFFMAN Director March 27, 1999
- --------------------------------------------------------
Marvin Hoffman
/s/ FREDERICK M. HANEY Director March 27, 1999
- --------------------------------------------------------
Frederick M. Haney
</TABLE>
21
<PAGE> 23
RAINBOW TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1998
<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-23
</TABLE>
F-1
<PAGE> 24
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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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 22, 1999
F-2
<PAGE> 25
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 29,900,000 $ 29,556,000
Marketable securities available-for-sale.................. 6,495,000 6,841,000
Accounts receivable, net of allowance for doubtful
accounts of $291,000 and $500,000 in 1998 and 1997,
respectively........................................... 20,753,000 16,343,000
Inventories............................................... 10,891,000 9,780,000
Unbilled costs and fees................................... 2,740,000 1,782,000
Prepaid expenses and other current assets................. 3,815,000 4,803,000
------------ ------------
Total current assets.............................. 74,594,000 69,105,000
Property, plant and equipment, at cost:
Buildings................................................. 8,580,000 8,058,000
Furniture................................................. 1,338,000 1,191,000
Equipment................................................. 13,738,000 12,963,000
Leasehold improvements.................................... 1,177,000 636,000
------------ ------------
24,833,000 22,848,000
Less accumulated depreciation and amortization............ 8,873,000 6,315,000
------------ ------------
Net property, plant and equipment................. 15,960,000 16,533,000
Goodwill, net of accumulated amortization of $11,731,000 and
$8,736,000 in 1998 and 1997, respectively................. 6,318,000 5,543,000
Product licenses, net of accumulated amortization of
$1,190,000 and $469,000 in 1998 and 1997, respectively.... 5,855,000 6,481,000
Other assets, net of accumulated amortization of $1,463,000
and $2,763,000 in 1998 and 1997, respectively............. 7,026,000 5,389,000
------------ ------------
$109,753,000 $103,051,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,542,000 $ 4,937,000
Accrued payroll and related expenses...................... 5,150,000 4,199,000
Other accrued liabilities................................. 3,841,000 2,986,000
Billings in excess of costs and fees...................... 20,000 87,000
Long-term debt, due within one year....................... 278,000 259,000
Income taxes payable...................................... -- 861,000
------------ ------------
Total current liabilities......................... 14,831,000 13,329,000
Long-term debt, net of current portion...................... 1,458,000 1,616,000
Minority interest........................................... 315,000 1,723,000
Other liabilities........................................... 948,000 24,000
Commitments and contingencies............................... -- --
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized, 11,773,595 and 11,726,754 shares issued and
outstanding in 1998 and 1997, respectively............. 12,000 12,000
Additional paid-in capital................................ 30,335,000 30,629,000
Accumulated other comprehensive income.................... (447,000) (1,906,000)
Retained earnings......................................... 62,301,000 59,811,000
------------ ------------
92,201,000 88,546,000
Less cost of treasury shares (133,302 shares in 1997)..... -- (2,187,000)
------------ ------------
Total shareholders' equity........................ 92,201,000 86,359,000
------------ ------------
$109,753,000 $103,051,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 26
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Software Protection Products..................... $ 57,238,000 $60,125,000 $57,409,000
Information Security Products.................... 50,236,000 33,894,000 24,270,000
Internet Security Products....................... 1,690,000 222,000 31,000
Ion Beam Surface Treatment....................... 68,000 483,000 --
------------ ----------- -----------
Total revenues........................... 109,232,000 94,724,000 81,710,000
OPERATING EXPENSES:
Cost of Software Protection Products............. 16,747,000 17,484,000 17,035,000
Cost of Information Security Products............ 39,360,000 27,228,000 19,851,000
Cost of Internet Security Products............... 781,000 109,000 16,000
Cost of Ion Beam Surface Treatment............... 30,000 419,000 --
Selling, general and administrative.............. 26,377,000 21,735,000 19,512,000
Research and development......................... 10,181,000 8,424,000 6,247,000
Goodwill amortization............................ 2,794,000 1,792,000 1,784,000
Asset impairment charge.......................... 3,942,000 -- --
Acquired research and development................ 1,500,000 -- --
------------ ----------- -----------
Total operating expenses................. 101,712,000 77,191,000 64,445,000
------------ ----------- -----------
Operating income................................... 7,520,000 17,533,000 17,265,000
Interest income.................................... 1,375,000 1,605,000 1,520,000
Interest expense................................... (220,000) (255,000) (325,000)
Other income (expense), net........................ 247,000 319,000 (524,000)
------------ ----------- -----------
Income before provision for income taxes........... 8,922,000 19,202,000 17,936,000
Provision for income taxes......................... 6,432,000 7,870,000 7,419,000
------------ ----------- -----------
Net income......................................... $ 2,490,000 $11,332,000 $10,517,000
============ =========== ===========
NET INCOME PER SHARE:
Basic............................................ $ 0.21 $ 0.97 $ .91
============ =========== ===========
Diluted.......................................... $ 0.21 $ 0.95 $ .88
============ =========== ===========
SHARES USED IN COMPUTING NET INCOME PER SHARE:
Basic............................................ 11,699,000 11,653,000 11,615,000
============ =========== ===========
Diluted.......................................... 11,973,000 11,968,000 11,910,000
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 27
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL
---------- ------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... 11,353,767 $11,000 $29,822,000 $ 456,000 $37,962,000 $ -- $68,251,000
Exercise of common stock options... 361,816 1,000 1,183,000 -- -- -- 1,184,000
Purchase and retirement of common
stock............................ (52,500) -- (706,000) -- -- -- (706,000)
Tax benefit of employee stock
options.......................... -- -- 383,000 -- -- -- 383,000
Other comprehensive income:
Unrealized gain on marketable
securities (including tax
expense of $72,000).......... -- -- -- 102,000 -- -- 102,000
Translation adjustment
(including tax benefit of
$462,000).................... -- -- -- (655,000) -- -- (655,000)
-----------
Total other comprehensive
income................... -- -- -- -- -- -- (553,000)
Net income......................... -- -- -- -- 10,517,000 -- 10,517,000
-----------
Comprehensive income............... -- -- -- -- -- -- 9,964,000
---------- ------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996......... 11,663,083 12,000 30,682,000 (97,000) 48,479,000 -- 79,076,000
Exercise of common stock options... 302,396 -- 2,064,000 -- -- -- 2,064,000
Purchase and retirement of common
stock............................ (238,725) -- (2,767,000) -- -- -- (2,767,000)
Purchase of common stock........... -- -- -- -- -- (2,187,000) (2,187,000)
Tax benefit of employee stock
options.......................... -- -- 650,000 -- -- -- 650,000
Other comprehensive income:
Unrealized loss on marketable
securities (including tax
benefit of $158,000)......... -- -- -- (227,000) -- -- (227,000)
Translation adjustment
(including tax benefit of
$1,099,000).................. -- -- -- (1,582,000) -- -- (1,582,000)
-----------
Total other comprehensive
income................... -- -- -- -- -- -- (1,809,000)
Net income......................... -- -- -- -- 11,332,000 -- 11,332,000
-----------
Comprehensive income............... -- -- -- -- -- -- 9,523,000
---------- ------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997......... 11,726,754 12,000 30,629,000 (1,906,000) 59,811,000 (2,187,000) 86,359,000
Exercise of common stock options... 221,393 -- 1,900,000 -- -- -- 1,900,000
Purchase and retirement of common
stock............................ (41,250) -- (661,000) -- -- -- (661,000)
Retirement of common stock......... (133,302) -- (2,187,000) -- -- 2,187,000 --
Tax benefit of employee stock
options.......................... -- -- 654,000 -- -- -- 654,000
Other comprehensive income:
Unrealized loss on marketable
securities (including tax
benefit of $42,000).......... -- -- -- (56,000) -- -- (56,000)
Translation adjustment
(including tax expense of
$1,143,000).................. -- -- -- 1,515,000 -- -- 1,515,000
-----------
Total other comprehensive
income................... -- -- -- -- -- -- 1,459,000
Net income......................... -- -- -- -- 2,490,000 -- 2,490,000
-----------
Comprehensive income............... -- -- -- -- -- -- 3,949,000
---------- ------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998......... 11,773,595 $12,000 $30,335,000 $ (447,000) $62,301,000 $ -- $92,201,000
========== ======= =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 28
RAINBOW TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,490,000 $ 11,332,000 $10,517,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization.......................................... 4,368,000 2,850,000 2,821,000
Depreciation.......................................... 3,637,000 2,120,000 1,453,000
Change in deferred income taxes....................... 2,444,000 (3,097,000) (666,000)
Allowance for doubtful accounts....................... (217,000) 182,000 33,000
Loss from retirement of property, plant, and
equipment.......................................... 49,000 32,000 87,000
Write-off of long-term investment..................... 1,320,000 158,000 203,000
Asset impairment charge............................... 3,942,000 45,000 524,000
Write-off of capitalized and developed software....... 1,211,000 242,000 273,000
Minority interest in subsidiary's earnings............ (1,653,000) (448,000) --
Write-off of acquired research and development........ 1,500,000 -- --
Provision for loss on contract........................ -- 400,000 --
Changes in operating assets and liabilities:
Accounts receivable................................ (4,661,000) (1,587,000) (1,539,000)
Inventories........................................ (1,159,000) (2,811,000) (4,273,000)
Unbilled costs and fees............................ (958,000) 467,000 1,713,000
Prepaid expenses and other current assets.......... 478,000 (282,000) 157,000
Accounts payable................................... 517,000 348,000 281,000
Accrued liabilities................................ 1,713,000 4,053,000 1,341,000
Billings in excess of costs and fees............... (67,000) (227,000) 312,000
Income taxes....................................... (2,685,000) (829,000) (975,000)
------------ ------------ -----------
Net cash provided by operating activities................... 12,269,000 12,948,000 12,262,000
Cash flows from investing activities:
Purchase of marketable securities......................... (5,770,000) (11,995,000) (8,960,000)
Sale of marketable securities............................. 6,116,000 16,364,000 9,424,000
Purchases of property, plant, and equipment............... (5,029,000) (6,749,000) (2,719,000)
Net cash paid related to acquisition of Wyatt River
Software................................................ (8,027,000) --
Other non-current assets.................................. (1,660,000) (1,130,000) (3,703,000)
Investment by new partners in majority owned
subsidiaries............................................ 1,047,000 -- --
Capitalized software development costs.................... (1,241,000) (1,493,000) (348,000)
Purchase of new product line.............................. -- (7,000,000) --
Acquired cash from QM Technologies........................ -- 556,000 --
------------ ------------ -----------
Net cash used in investing activities.............. (14,564,000) (11,447,000) (6,306,000)
Cash flows from financing activities:
Exercise of common stock options.......................... 1,900,000 2,064,000 1,184,000
Payment of long-term debt................................. (139,000) (279,000) (303,000)
Purchase of treasury stock................................ (661,000) (2,187,000) --
Purchase and retirement of common stock................... -- (2,767,000) (706,000)
------------ ------------ -----------
Net cash provided by (used in) financing
activities....................................... 1,100,000 (3,169,000) 175,000
Effect of exchange rate changes on cash..................... 1,539,000 (511,000) 274,000
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ 344,000 (2,179,000) 6,405,000
Cash and cash equivalents at beginning of period............ 29,556,000 31,735,000 25,330,000
------------ ------------ -----------
Cash and cash equivalents at end of period.................. $ 29,900,000 $ 29,556,000 $31,735,000
============ ============ ===========
Supplemental disclosure of cash flow information:
Income taxes paid......................................... $ 6,871,000 $ 9,827,000 $ 8,105,000
Interest paid............................................. 159,000 259,000 247,000
</TABLE>
See accompanying notes.
F-6
<PAGE> 29
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 for satellite communications; and develops and manufactures
internet security products to provide privacy and security for network
communications. 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 1998 presentation. Share
amounts for all years presented have been adjusted to reflect the impact of a
3-for-2 stock split effective July 1, 1998.
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, total estimated contract costs
associated with billed and unbilled contract revenues, and future operating cash
flows used in the long-lived assets impairment analysis of Quantum Manufacturing
Technologies, Inc. (QMT), one of the Company's subsidiaries.
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, 1998 gross unrealized
losses were $226,000 while gross unrealized losses were $128,000 as of December
31, 1997. There were no material realized gains or losses recognized for the
years ended December 31, 1998, 1997 and 1996. The cost of securities sold is
based on the specific identification method. The Company's portfolio of
marketable debt securities at December 31, 1998 matures as follows: 87% in 1999,
0% in 2000 - 2004, and 13% 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, 1998 and 1997, the Company had capitalized computer
software costs of $2,026,000 and $1,844,000, respectively. Amortization of
computer software development costs for the years ended
F-7
<PAGE> 30
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
December 31, 1998, 1997 and 1996 amounted to $233,000, $173,000 and $44,000,
respectively. During 1998, 1997 and 1996, the Company wrote-off $784,000,
$242,000 and $273,000 respectively, of previously capitalized computer software
development costs which were determined to be obsolete.
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
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (FAS 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.
REVENUE RECOGNITION
Software Protection Products and Internet Security 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
F-8
<PAGE> 31
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 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
The Company recognizes revenues from ion beam surface treatments at the
time services are provided.
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 $2,857,000, $2,601,000 and $2,221,000 for 1998, 1997, and 1996,
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 Accumulated Other
Comprehensive Income within 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, 1998
or 1997.
STOCK OPTION PLANS
The Company applies the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS No. 123) and accordingly, is accounting for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations. Under APB
25, because the exercise price of the
F-9
<PAGE> 32
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
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.
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 of 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
67%, 52%, and 65% of contract revenues in 1998, 1997, and 1996, respectively. In
addition, approximately 67% and 99% of contract accounts receivable and 73% and
86% of unbilled costs and fees at December 31, 1998 and 1997, respectively, were
related to the U.S. Government.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of FAS 130 had no impact on the
Company's net income or shareholders' equity. FAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. All periods
presented have been reclassified to conform to the requirements of FAS 130.
RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee (AcSEC) issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", during 1998. The objective of the SOP is to provide guidance that
specifically addresses the accounting for the costs related to developing,
obtaining, modifying and/or implementing internal use software. The SOP requires
that companies capitalize qualifying costs incurred during the application
development stage. Additionally, the SOP requires companies to evaluate
capitalized software costs for impairment in accordance with FAS121.
SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998 and should be applied prospectively to all costs
incurred in connection with internal use software development projects in those
fiscal years, including costs incurred subsequent to adopting the SOP on
projects that commenced in earlier years. SOP 98-1 does not require any new
disclosures, however, information related to internal use software may be
required by other accounting literature. The Company will adopt SOP 98-1 in
fiscal 1999 and does not believe that adoption will have a material impact to
its financial statements.
F-10
<PAGE> 33
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
2. ACQUISITIONS
On February 26, 1998, the Company completed the acquisition of Wyatt River
Software, Inc. (Wyatt). Wyatt develops, manufactures, and markets network
license management software. The total transaction value was $9 million,
including $3.9 million paid in cash to Wyatt stockholders and $5.1 million in
assumed liabilities. The Company may be required to pay Wyatt shareholders an
additional sum of up to $2 million based upon sales of the Wyatt technology
through June 30, 1999. This acquisition has been accounted for under the
purchase method of accounting. The purchase price has been allocated based upon
estimated fair values at the date of acquisition. Approximately $1.5 million of
the purchase price was written off as in-process research and development at the
acquisition date, approximately $2.7 million was allocated to developed
software, and the remaining $4.8 million was allocated to goodwill and other
intangibles. The goodwill and other intangibles are being amortized on a
straight-line basis over five years. At December 31, 1998 the Company wrote-off
developed software related to the Wyatt acquisition which had a net book value
of $427,000. This amount has been included in research and development expense
for the year ended December 31, 1998.
On March 6, 1998, the Company entered into an agreement to purchase certain
assets from Elan Computer Group, Inc. (Elan) for $800,000. 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. The lawsuit is deemed to include any and all
claims made now or in the future by Globetrotter Software, Inc. The Company does
not expect that this matter will have a material adverse effect on its financial
position or results of operations. Prior to the asset purchase agreement with
Elan, the Company had an investment in Elan of $1.3 million. The Company owned
less than 20% of Elan's stock and accounted for the investment under the cost
method. During the first quarter of 1998 the Company wrote-off its investment in
Elan, as it was determined that the Company's original investment was fully
impaired. The write-off is included in other income (expense), net in the income
statement for the year ended December 31, 1998.
In October 1997, the Company acquired certain assets from AlliedSignal,
Inc. for approximately $7 million in cash comprising AlliedSignal's "KIV-7"
information security product line. 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. In September 1998,
Raytheon Systems Company acquired the division of Allied-Signal which
manufactured the KIV-7 product. As a result, Raytheon has assumed the
obligations to manufacture the KIV-7 product and to complete the enhanced
version of the product.
In 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 in QMT. As of December 31, 1998, the Company
owns a majority interest in QMT and accordingly recognizes a minority interest
share in its losses. 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
known as "IBEST". In the fourth quarter of 1998, the Company determined that the
aggregate estimated future undiscounted operating cash flows of QMT, one of its
subsidiaries, were less than the carrying amount of long-lived assets related to
QMT. Based on its evaluation,
F-11
<PAGE> 34
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
the Company determined the assets with a carrying value of $6.1 million were
impaired and wrote them down by $3,942,000 to the estimated fair value. Fair
value was based on estimated discounted future operating cash flows of QMT. The
FAS 121 charge had no impact on the Company's 1998 cash flows or its ability to
generate cash flows in the future. As a result of the FAS 121 charges,
depreciation and amortization expense related to those assets will decrease in
future periods.
The results of the acquired operations are included in the consolidated
statements of income from the respective dates of acquisition. Pro forma income
statement information for 1998 and 1997 related to the above acquisitions has
not been presented because the respective acquisitions are not significant
enough to require such presentation.
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, which was 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 0.525 shares of Company common stock for each share
of issued and outstanding SSI common stock. Accordingly, the Company issued
504,767 shares of its common stock to SSI shareholders in exchange for all
outstanding SSI shares. In addition, 6,549 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.
3. GOVERNMENT CONTRACTS
The Company is both a prime contractor and subcontractor under fixed-price
and cost reimbursement contracts with the U.S. Government (Government). At the
commencement of each contract or contract modification, the Company submits
pricing proposals to the Government to establish indirect cost rates applicable
to such contracts. These rates, after audit and approval by the Government, are
used to settle costs on contracts completed during the previous fiscal year.
To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable. These provisional billing
rates are adjusted to actual at year-end and are subject to adjustment after
Government audit.
The Company has unbilled costs and fees of $2,740,000 and $1,782,000 at
December 31, 1998 and 1997, respectively. Based on the Company's experience with
similar contracts in recent years, the unbilled costs and fees at December 31,
1998 are expected to be collected within one year.
4. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date......... $ 5,237,000 $4,491,000
Finished goods.............................................. 4,426,000 4,257,000
Raw materials............................................... 917,000 271,000
Work in process............................................. 311,000 761,000
----------- ----------
$10,891,000 $9,780,000
=========== ==========
</TABLE>
F-12
<PAGE> 35
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
General and administrative expenses in inventory at December 31, 1998 and
1997 were $434,000 and $51,000, respectively.
5. LONG-TERM DEBT
Long-term debt consists of a note payable to a bank with principal and
interest at 11.9%, payable quarterly in French Francs. The note matures in
January 2005 and is secured by a building with a net book value of $5,709,000 at
December 31, 1998.
Annual principal payments are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 278,000
2000..................................................... 278,000
2001..................................................... 278,000
2002..................................................... 278,000
2003..................................................... 278,000
Thereafter............................................... 346,000
----------
$1,736,000
==========
</TABLE>
6. REORGANIZATION COSTS
Included in selling, general and administrative expenses for the year ended
December 31, 1998 are $972,000 in subsidiary reorganization costs primarily
related to the Company's efforts to lower its future effective tax rate.
7. 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>
1998 1997
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Marketable securities........... $6,495,000 $6,495,000 $6,841,000 $6,841,000
Long-term debt.................. 1,736,000 2,052,000 1,875,000 2,125,000
</TABLE>
F-13
<PAGE> 36
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
8. COMMITMENTS AND CONTINGENCIES
The Company has purchase commitments with various vendors for approximately
$6,865,000 as of December 31, 1998. These purchase commitments are payable in
less than a year.
Annual obligations under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1999..................................................... $1,431,000
2000..................................................... 1,235,000
2001..................................................... 847,000
2002..................................................... 148,000
2003..................................................... 77,000
2004..................................................... 77,000
----------
$3,815,000
==========
</TABLE>
Rent expense charged to operations for the years ended December 31, 1998,
1997 and 1996 was $1,628,000, 1,663,000, and 1,410,000, respectively.
9. STOCK OPTION PLANS
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 plan specifies 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, 1998 the total number of shares available for grant
under the existing stock option plans was 37,000.
F-14
<PAGE> 37
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
The following is a summary of changes in options outstanding pursuant to
the plans for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
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........................... 2,409,674 $10.35 2,012,583 $ 9.54 1,929,051 $ 8.53
Granted.......................... 727,650 12.44 886,800 11.30 512,819 10.55
Exercised........................ (221,393) 8.58 (302,396) 6.84 (361,816) 3.83
Cancelled........................ (136,062) 11.40 (187,313) 11.79 (67,471) 10.76
---------- ------ ---------- ------ ---------- ------
Outstanding -- end of year....... 2,779,869 $10.98 2,409,674 $10.35 2,012,583 $ 9.54
Exercisable at end of year....... 1,428,130 $10.18 1,069,083 $ 9.61 895,916 $ 8.65
Weighted-average fair value of
options granted during the
year........................... $ 4.85 $ 4.37 $ 4.12
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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>
$ 3.59 to
4.40........ 32,560 2.1 $4.28 32,560 $ 4.28
5.82 to
8.00........ 427,626 5.5 7.61 427,030 7.62
9.00 to
12.50........ 2,043,258 7.9 11.28 960,203 11.47
14.33 to
15.92........ 276,425 9.4 14.77 8,337 15.75
</TABLE>
The weighted average remaining contractual life of stock options
outstanding at December 31, 1998 and 1997 was 7.6 years and 8.0 years,
respectively.
Pro forma information regarding net income and earnings per share is
required by FAS 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 the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996: risk free interest rate of 4.8% for 1998,
5.7% for 1997 and 6.3% for 1996; dividend yield of 0% for 1998, 1997 and 1996;
volatility factor of the expected market price of the Company's common stock of
0.42 for 1998, 0.39 for 1997 and 0.38 for 1996; and a weighted-average life of
the option of 4.0 years for 1998, 1997 and 1996.
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-15
<PAGE> 38
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Pro forma net income...................... $1,305,000 $10,120,000 $9,840,000
Pro forma earnings per share:
Basic................................... $ .11 $ .87 $ .85
Diluted................................. .11 .85 .83
</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.
10. 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 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.
11. INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal......................................... $2,096,000 $ 7,447,000 $4,775,000
State........................................... 562,000 1,362,000 1,387,000
Foreign......................................... 1,330,000 2,158,000 1,923,000
---------- ----------- ----------
3,988,000 10,967,000 8,085,000
Deferred:
Federal......................................... 2,311,000 (2,605,000) (567,000)
State........................................... 266,000 (254,000) (96,000)
Foreign......................................... (133,000) (238,000) (3,000)
---------- ----------- ----------
2,444,000 (3,097,000) (666,000)
---------- ----------- ----------
$6,432,000 $ 7,870,000 $7,419,000
========== =========== ==========
</TABLE>
F-16
<PAGE> 39
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
A reconciliation of the statutory federal income tax provision to the
actual provision follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax expense............... $3,122,000 $6,721,000 $6,278,000
Non-deductible amortization of goodwill............ 969,000 627,000 624,000
Non-deductible subsidiary loss..................... 601,000 -- --
State taxes, net of federal benefit................ 518,000 720,000 839,000
In-process research and development write-off...... 525,000 -- --
Write-off long-term investment..................... 455,000 -- --
Effect of foreign operations, net.................. (54,000) (19,000) (242,000)
Non-deductible merger related costs................ -- (57,000) 116,000
Research and experimentation credit................ -- (119,000) --
Municipal interest................................. -- (209,000) (223,000)
Other.............................................. 296,000 206,000 27,000
---------- ---------- ----------
$6,432,000 $7,870,000 $7,419,000
========== ========== ==========
</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>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves not currently tax deductible........ $ 1,472,000 $ 2,005,000
Contract revenue recognized for tax reporting purposes.... 1,439,000 1,563,000
Foreign tax loss carryforwards............................ 527,000 586,000
State taxes not currently deductible...................... 456,000 586,000
Cumulative translation adjustment......................... -- 383,000
----------- -----------
Total deferred tax assets.............................. 3,894,000 5,123,000
Valuation allowance for deferred tax assets............... (527,000) (586,000)
----------- -----------
3,367,000 4,537,000
Deferred tax liabilities:
Tax depreciation.......................................... (1,661,000) (1,395,000)
Amortization of intangibles............................... (423,000) --
Cumulative translation adjustment......................... (367,000) --
Book/tax basis difference in Wyatt River assets........... (296,000) --
Accruals without tax effect............................... (188,000) (266,000)
----------- -----------
Total deferred tax liabilities......................... (2,935,000) (1,661,000)
----------- -----------
Net deferred tax assets..................................... $ 432,000 $ 2,876,000
=========== ===========
</TABLE>
F-17
<PAGE> 40
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
United States and foreign earnings before income taxes are as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
United States.................................. $5,348,000 $15,400,000 $14,281,000
Foreign........................................ 3,574,000 3,802,000 3,655,000
---------- ----------- -----------
$8,922,000 $19,202,000 $17,936,000
========== =========== ===========
</TABLE>
The Company realized tax benefits of $654,000, $650,000, and $383,000 in
1998, 1997 and 1996, respectively, from the exercise of non-qualified stock
options and disqualifying disposition of incentive stock options. The deferred
tax assets and liabilities are included in prepaid expenses and other current
assets and other liabilities in the accompanying balance sheets.
12. BENEFIT PLANS
At December 31, 1998, the Company sponsored two tax deferred defined
contribution plans for all eligible US employees. Under both plans, the employer
matches certain employee contributions. During the years ended December 31,
1998, 1997 and 1996, Company contributions under both Plans totaled
approximately $476,000, $368,000, and $307,000, respectively.
13. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1998, 1997 and 1996, the Company made
purchases of services from companies controlled by directors of the Company
totaling $39,000, $273,000, and $152,000, respectively.
14. INDUSTRY SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 superseded FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise". FAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. FAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
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 and sale of services
which accelerate performance of security servers and virtual private networks
and services which provide access control to computer networks, Internet Web
sites and virtual private networks. Summaries of the Company's operations by
industry and geographic area are as follows:
F-18
<PAGE> 41
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
A summary of the Company's operations by industry segment follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
SOFTWARE INFORMATION INTERNET
PROTECTION SECURITY SECURITY OTHER/ELIMIN CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
External customers........... $57,238,000 $50,236,000 $ 1,690,000 $ 68,000 $109,232,000
Intersegment................. -- 1,224,000 11,000 (1,235,000) --
Operating income (loss)........ 3,098,000 9,862,000 (3,824,000) (1,616,000) 7,520,000
Identifiable assets............ 86,860,000 31,104,000 634,000 (8,845,000) 109,753,000
Interest expense............... 220,000 -- -- -- 220,000
Interest income................ 1,111,000 264,000 -- -- 1,375,000
Income tax expense............. 3,974,000 3,949,000 (1,491,000) -- 6,432,000
Capital expenditures........... 1,705,000 1,014,000 973,000 1,337,000 5,029,000
Significant non-cash items:
Changes in deferred taxes.... 2,068,000 376,000 -- -- 2,444,000
Depreciation and
amortization.............. 4,911,000 1,346,000 212,000 1,536,000 8,005,000
Asset impairment charge...... -- -- -- 3,942,000 3,942,000
Write-off in-process research
and development........... 1,500,000 -- -- -- 1,500,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
SOFTWARE INFORMATION INTERNET
PROTECTION SECURITY SECURITY OTHER/ELIMIN CONSOLIDATED
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
External customers........... $60,125,000 $33,894,000 $ 222,000 $ 483,000 $ 94,724,000
Intersegment................. -- 1,789,000 -- (1,789,000) --
Operating income (loss)........ 15,392,000 6,192,000 (2,906,000) (1,145,000) 17,533,000
Identifiable assets............ 84,134,000 27,847,000 633,000 (9,563,000) 103,051,000
Interest expense............... 255,000 -- -- -- 255,000
Interest income................ 1,430,000 144,000 -- 31,000 1,605,000
Income tax expense............. 6,478,000 2,554,000 (1,162,000) -- 7,870,000
Capital expenditures........... 1,094,000 1,431,000 408,000 3,816,000 6,749,000
Significant non-cash items:
Changes in deferred taxes.... 1,042,000 2,055,000 -- -- 3,097,000
Depreciation and
amortization.............. 3,840,000 614,000 193,000 323,000 4,970,000
</TABLE>
F-19
<PAGE> 42
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
SOFTWARE INFORMATION INTERNET
PROTECTION SECURITY SECURITY OTHER/ELIMIN CONSOLIDATED
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
External customers.............. $57,409,000 $24,270,000 $ 31,000 $ -- $81,710,000
Intersegment.................... -- 229,000 -- (229,000) --
Operating income (loss)........... 14,460,000 3,529,000 (724,000) -- 17,265,000
Identifiable assets............... 78,433,000 15,052,000 129,000 (250,000) 93,364,000
Interest expense.................. 323,000 2,000 -- -- 325,000
Interest income................... 1,417,000 103,000 -- -- 1,520,000
Income tax expense................ 5,945,000 1,764,000 (290,000) -- 7,419,000
Capital expenditures.............. 1,254,000 1,421,000 44,000 -- 2,719,000
Significant non-cash items:
Changes in deferred taxes....... 787,000 (121,000) -- -- 666,000
Depreciation and amortization... 4,054,000 219,000 1,000 -- 4,274,000
</TABLE>
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
UNITED STATES EUROPE UNITED KINGDOM ELIMINATION CONSOLIDATED
------------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.................. $87,649,000 $16,532,000 $5,051,000 $ -- $109,232,000
Transfers between geographic
areas...................... 3,160,000 4,782,000 1,358,000 (9,300,000) --
----------- ----------- ---------- ----------- ------------
Revenues................ $90,809,000 $21,314,000 $6,409,000 $(9,300,000) $109,232,000
=========== =========== ========== =========== ============
Operating income............. $ 4,162,000 $ 2,088,000 $1,070,000 $ 200,000 $ 7,520,000
Identifiable assets.......... 78,240,000 26,689,000 4,994,000 (170,000) 109,753,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
UNITED STATES EUROPE UNITED KINGDOM ELIMINATION CONSOLIDATED
------------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.................... $74,972,000 $8,420,000 $11,332,000 $ -- $94,724,000
Transfers between geographic
areas........................ 4,226,000 927,000 1,692,000 (6,845,000) --
----------- ---------- ----------- ----------- -----------
Revenues.................. $79,198,000 $9,347,000 $13,024,000 $(6,845,000) $94,724,000
=========== ========== =========== =========== ===========
Operating income............... $13,163,000 $ (530,000) $ 4,940,000 $ (40,000) $17,533,000
Identifiable assets............ 77,508,000 19,552,000 6,361,000 (370,000) 103,051,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
UNITED STATES EUROPE UNITED KINGDOM ELIMINATION CONSOLIDATED
------------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers................... $61,976,000 $ 9,569,000 $10,165,000 $ -- $81,710,000
Transfers between geographic
areas....................... 1,042,000 1,222,000 1,938,000 (4,202,000) --
----------- ----------- ----------- ----------- -----------
Revenues................. $63,018,000 $10,791,000 $12,103,000 $(4,202,000) $81,710,000
=========== =========== =========== =========== ===========
Operating income.............. $13,664,000 $ 405,000 $ 3,414,000 $ (218,000) $17,265,000
Identifiable assets........... 61,280,000 26,087,000 6,327,000 (330,000) 93,364,000
</TABLE>
Geographic information for Europe encompasses the Company's operations in
France, Germany, Russia, Australia 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-20
<PAGE> 43
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
16. SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998(1) 1998 1998 1998(2)
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Software Protection....................... $14,171,000 $14,450,000 $14,250,000 $14,367,000
Information Security...................... 10,801,000 12,211,000 12,297,000 14,927,000
Internet Security......................... 48,000 91,000 201,000 1,350,000
Ion Beam Surface Treatment................ 10,000 8,000 9,000 41,000
----------- ----------- ----------- -----------
Total revenues.................... $25,030,000 $26,760,000 $26,757,000 $30,685,000
=========== =========== =========== ===========
COST OF REVENUES:
Software Protection....................... $ 3,555,000 $ 3,859,000 $ 4,364,000 $ 4,969,000
Information Security...................... 8,573,000 9,235,000 9,513,000 12,039,000
Internet Security......................... 32,000 179,000 107,000 463,000
Ion Beam Surface Treatment................ 20,000 -- 1,000 9,000
----------- ----------- ----------- -----------
Total cost of revenues............ $12,180,000 $13,273,000 $13,985,000 $17,480,000
=========== =========== =========== ===========
Operating income (loss)..................... $ 2,103,000 $ 4,394,000 $ 3,804,000 $(2,781,000)
Net income (loss)........................... (619,000) 2,869,000 2,601,000 (2,361,000)
Net income (loss) per share:
Basic..................................... $ (.05) $ .25 $ .22 $ (.20)
Diluted................................... (.05) .23 .21 (.20)
</TABLE>
- ---------------
(1) The results of operations for the quarter ended March 31, 1998 reflects a
$1.5 million write-off of acquired in-process research and development and a
$1.3 million write-off of a fully impaired investment.
(2) The results of operations for the quarter ended December 31, 1998 reflects
an asset impairment charge of $3.9 million
The Company has restated its Form 10-Q's for the three month periods ended
March 31, June 30, and September 31, 1998. The above quarterly financial data is
derived from the restated Form 10-Q's, as applicable. In September 1998, the
Securities and Exchange Commission issued a letter to the American Institute of
Certified Public Accountants wherein a new suggested valuation method for
in-process research and development determination was provided. The new
valuation method was to be retroactively applied to all acquisitions in 1998.
Accordingly, during the fourth quarter of 1998 the Company performed a new
valuation analysis related to the acquisition of Wyatt in February 1998 (see
note 2 to the Notes to Consolidated
F-21
<PAGE> 44
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
Financial Statements), which resulted in the Company adjusting the write-off
taken in the first quarter of 1998 related to in-process research and
development acquired in the Wyatt acquisition.
<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 6,783,000 7,297,000 13,004,000
Internet Security......................... -- 76,000 17,000 129,000
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 $ 4,582,000
Information Security...................... 5,725,000 5,219,000 5,901,000 10,382,000
Internet Security......................... (14,000) 24,000 74,000 25,000
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..................................... $ 0.21 $ 0.24 $ 0.24 $ 0.28
Diluted................................... 0.20 0.24 0.24 0.27
</TABLE>
Net income per share is computed independently for each of the quarters
presented and the summation of quarterly amounts may not equal the total net
income per share reported for the year.
F-22
<PAGE> 45
RAINBOW TECHNOLOGIES, INC.
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
DEDUCTIONS/
BALANCE AT RECOVERIES BALANCE AT
DESCRIPTION BEGINNING OF YEAR ADDITIONS AND WRITE-OFFS END OF YEAR
----------- ----------------- --------- -------------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31:
1998
Allowance for doubtful accounts
receivable............................. $500,000 $217,000 $(426,000) $291,000
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
</TABLE>
F-23
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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. (incorporated by reference to
Exhibit 2(iii) of the Company's 1997 Annual Report on Form
10-K under the Securities Exchange Act of 1934 filed in
March 1998 (the "1997 10-K")).
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
(incorporated by reference to Exhibit 4(c) to the Company's
1997 10-K).
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 October 1996, between the Company and
National Semiconductor Corporation.
10(c) Agreement, dated December 1998, between the Company and EM
Microelectronic -- Marin S.A.
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>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <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 (incorporated by reference to
Exhibit 10(o) of the 1997 10-K).
10(p) Change of Control Agreement, dated April 7, 1997, between
the Company and Aviram Margalith (incorporated by reference
to Exhibit 10(p) of the 1997 10-K).
10(q) Employment Agreement, dated January 1, 1998, between the
Company and Laurie Casey (incorporated by reference to
Exhibit 10(q) of the 1997 10-K).
10(r) Change of Control Agreement, dated January 1, 1998, between
the Company and Laurie Casey (incorporated by reference to
Exhibit 10(r) of the 1997 10-K).
10(s) Employment Agreement, dated January 1, 1998, between the
Company and Richard Burris (incorporated by reference to
Exhibit 10(s) of the 1997 10-K).
10(t) Change of Control Agreement, dated January 1, 1998, between
the Company and Richard Burris (incorporated by reference to
Exhibit 10(t) of the 1997 10-K).
10(u) Manufacturing Agreement, dated September 30, 1997, between
AlliedSignal, Inc. and Mykotronx, Inc.
10(v) Development Agreement, dated September 30, 1997, between
AlliedSignal, Inc. and Mykotronx, Inc.
10(w) Agreement for Design and Product Purchase, dated September
4, 1997, between IBM Microelectronics and Rainbow
Technologies, Inc. and Mykotronx, Inc.
21 List of Rainbow's wholly-owned subsidiaries.
23(a) Consent of Independent Auditors.
27 FINANCIAL DATA SCHEDULE.
</TABLE>
<PAGE> 1
EXHIBIT 10(b)
DESIGN, DEVELOPMENT SERVICES AND PRODUCTION AGREEMENT
This agreement ("AGREEMENT"), effective as of the ______ day of
__________, 1996 ("EFFECTIVE DATE") is by and between Rainbow Technologies, Inc.
("RAINBOW") and National Semiconductor Corporation ("NATIONAL"). This AGREEMENT
will be valid until May 31, 1999. NATIONAL and RAINBOW may be referred to under
this AGREEMENT as a "PARTY" or the "PARTIES".
WHEREAS, RAINBOW has expertise in the fields of software protection and
anti-piracy devices for information technology applications; and
WHEREAS, NATIONAL provides technical and design services related to the
design, development, and manufacture of integrated circuits; and
WHEREAS, RAINBOW wishes to engage the technical and design service
capabilities of NATIONAL to obtain the design, development and production of an
integrated circuit hereinafter referred to as the "SuperPro_NS" or "RAINBOW
ASIC"; and
WHEREAS, the SuperPro_NS integrated circuit will be designed using
NATIONAL's 0.65 micron CMOS EEPROM process, and later, when economically
feasible, will be migrated to NATIONAL's 0.4 micron CMOS EEPROM process;
Now, THEREFORE, the PARTIES agree as follows:
DEFINITIONS
"ATE" shall mean automatic test equipment.
"DESIGN DATABASE" shall include the net list, GDSII tape, maskworks,
and ATE program prepared under the DEVELOPMENT PROJECT, but shall
exclude any patent, copyrights, or trade secrets related to NATIONAL's
cells or subcells.
"DEVELOPMENT PROJECT" shall mean the work performed under this
AGREEMENT in preparation to manufacture the ASIC. (See APPENDIX A).
"DEVELOPMENT WORK" shall mean the work performed by NATIONAL for the
DEVELOPMENT PROJECT.
"k", if located immediately after any number, shall denote one thousand
(1000). (E.g., $60k shall mean $60,000 and 100k shall mean 100,000).
"NRE" shall mean any non-recurring engineering expense.
"PHASE" shall mean any phase of the DEVELOPMENT PROJECT.
"PROPRIETARY INFORMATION" shall mean all information delivered under
this AGREEMENT and marked confidential (as set forth in section 3.01)
that is not PUBLIC INFORMATION.
"PUBLIC INFORMATION" shall include: (a) published data sheets; (b)
published specifications; (c) published technical writings; and (d)
information in the public domain.
"INTELLECTUAL PROPERTY" shall include: (a) inventions and improvements
conceived, as those terms are used before the United States Patent
Office; (b) patents; (c) mask works; (d) copyrights; and (e) trade
secrets.
"RAINBOW ASIC" shall mean the SUPERPRO_NS, which is identified by
RAINBOW as part number 104669.
<PAGE> 2
1.0 DEVELOPMENT
1.01 DEVELOPMENT PROJECT
A description of each PHASE of the DEVELOPMENT PROJECT is attached as
APPENDIX A. NATIONAL will use its reasonable best efforts to complete
the DEVELOPMENT WORK in accordance with the schedule set forth in
APPENDIX A.
1.02 SPECIFICATIONS
RAINBOW will furnish NATIONAL with the desired specifications for the
RAINBOW ASIC. NATIONAL will review the submitted specifications and
request any modifications it deems appropriate. The PARTIES will agree
to the final specifications for the RAINBOW ASIC and attach these
specifications as APPENDIX B.
1.03 RAINBOW'S RESPONSIBILITIES
RAINBOW shall provide NATIONAL the following information with respect
to the RAINBOW ASIC:
A. specifications including but not limited to APPENDIX B;
B. schematic files and net list files required to complete the
DEVELOPMENT PROJECT; and
C. supply test vectors and testing information required for
NATIONAL to create the functional tests and electrical
parametric tests (that is, test programs) for production ATE.
1.04 NATIONAL'S RESPONSIBILITIES
NATIONAL shall perform responsibilities in accordance with APPENDIX A.
RAINBOW shall signify acceptance of completion of each PHASE by
providing NATIONAL a signed copy of APPENDIX A at the appropriate PHASE
transaction date. RAINBOW shall indicate an unsatisfactory PHASE
completion by a description of the non-conformity. Specifically,
NATIONAL shall, in addition to other obligations under this AGREEMENT:
A. supply design notebook(s) which contain all simulations,
Device sizes, schematics, etc., that meet RAINBOW document
control requirements;
B. supply Calma GDSII compatible data base tape and a complete
data base for the RAINBOW ASIC when completed by NATIONAL
(electronic version of 1.04, A.);
C. characterize, to the Specification, a five piece sample of the
RAINBOW ASIC (in accordance with standard practice) and
provide RAINBOW the findings resulting from the analysis of
first silicon;
D. thoroughly analyze (in accordance with standard practice) the
RAINBOW characterization report and data resulting from
RAINBOW's analysis of first silicon;
E. upon completion of the analysis in C. and D. and after
receiving information concerning design errors (if any) from
RAINBOW, make any mutually agreed upon design corrections as
outlined in sections 2.01 and 2.02;
F. generate Test Programs for the production ATE; and
G. manage the production and deliveries of any RAINBOW ASIC.
H. provide deliverables in a timely manner as set forth in
APPENDIX D, RAINBOW ASIC development schedule.
I. provide a written report describing the results from
production qualification of the RAINBOW ASIC.
<PAGE> 3
1.05 ADDITIONAL NATIONAL RESPONSIBILITIES
NATIONAL shall provide technical, engineering and developmental
services resulting in the delivery of ten, (10), prototypes of the
RAINBOW ASIC properly tested and packaged. (the "Tested Prototypes").
RAINBOW will have thirty (30) days to accept or reject the Tested
Prototypes. If RAINBOW accepts, then RAINBOW's notice of acceptance
will be in the form attached as APPENDIX C. If a written notice of
rejection is not received by NATIONAL within thirty (30) days of
shipment of the Tested Prototypes, the Tested Prototypes will be deemed
to have been accepted by RAINBOW.
NATIONAL will deliver additional prototypes of the RAINBOW ASIC at
$____ per unit within 4 weeks after RAINBOW places a purchase order for
such prototypes. The quantities of the prototypes will not exceed 750
pieces. If for any reason, including but not limited to wafer yield or
wafer foundry capacity restraints, NATIONAL cannot deliver the
additional prototypes of the RAINBOW ASIC within the 4 week schedule,
then NATIONAL will immediately notify RAINBOW of any new quantities and
delivery schedule.
1.06 DEVELOPMENT CHARGE AND PAYMENT SCHEDULE
In full payment for the design, development and layout work to be
performed for the DEVELOPMENT PROJECT, NATIONAL shall be paid a NRE for
the RAINBOW ASIC.
Non Recurring Engineering expense payments are due and payable upon the
acceptance by RAINBOW of each PHASE as described in section 1.04, and
the milestone schedule shown in APPENDIX A.
1.07 CHANGES
A. In the event RAINBOW desires to change the Specifications for
the DEVELOPMENT PROJECT, a request for change will be
submitted in writing to NATIONAL, and NATIONAL will estimate
the additional time and development costs necessary to
implement any requested change. RAINBOW must approve of the
additional cost and development time.
B. Upon receipt of RAINBOW's written approval, implementation of
the change will proceed and any additional cost will be paid
by RAINBOW. The Specifications will be amended to reflect any
change, and the DEVELOPMENT PROJECT will be modified as
necessary.
C. In order to facilitate proper financial control, NATIONAL has
provided the above fixed price quotation based on detailed
estimates of NATIONAL's efforts to complete this project. It
is anticipated that RAINBOW may require additional services
during or after completion of the DEVELOPMENT PROJECT, which
may affect cost or schedule. If RAINBOW (or its contract
manufacturer) requests any assistance from NATIONAL, then
NATIONAL will use its reasonable best efforts to provide such
additional services charges will be billed based on the actual
time expended by each individual assigned to the project.
Additional charges are payable on Net 30 day terms.
NATIONAL's current billing rate for senior engineers is
__________________ ($_______) per hour.
D. NATIONAL will bill RAINBOW for actual expenses of out of town
travel requested or previously approved by RAINBOW. All travel
expenses shall be paid by RAINBOW on thirty (30) day net
terms, from the date of invoice. Travel will be at coach or
standard room rates, unless these accommodations are not
available within the time constraints, in which case the next
available higher level of travel or accommodations will be
used.
2.0 WARRANTY, REMEDIES
2.01 WARRANTY OF DESIGN INTEGRITY
NATIONAL warrants that all or part of the RAINBOW ASIC designs and
other material delivered by NATIONAL to RAINBOW under this AGREEMENT
(hereinafter, "WARRANTED INFORMATION") shall be free of design rule
defects and layout defects; will be logically correct, and will be
consistent with acceptable engineering practices.
<PAGE> 4
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, NO WARRANTIES, EXPRESSED
OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, EXIST WITH RESPECT TO ANY PRODUCTS OR SERVICES PURCHASED UNDER
THIS AGREEMENT AND THEREFORE ALL SUCH WARRANTIES ARE EXPRESSLY
EXCLUDED.
2.02 REMEDY
In the event RAINBOW rejects WARRANTED INFORMATION, NATIONAL shall, at
NATIONAL's expense, promptly correct any defects which RAINBOW has
identified.
2.03 WARRANTY OF RAINBOW ASIC PERFORMANCE
NATIONAL hereby warrants that any RAINBOW ASIC delivered in the
production PHASE will perform according to the electrical requirements
defined by the Specifications and the functional requirements defined
by the RAINBOW-approved production test program for a period of twelve
(12) months following the delivery thereof (the "WARRANTY PERIOD").
Notwithstanding the foregoing, NATIONAL does not warrant failure in the
RAINBOW ASIC due to storage or handling by RAINBOW, its subcontractors
or agents which does not conform to the industry standards set forth
for storage and handling.
2.04 REMEDY OF RAINBOW ASIC PERFORMANCE
During the WARRANTY PERIOD, NATIONAL will repair or replace any defect
in any RAINBOW ASIC which fails to perform in accordance with the
RAINBOW-approved production test program. NATIONAL will perform its
warranty obligations within one hundred (100) days after RAINBOW
notifies NATIONAL of any defect in any RAINBOW ASIC.
2.05 WARRANTY OF TITLE, INDEMNIFICATION
NATIONAL, at its own expense, will indemnify, hold RAINBOW harmless and
defend any action brought against RAINBOW to the extent that it is
based on a claim that any NATIONAL property or any NATIONAL designed
material infringes any United States (or former COCOM member country)
patent, copyright, trade secret, or other proprietary right, provided
that NATIONAL is immediately notified in writing of such claim.
NATIONAL shall have the right to control the defense of all such
claims, lawsuits, and other proceedings. In no event shall RAINBOW
settle any such claim, lawsuit or proceeding without NATIONAL's prior
written approval.
RAINBOW, at its own expense, will indemnify, hold NATIONAL harmless and
defend any action brought against NATIONAL to the extent that it is
based on a claim that RAINBOW property and/or RAINBOW designed material
infringes any United States (or former COCOM member country) patent,
copyright, trade secret, or other proprietary right, provided that
RAINBOW is immediately notified in writing of such claim. RAINBOW shall
have the right to control the defense of all such claims, lawsuits and
other proceedings. In no event shall NATIONAL settle any such claim,
lawsuit, or proceeding without RAINBOW's prior written approval.
3.0 INTELLECTUAL PROPERTY MATTERS
3.01 PROPRIETARY INFORMATION
Any PROPRIETARY INFORMATION to be transferred by one PARTY to the other
PARTY under this AGREEMENT shall be marked "confidential",
"proprietary" or by words of similar import. If any PROPRIETARY
INFORMATION is disclosed in an oral manner, the disclosing PARTY will
inform the other PARTY at the time of disclosure of such information's
proprietary nature, and confirm the same in writing to the receiving
PARTY within thirty (30) days. The PARTIES agree to hold PROPRIETARY
INFORMATION in confidence and to exert the same effort to prevent
disclosure thereof as it would regarding its own proprietary
information but in no less than a reasonable degree of care. The
PARTIES agree to not disclose any PROPRIETARY INFORMATION without
written authority. The obligations of this paragraph shall terminate
with respect to any portion of the received PROPRIETARY INFORMATION:
(a) known prior to receipt; (b) becoming known through no act or
failure to act by either PARTY; or (c) furnished to third parties
without restriction on disclosure; or (d) independently developed by
the PARTY receiving the PROPRIETARY INFORMATION.
<PAGE> 5
3.02 OWNERSHIP OF INTELLECTUAL PROPERTY
All INTELLECTUAL PROPERTY first conceived, discovered, developed, or
acquired by one PARTY (alone or jointly with another party) outside the
scope of the DEVELOPMENT PROJECT shall remain the sole and exclusive
property of such PARTY.
Except for the RAINBOW ASIC net list and maskworks, any INTELLECTUAL
PROPERTY first conceived, discovered, developed, or acquired solely by
NATIONAL under the DEVELOPMENT PROJECT shall be the exclusive property
of NATIONAL. Any RAINBOW ASIC net list or maskworks shall be owned
solely by RAINBOW. INTELLECTUAL PROPERTY first conceived, discovered,
developed, or acquired solely by RAINBOW under the DEVELOPMENT PROJECT
shall be the exclusive property of RAINBOW.
INTELLECTUAL PROPERTY first conceived, discovered, developed, or
acquired jointly, as those terms are used before the United States
Patent Office, by both PARTIES under the DEVELOPMENT PROJECT shall be
jointly owned by both PARTIES. Each PARTY shall have the right to
exploit and licenses JOINT INTELLECTUAL PROPERTY without accounting to
the other PARTY.
In furtherance of the foregoing: (a) except for those licenses granted
under section 3.03, no patent or software licenses of any kind are
granted or implied under this AGREEMENT; and (b) no RAINBOW ASIC unit
shall be transferred or sold to any third party without RAINBOW's
signed and written permission.
3.03 LICENSE GRANT
Upon full payment of all development charges, RAINBOW will be granted a
fully paid, perpetual, non-exclusive, license to:
A. use the NATIONAL DESIGN DATABASE to have RAINBOW ASIC units
produced for the benefit of RAINBOW by a third party vendor in
the event that NATIONAL: (i) breaches this AGREEMENT; (ii) is
unwilling or unable to produce and deliver an order of RAINBOW
ASIC units ordered by RAINBOW; or (iii) upon the occurrence of
an event described in section 12.0; and
B. use and include the RAINBOW ASIC designed and manufactured
under this AGREEMENT in any current or future RAINBOW
products.
4.0 PRODUCTION
4.01 PRODUCTION QUANTITIES
RAINBOW agrees to provide NATIONAL with schedules detailing requested
deliveries of the RAINBOW ASIC units one hundred twenty (120) days in
advance. RAINBOW's order will be acknowledged with detailed quantity
and delivery schedules. Terms and conditions of production deliveries
shall be defined by the purchase agreements. The production pricing is
shown below in section 4.02. Notwithstanding the detailed delivery
schedule, NATIONAL agrees that RAINBOW has the right to extend the date
of delivery of RAINBOW ASIC units scheduled to occur more than 90 days
from the date RAINBOW informs NATIONAL of the extended date. The
pricing below reflects no amortization.
4.02 PRODUCTION PRICING
Both PARTIES agree to the two scenarios described below, section 4.03
and section 4.04. These scenarios apply relative to the final die size
reached after the best design effort has been expended by NATIONAL. In
addition, if NATIONAL determines during the design effort that it
cannot attain either scenario 4.03 or scenario 4.04, NATIONAL may
exercise its option under section 8.01 to terminate the DEVELOPMENT
PROJECT and this AGREEMENT. In this case, any NRE paid to NATIONAL by
RAINBOW will be refunded to RAINBOW.
<PAGE> 6
SCENARIO 4.03 PRODUCTION PRICE WITH LARGE DIE SIZE
The price for the RAINBOW ASIC units are as follows:
<TABLE>
<S> <C> <C>
RAINBOW ASIC:
Die Size: 8,500 square mils maximum
Package: 20 pin 208 mil wide body SSOP
PACKAGED UNIT PRICE
o first 10k units $____ per unit
o up to 100k units per year $____ per unit
o up to 200k units per year $____ per unit
o up to 400k units per year $____ per unit
WAFFLE-PACK DIE PRICE TESTED-WAFER DIE PRICE
o first 10k die $____ per unit $____ per unit
o up to 200k die per year $____ per unit $____ per unit
o up to 400k die per year $____ per unit $____ per unit
o up to 800k die per year $____ per unit $____ per unit
</TABLE>
NATIONAL agrees to renegotiate this pricing structure toward lower
pricing based on a sliding scale in the event the die size achieved is
smaller than 8,500 square mils. (e.g., the price would be $____ per
unit for an 8000 square mils die if 800k units were delivered).
The NRE under this scenario is agreed to be $334k per APPENDIX A.
SCENARIO 4.04 PRODUCTION PRICE WITH SMALL DIE SIZE
The unit price for the RAINBOW ASIC units are as follows:
<TABLE>
<S> <C> <C>
RAINBOW ASIC
Die Size: 7,500 square mils or less
Package: 20 pin 208 mil wide body SSOP
PACKAGED UNIT PRICE
o first 10k units $____ per unit
o up to 100k units per year $____ per unit
o up to 200k units per year $____ per unit
o up to 400k units per year $____ per unit
WAFFLE-PACK DIE PRICE TESTED-WAFER DIE PRICE
o first 10k die $____ per unit $____ per unit
o up to 200k die per year $____ per unit $____ per unit
o up to 400k die per year $____ per unit $____ per unit
o up to 800k die per year $____ per unit $____ per unit
</TABLE>
Under this scenario NATIONAL agrees to hold the pricing to the $____
unit price at 800k quantities as a fixed pricing. In consideration
thereof, RAINBOW agrees to pay the higher NRE of $____ per APPENDIX A.
NATIONAL, at its option, may achieve a smaller die size than 7,500
square mils, thus potentially improving its profitability, while
holding to the fixed pricing with RAINBOW.
<PAGE> 7
5.0 PERFORMANCE TO SCHEDULE (PRODUCTION ORDERS)
5.01 CONSIDERATION FOR LATE DELIVERY ON EXPEDITED LOTS
RAINBOW shall be relieved of its obligation to pay an expedite fee if
the expedited lot is one (1) day late based on the acknowledged
delivery date from NATIONAL.
5.02 SHIP AHEAD ALLOWANCE
RAINBOW grants NATIONAL the right to ship product sixty (60) days ahead
of the original delivery date as specified on the acknowledged purchase
order.
5.03 YIELD FALLOUT/RECOVERY PLAN
NATIONAL shall start enough wafers to fulfill the quantities stated in
an acknowledged purchase order from RAINBOW, regardless of the yield
fallout from defective wafers within a production lot.
6.0 PRODUCTION ORDER DESCRIPTIONS
6.01 PURCHASE ORDERS
RAINBOW purchase orders are uncancelable and will explicitly state
RAINBOW part numbers, NATIONAL part numbers, and RAINBOW ASIC
descriptions and form of product delivery (i.e., packaged (SSOP),
waffle pack, wafer, or membrane).
7.0 BUSINESS STRATEGY
7.01 ESTABLISHING A SECOND MANUFACTURING LOCATION
NATIONAL may, in its sole discretion, establish a second manufacturing
location for RAINBOW ASIC production provided that it notifies RAINBOW
in advance. RAINBOW will not be held accountable for the costs
associated with starting a second manufacturing location.
NATIONAL will perform the necessary tasks to establish the
manufacturing capability at a second location if RAINBOW exercises this
option by payment of ______________________ ($_________) to NATIONAL.
The RAINBOW ASIC unit price shall not increase, regardless of where the
manufacturing takes place. Pricing shall be renegotiated if more
favorable cost structures are available at another site.
7.02 DISCONTINUANCE OF MANUFACTURING
If NATIONAL decides to discontinue manufacturing the RAINBOW ASIC,
NATIONAL must notify RAINBOW in writing at least twelve (12) months in
advance. NATIONAL will allow RAINBOW a "last buy" purchase order to
cover the twelve (12) month period prior to the discontinue date.
Furthermore, NATIONAL will provide reasonable assistance to transition
the manufacturing of the product to an alternate supplier.
8.0 CANCELLATION
If either PARTY materially breaches this AGREEMENT, the other PARTY may, upon
thirty (30) days written notice of such breach or default, cancel its remaining
obligations under this AGREEMENT. In no event shall NATIONAL be liable for delay
in the rendering of services under this AGREEMENT due to causes beyond its
reasonable control, including by way of illustration, but not limited to, acts
of God, acts of civil or military authority, fire, or inability's due to causes
beyond NATIONAL's reasonable control to obtain necessary labor, materials,
facilities, or services. In the event of such a delay, the dates of performance
under this AGREEMENT shall be deferred for a period equal to the time lost by
reason of the delay. Notwithstanding such event or delay, RAINBOW may, if so
desires, exercise its rights under section 8.01. In the event that this
AGREEMENT is terminated, each PARTY shall return all PROPRIETARY INFORMATION and
works in progress received from the other PARTY.
<PAGE> 8
8.01 TERMINATION FOR CONVENIENCE OR FOR DEFAULT
RAINBOW shall have the right, upon giving thirty (30) days written
notice, to terminate the DEVELOPMENT PROJECT at any time. In the event
of such termination, RAINBOW's total liability to NATIONAL shall be
payment for the then current accumulated charges, including charges
that were to be amortized and were expended.
NATIONAL shall have the right, upon giving thirty (30) days written
notice, to terminate the Development project. If this AGREEMENT is
terminated by NATIONAL, then NATIONAL will return to RAINBOW any and
all development charges that have already been paid at the time of
termination. In such instance, NATIONAL will have no further liability.
This AGREEMENT will terminate upon the termination of the DEVELOPMENT
PROJECT. Section 3.0, however, will survive the termination of this
AGREEMENT.
9.0 INTEGRATION
This AGREEMENT constitutes the entire agreement between the PARTIES relating to
the subject matter contained within this AGREEMENT. This AGREEMENT supersedes
and repeals all previous negotiations or understanding between the PARTIES
relating to this subject matter.
10.0 MISCELLANEOUS
10.01 MODIFICATION
This AGREEMENT may not be modified, altered, changed or amended in any
respect unless done so in writing and signed by both PARTIES.
10.02 ASSIGNMENT OF AGREEMENT
NATIONAL may only assign this AGREEMENT or any portion hereof to an
affiliate of NATIONAL with prior written authorization from RAINBOW.
In the event that NATIONAL is unable to perform all or part of this
AGREEMENT, NATIONAL may only transfer its obligations with the
RAINBOW's prior written authorization.
10.03 SUBCONTRACTING
If NATIONAL assigns or subcontracts its obligations, NATIONAL will
remain liable for the performance of this AGREEMENT. If NATIONAL enters
any separate agreement with a subcontractor, such agreement shall: (a)
acknowledge that any INTELLECTUAL PROPERTY in any RAINBOW ASIC is owned
as set forth in section 3.0 of this AGREEMENT; and (b) protect
PROPRIETARY INFORMATION as set forth in section 3.01.
10.04 ACCESS TO PEOPLE AND INFORMATION
RAINBOW reserves the right to have technical or quality personnel
witness the development and manufacturing processes, and to perform any
necessary verification audits to assure the quality of the deliverable
items. This includes, but is not limited to, access to quality and
wafer process data and personnel. RAINBOW shall provide adequate
advanced notice to NATIONAL's designated program manager who will
arrange the logistics for such meetings.
11.0 NOTICE
Any notices delivered under this AGREEMENT, shall be in writing and addressed as
follows:
National Semiconductor Corp. Rainbow Technologies
1120 Kifer Rd. 50 Technology Dr.
MS 10-225 Irvine, CA 92718
Sunnyvale, CA 94086-3737 Attn: Rudy Goetz
Attn: Roger Thompson
<PAGE> 9
12.0 BANKRUPTCY
Notwithstanding the provisions of section 4.0, if either PARTY files a petition
in bankruptcy or is adjudicated a bankrupt, or commits an act of bankruptcy, or
if a petition in bankruptcy is filed against it, or if it makes an arrangement
pursuant to any bankruptcy or insolvency law, or if it discontinues its
business, or if a receiver is appointed for it or its business, then the other
PARTY shall, without further notice, have the immediate right to terminate this
AGREEMENT and enter upon the other PARTY's premises to repossess and remove (i)
any works in progress in connection with this AGREEMENT and (ii) any Proprietary
Property. In the event that NATIONAL files a petition, NATIONAL will return any
of the RAINBOW ASIC designs that are RAINBOW property.
13.0 FURTHER ACTIONS
At any time and from time to time, each PARTY agrees, without further
consideration, to take such actions and to execute and deliver such documents as
the other PARTY may reasonably request as necessary to effectuate the purposes
of this AGREEMENT.
14.0 GOVERNING LAW THIS AGREEMENT AND ITS PERFORMANCE SHALL BE GOVERNED BY,
SUBJECT TO, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA, USA.
15.0 GENERAL LIMITATIONS OF LIABILITY
In no event, whether as a result of breach of this AGREEMENT or otherwise, shall
either PARTY be liable to the other for loss of profit or revenue, loss of
goodwill, claims of customers, or special, consequential or punitive damages of
any nature.
16.0 EXPORT CONTROL
Both PARTIES shall adhere to all applicable laws, regulations and rules relating
to the export of technical data to any proscribed country listed in such
applicable laws, regulations and rules of the United States. The obligations
under this section 16.0 shall survive the termination or expiration of this
AGREEMENT.
17.0 SIGNATURE
IN WITNESS WHEREOF, the PARTIES have had this AGREEMENT executed by their
respective authorized officers on the date(s) written below with the intent that
they be legally and equitably bound by its terms. This AGREEMENT shall not be
enforceable until stamped and initialed below by NATIONAL's Intellectual
Property Group.
NATIONAL SEMICONDUCTOR CORP.
By: ______________________________
______________________
Title: ___________________________ National IP Stamp Date
__________________________________
RAINBOW TECHNOLOGIES, INC.
By: ______________________________
Date
Title: ___________________________ ______________________
<PAGE> 1
EXHIBIT 10(c)
DESIGN, DEVELOPMENT SERVICES AND PRODUCTION AGREEMENT
This agreement ("AGREEMENT"), effective as of the __21____ day of
_December_________, 1998 ("EFFECTIVE DATE") is by and between Rainbow
Technologies, Inc. ("RAINBOW") and EM Microelectronic-Marin SA ("EM MARIN").
This AGREEMENT will be valid until May 31, 2001. EM MARIN and RAINBOW may be
referred to under this AGREEMENT as a "PARTY" or the "PARTIES".
WHEREAS, RAINBOW has expertise in the fields of software protection and
anti-piracy devices for information technology applications; and
WHEREAS, EM MARIN provides technical and design services related to the
design, development, and manufacture of integrated circuits; and
WHEREAS, RAINBOW wishes to engage the technical and design service
capabilities of EM MARIN to obtain the design, development and production of an
integrated circuit hereinafter referred to as the "ProM/C" or "RAINBOW ASIC";
and
WHEREAS, the ProM/C integrated circuit will be designed using EM
MARIN's ALP1MVEE CMOS process;
Now, THEREFORE, the PARTIES agree as follows:
DEFINITIONS
"ATE" shall mean automatic test equipment.
"DESIGN DATABASE" shall include the net list, GDSII tape, maskworks,
and ATE program prepared under the DEVELOPMENT PROJECT, but shall
exclude any patent, copyrights, or trade secrets related to EM MARIN's
cells or subcells.
"DEVELOPMENT PROJECT" shall mean the work performed under this
AGREEMENT in preparation to manufacture the ASIC. (See APPENDIX A).
"DEVELOPMENT WORK" shall mean the work performed by EM MARIN for the
DEVELOPMENT PROJECT.
"k", if located immediately after any number, shall denote one thousand
(1000). (E.g., $60k shall mean $60,000 and 100k shall mean 100,000).
"NRE" shall mean any non-recurring engineering expense.
"PHASE" shall mean any phase of the DEVELOPMENT PROJECT.
"PROPRIETARY INFORMATION" shall mean all information delivered under
this AGREEMENT and marked confidential (as set forth in section 3.01)
that is not PUBLIC INFORMATION.
"PUBLIC INFORMATION" shall include: (a) published data sheets; (b)
published specifications; (c) published technical writings; and (d)
information in the public domain.
"INTELLECTUAL PROPERTY" shall include: (a) inventions and improvements
conceived, as those terms are used before the United States Patent
Office; (b) patents; (c) mask works; (d) copyrights; and (e) trade
secrets.
"RAINBOW ASIC" shall mean the PROM/C, which is identified by RAINBOW as
part number 105562.
<PAGE> 2
1.0 DEVELOPMENT
1.01 DEVELOPMENT PROJECT
A description of each PHASE of the DEVELOPMENT PROJECT is attached as
APPENDIX A. EM MARIN will use its reasonable best efforts to complete
the DEVELOPMENT WORK in accordance with the schedule set forth in
APPENDIX A.
1.02 SPECIFICATIONS
RAINBOW will furnish EM MARIN with the desired specifications for the
RAINBOW ASIC. EM MARIN will review the submitted specifications and
request any modifications it deems appropriate. The PARTIES will agree
to the final specifications for the RAINBOW ASIC and attach these
specifications as APPENDIX B.
1.03 RAINBOW'S RESPONSIBILITIES
RAINBOW shall provide EM MARIN the following information with respect
to the RAINBOW ASIC:
A. specifications including but not limited to APPENDIX B;
B. schematic files of the ProM circuit; and
C. supply testing information required for EM MARIN to create the
functional tests and electrical parametric tests (that is,
test programs) for production ATE.
1.04 EM MARIN'S RESPONSIBILITIES
EM MARIN shall perform responsibilities in accordance with APPENDIX A.
RAINBOW shall signify acceptance of completion of each PHASE by
providing EM MARIN a signed copy of APPENDIX A at the appropriate PHASE
transaction date. RAINBOW shall indicate an unsatisfactory PHASE
completion by a description of the non-conformity. Specifically, EM
MARIN shall, in addition to other obligations under this AGREEMENT:
A. provide access to design notebook(s) which contain all
simulations, Device sizes, schematics or design models, etc.,
in EM Marin's offices and shall supply simulation results;
B. supply to the mutually designated escrow company Calma GDSII
compatible data base tape and a complete data base for the
RAINBOW ASIC when completed by EM MARIN (electronic version of
1.04, A.);
C. characterize, to the Specification, a five piece sample of the
RAINBOW ASIC (in accordance with standard practice) and
provide RAINBOW the findings resulting from the analysis of
first silicon;
D. thoroughly analyze (in accordance with standard practice) the
RAINBOW characterization report and data resulting from
RAINBOW's analysis of first silicon;
E. upon completion of the analysis in C. and D. and after
receiving information concerning design errors (if any) from
RAINBOW, make any mutually agreed upon design corrections as
outlined in sections 2.01 and 2.02;
F. generate Test Programs for the production ATE; and
G. manage the production and deliveries of any RAINBOW ASIC.
H. provide deliverables in a timely manner as set forth in
APPENDIX A.
I. provide a written report describing the results from
production qualification of the RAINBOW ASIC.
<PAGE> 3
1.05 ADDITIONAL EM MARIN RESPONSIBILITIES
EM MARIN shall provide technical, engineering and developmental
services resulting in the delivery of ten, (10), prototypes of the
RAINBOW ASIC properly tested and packaged. (the "Tested Prototypes").
RAINBOW will have thirty (30) days to accept or reject the Tested
Prototypes. If RAINBOW accepts, then RAINBOW's notice of acceptance
will be in the form attached as APPENDIX C. If a written notice of
rejection is not received by EM MARIN within thirty (30) days of
shipment of the Tested Prototypes, the Tested Prototypes will be deemed
to have been accepted by RAINBOW.
EM MARIN will deliver additional prototypes of the RAINBOW ASIC at
$____ per unit within 4 weeks after RAINBOW places a purchase order for
such prototypes. The quantities of the prototypes will not exceed 200
pieces. If for any reason, including but not limited to wafer yield or
wafer foundry capacity restraints, EM MARIN cannot deliver the
additional prototypes of the RAINBOW ASIC within the 4 week schedule,
then EM MARIN will immediately notify RAINBOW of any new quantities and
delivery schedule.
1.06 DEVELOPMENT CHARGE AND PAYMENT SCHEDULE
In full payment for the design, development and layout work to be
performed for the DEVELOPMENT PROJECT, EM MARIN shall be paid a NRE
charge for the RAINBOW ASIC.
Non Recurring Engineering expense payments are due and payable upon the
acceptance by RAINBOW of each PHASE as described in section 1.04, and
the milestone schedule shown in APPENDIX A.
1.07 CHANGES
A. In the event RAINBOW desires to change the Specifications for
the DEVELOPMENT PROJECT, a request for change will be
submitted in writing to EM MARIN, and EM MARIN will estimate
the additional time and development costs necessary to
implement any requested change. RAINBOW must approve of the
additional cost and development time.
B. Upon receipt of RAINBOW's written approval, implementation of
the change will proceed and any additional cost will be paid
by RAINBOW. The Specifications will be amended to reflect any
change, and the DEVELOPMENT PROJECT will be modified as
necessary.
C. In order to facilitate proper financial control, EM MARIN has
provided the above fixed price quotation based on detailed
estimates of EM MARIN's efforts to complete this project. It
is anticipated that RAINBOW may require additional services
during or after completion of the DEVELOPMENT PROJECT, which
may affect cost or schedule. If RAINBOW (or its contract
manufacturer) requests any assistance from EM MARIN, then EM
MARIN will use its reasonable best efforts to provide such
additional services and charges will be billed based on the
actual time expended by each individual assigned to the
project. Additional charges are payable on Net 30 day terms.
EM MARIN's current billing rate for senior engineers is
______________________________ ($__________) per hour.
D. EM MARIN will bill RAINBOW for actual expenses of out of town
travel requested or previously approved by RAINBOW. All travel
expenses shall be paid by RAINBOW on thirty (30) day net
terms, from the date of invoice. Travel will be at coach or
standard room rates, unless these accommodations are not
available within the time constraints, in which case the next
available higher level of travel or accommodations will be
used.
<PAGE> 4
2.0 WARRANTY, REMEDIES
2.01 WARRANTY OF DESIGN INTEGRITY
EM MARIN warrants that all or part of the RAINBOW ASIC designs and
other material delivered by EM MARIN to RAINBOW under this AGREEMENT
meeting the Rainbow ASIC specification (hereinafter, "WARRANTED
INFORMATION") shall be free of design rule defects and layout defects;
will be logically correct, and will be consistent with acceptable
engineering practices.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, NO WARRANTIES, EXPRESSED
OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, EXIST WITH RESPECT TO ANY PRODUCTS OR SERVICES PURCHASED UNDER
THIS AGREEMENT AND THEREFORE ALL SUCH WARRANTIES ARE EXPRESSLY
EXCLUDED.
2.02 REMEDY
In the event RAINBOW rejects WARRANTED INFORMATION, EM MARIN shall, at
EM MARIN's expense, promptly correct any defects which RAINBOW has
identified.
2.03 WARRANTY OF RAINBOW ASIC PERFORMANCE
EM MARIN hereby warrants that any RAINBOW ASIC delivered in the
production PHASE will perform according to the electrical requirements
defined by the Specifications and the functional requirements defined
by the RAINBOW-approved production test program for a period of twelve
(12) months following the delivery thereof (the "WARRANTY PERIOD").
Notwithstanding the foregoing, EM MARIN does not warrant failure in the
RAINBOW ASIC due to storage or handling by RAINBOW, its subcontractors
or agents which does not conform to the industry standards set forth
for storage and handling.
2.04 REMEDY OF RAINBOW ASIC PERFORMANCE
During the WARRANTY PERIOD, EM MARIN will repair or replace any defect
in any RAINBOW ASIC which fails to perform in accordance with the
RAINBOW-approved production test program. EM MARIN will perform its
warranty obligations within one hundred (120) days after RAINBOW
notifies EM MARIN of any defect in any RAINBOW ASIC.
2.05 WARRANTY OF TITLE, INDEMNIFICATION
EM MARIN, at its own expense, will indemnify, hold RAINBOW harmless and
defend any action brought against RAINBOW to the extent that it is
based on a claim that any EM MARIN designed circuit blocks, cells or
other design details used by EM Marin in the Rainbow ASIC infringes any
United States (or former COCOM member country) patent, copyright, trade
secret, or other proprietary right, provided that EM MARIN is
immediately notified in writing of such claim. EM MARIN shall have the
right to control the defense of all such claims, lawsuits, and other
proceedings. In no event shall RAINBOW settle any such claim, lawsuit
or proceeding without EM MARIN's prior written approval.
RAINBOW, at its own expense, will indemnify, hold EM MARIN harmless and
defend any action brought against EM MARIN to the extent that it is
based on a claim that RAINBOW property and/or RAINBOW designed material
infringes any United States (or former COCOM member country) patent,
copyright, trade secret, or other proprietary right, provided that
RAINBOW is immediately notified in writing of such claim. RAINBOW shall
have the right to control the defense of all such claims, lawsuits and
other proceedings. In no event shall EM MARIN settle any such claim,
lawsuit, or proceeding without RAINBOW's prior written approval.
<PAGE> 5
3.0 INTELLECTUAL PROPERTY MATTERS
3.01 PROPRIETARY INFORMATION
Any PROPRIETARY INFORMATION to be transferred by one PARTY to the other
PARTY under this AGREEMENT shall be marked "confidential",
"proprietary" or by words of similar import. If any PROPRIETARY
INFORMATION is disclosed in an oral manner, the disclosing PARTY will
inform the other PARTY at the time of disclosure of such information's
proprietary nature, and confirm the same in writing to the receiving
PARTY within thirty (30) days. The PARTIES agree to hold PROPRIETARY
INFORMATION in confidence and to exert the same effort to prevent
disclosure thereof as it would regarding its own proprietary
information but in no less than a reasonable degree of care. The
PARTIES agree to not disclose any PROPRIETARY INFORMATION without
written authority. The obligations of this paragraph shall terminate
with respect to any portion of the received PROPRIETARY INFORMATION:
(a) known prior to receipt; (b) becoming known through no act or
failure to act by either PARTY; or (c) furnished to third parties
without restriction on disclosure; or (d) independently developed by
the PARTY receiving the PROPRIETARY INFORMATION.
3.02 OWNERSHIP OF INTELLECTUAL PROPERTY
All INTELLECTUAL PROPERTY first conceived, discovered, developed, or
acquired by one PARTY (alone or jointly with another party) outside the
scope of the DEVELOPMENT PROJECT shall remain the sole and exclusive
property of such PARTY.
Except for the RAINBOW ASIC net list, any INTELLECTUAL PROPERTY first
conceived, discovered, developed, or acquired solely by EM MARIN under
the DEVELOPMENT PROJECT shall be the exclusive property of EM MARIN.
Any RAINBOW ASIC net list shall be owned solely by RAINBOW.
INTELLECTUAL PROPERTY first conceived, discovered, developed, or
acquired solely by RAINBOW under the DEVELOPMENT PROJECT shall be the
exclusive property of RAINBOW.
INTELLECTUAL PROPERTY first conceived, discovered, developed, or
acquired jointly, as those terms are used before the United States
Patent Office, by both PARTIES under the DEVELOPMENT PROJECT shall be
jointly owned by both PARTIES. Each PARTY shall have the right to
exploit and licenses JOINT INTELLECTUAL PROPERTY without accounting to
the other PARTY.
In furtherance of the foregoing: (a) except for those licenses granted
under section 3.03, no patent or software licenses of any kind are
granted or implied under this AGREEMENT; and (b) no RAINBOW ASIC unit
shall be transferred or sold to any third party without RAINBOW's
signed and written permission.
3.03 LICENSE GRANT
Upon full payment of all development charges, RAINBOW will be granted a
fully paid, perpetual, non-exclusive, license to:
A. use the EM MARIN DESIGN DATABASE (put into escrow according to
1.04.B.) to have RAINBOW ASIC units produced for the benefit
of RAINBOW by a third party vendor in the event that EM MARIN:
(i) breaches this AGREEMENT; (ii) is unwilling or unable to
produce and deliver an order of RAINBOW ASIC units ordered by
RAINBOW within a default period of 60 days of scheduled
deliveries; or (iii) upon the occurrence of an event described
in section 12.0; and
B. use and include the RAINBOW ASIC designed and manufactured
under this AGREEMENT in any current or future RAINBOW
products.
<PAGE> 6
4.0 PRODUCTION
4.01 PRODUCTION QUANTITIES
RAINBOW agrees to provide EM MARIN with schedules detailing requested
deliveries of the RAINBOW ASIC units one hundred twenty (120) days in
advance. RAINBOW's order will be acknowledged with detailed quantity
and delivery schedules. Terms and conditions of production deliveries
shall be defined by the purchase agreements. The production pricing is
shown below in section 4.02. Notwithstanding the detailed delivery
schedule, EM MARIN agrees that RAINBOW has the right to extend the date
of delivery of RAINBOW ASIC units scheduled to occur more than 90 days
from the date RAINBOW informs EM MARIN of the extended date.
4.02 PRODUCTION PRICING
Both PARTIES agree to the pricing described below:
The unit price for the RAINBOW ASIC units are as follows:
<TABLE>
<S> <C> <C>
PACKAGED UNIT PRICE
20 pin 173 milTSSOP 20 pin Plastic DIP
o first 10k units $____ per unit $____
o up to 100k units per year $____ per unit $____
o up to 200k units per year $____ per unit $____
o up to 400k units per year $____ per unit $____
TESTED, SAWN DIE ON STICKY TAPE ADDED COST FOR GOLD BUMPING
o up to 200k die per year $____ per unit
o up to 400k die per year $____ per unit
o up to 800k die per year $____ per unit
o over 800k die per year $____ per unit $___
</TABLE>
5.0 PERFORMANCE TO SCHEDULE (PRODUCTION ORDERS)
5.01 CONSIDERATION FOR LATE DELIVERY ON EXPEDITED LOTS
RAINBOW shall be relieved of its obligation to pay an expedite fee if
the expedited lot is fourteen (14) days late based on the acknowledged
delivery date from (FOB factory) EM MARIN.
5.02 SHIP AHEAD ALLOWANCE
RAINBOW grants EM MARIN the right to ship product sixty (60) days ahead
of the original delivery date as specified on the acknowledged purchase
order.
5.03 YIELD FALLOUT/RECOVERY PLAN
EM MARIN shall establish a buffer stock to fulfill the quantities
stated in an acknowledged purchase order from RAINBOW and based on an
annual rolling forecast updated monthly and EM MARIN's current cycle
time and yields.
6.0 PRODUCTION ORDER DESCRIPTIONS
6.01 PURCHASE ORDERS
RAINBOW purchase orders are uncancelable after written order
confirmation by EM MARIN and will explicitly state RAINBOW part
numbers, EM MARIN part numbers, and RAINBOW ASIC descriptions and form
of product delivery (i.e., packaged or die).
7.0 BUSINESS STRATEGY
<PAGE> 7
7.01 ESTABLISHING A SECOND MANUFACTURING LOCATION
EM MARIN may, in its sole discretion, establish a second manufacturing
location for RAINBOW ASIC production provided that it notifies RAINBOW
in advance. RAINBOW will not be held accountable for the costs
associated with starting a second manufacturing location.
EM MARIN will perform the necessary tasks to establish the
manufacturing capability at a second location if RAINBOW exercises this
option after delivery of one (1) million pieces of the RAINBOW ASIC and
by payment of __________________________ ($___________) to EM MARIN.
The RAINBOW ASIC unit price shall not increase, regardless of where the
manufacturing takes place. Pricing shall be renegotiated if more
favorable cost structures are available at another site.
7.02 DISCONTINUANCE OF MANUFACTURING
If EM MARIN decides to discontinue manufacturing the RAINBOW ASIC, EM
MARIN must notify RAINBOW in writing at least twelve (12) months in
advance. EM MARIN will allow RAINBOW a "last buy" purchase order to
cover the twelve (12) month period prior to the discontinue date.
Furthermore, EM MARIN will provide reasonable assistance to transition
the manufacturing of the product to an alternate supplier.
8.0 DURATION AND TERMINATION
8.01 THIS AGREEMENT SHALL COME INTO EFFECT UPON SIGNATURE BY BOTH
PARTIES AND SHALL REMAIN IN FORCE UNTIL THE 31ST DAY OF
DECEMBER 2001. IT SHALL THEREAFTER IMPLICITLY BE RENEWED FOR
ADDITIONAL TERMS OF ONE YEAR PROVIDED (I) NEITHER PARTY IS
GIVING NOTICE TO THE OTHER IN WRITING AT LEAST THREE (3)
MONTHS IN ADVANCE AND (II) THE AGREEMENT IS NOT TERMINATED FOR
REASONS SET FORTH HEREINAFTER.
8.02 If either PARTY materially breaches this AGREEMENT, the other
PARTY may, upon thirty (30) days written notice of such breach
or default, cancel its remaining obligations under this
AGREEMENT. In no event shall EM MARIN be liable for delay in
the rendering of services under this AGREEMENT due to causes
beyond its reasonable control, including by way of
illustration, but not limited to, acts of God, acts of civil
or military authority, fire, or inability's due to causes
beyond EM MARIN's reasonable control to obtain necessary
labor, materials, facilities, or services. In the event of
such a delay, the dates of performance under this AGREEMENT
shall be deferred for a period equal to the time lost by
reason of the delay. Notwithstanding such event or delay,
RAINBOW may, if so desires, exercise its rights under section
8.01. In the event that this AGREEMENT is terminated, each
PARTY shall return all PROPRIETARY INFORMATION and works in
progress received from the other PARTY.
8.03 TERMINATION FOR CONVENIENCE OR FOR DEFAULT
RAINBOW shall have the right, upon giving thirty (30) days written
notice, to terminate the DEVELOPMENT PROJECT at any time. In the event
of such termination, RAINBOW's total liability to EM MARIN shall be
payment for the then current accumulated charges, including charges
that were to be amortized and were expended.
EM MARIN shall have the right, upon giving thirty (30) days written
notice, to terminate the Development project. If this AGREEMENT is
terminated by EM MARIN, then EM MARIN will return to RAINBOW any and
all development charges that have already been paid at the time of
termination with the exception of _____________________ ($________) US
Dollars for the work up to Specification Sign-off. In such instance,
EM MARIN will have no further liability.
This AGREEMENT will terminate in case of the termination of the
DEVELOPMENT PROJECT. Section 3.0, however, will survive the termination
of this AGREEMENT for three (3) years.
<PAGE> 8
9.0 INTEGRATION
This AGREEMENT constitutes the entire agreement between the PARTIES relating to
the subject matter contained within this AGREEMENT. This AGREEMENT supersedes
and repeals all previous negotiations or understanding between the PARTIES
relating to this subject matter.
10.0 MISCELLANEOUS
10.01 MODIFICATION
This AGREEMENT may not be modified, altered, changed or amended in any
respect unless done so in writing and signed by both PARTIES.
10.02 ASSIGNMENT OF AGREEMENT
EM MARIN may only assign this AGREEMENT or any portion hereof to an
affiliate of EM MARIN with prior written authorization from RAINBOW.
In the event that EM MARIN is unable to perform all or part of this
AGREEMENT, EM MARIN may only transfer its obligations with the
RAINBOW's prior written authorization.
10.03 SUBCONTRACTING
If EM MARIN assigns or subcontracts its obligations, EM MARIN will
remain liable for the performance of this AGREEMENT. If EM MARIN enters
any separate agreement with a subcontractor, such agreement shall: (a)
acknowledge that any INTELLECTUAL PROPERTY in any RAINBOW ASIC is owned
as set forth in section 3.0 of this AGREEMENT; and (b) protect
PROPRIETARY INFORMATION as set forth in section 3.01.
10.04 ACCESS TO PEOPLE AND INFORMATION
RAINBOW reserves the right to have technical or quality personnel
witness the development and manufacturing processes, and to perform any
necessary verification audits to assure the quality of the deliverable
items. This includes, but is not limited to, access to quality and
wafer process data and personnel. RAINBOW shall provide adequate
advanced notice to EM MARIN's designated program manager who will
arrange the logistics for such meetings.
11.0 NOTICE
Any notices delivered under this AGREEMENT, shall be in writing and addressed as
follows:
EM Microelectronic - Marin SA Rainbow Technologies
Rue des Sors 3, CH-2074. 50 Technology Dr.
Marin / Switzerland Irvine, CA 92718
Attn: Peter Umminger, Sales Director Attn: Patrick Godding, Hdwr Eng
Director
12.0 BANKRUPTCY
Notwithstanding the provisions of section 4.0, if either PARTY files a petition
in bankruptcy or is adjudicated a bankrupt, or commits an act of bankruptcy, or
if a petition in bankruptcy is filed against it, or if it makes an arrangement
pursuant to any bankruptcy or insolvency law, or if it discontinues its
business, or if a receiver is appointed for it or its business, then the other
PARTY shall, without further notice, have the immediate right to terminate this
AGREEMENT and enter upon the other PARTY's premises to repossess and remove (i)
any works in progress in connection with this AGREEMENT and (ii) any Proprietary
Property. In the event that EM MARIN files a petition, EM MARIN will return any
of the RAINBOW ASIC designs that are RAINBOW property.
13.0 FURTHER ACTIONS
At any time and from time to time, each PARTY agrees, without further
consideration, to take such actions and to execute and deliver such documents as
the other PARTY may reasonably request as necessary to effectuate the purposes
of this AGREEMENT.
<PAGE> 9
14.0 GOVERNING LAW
THIS AGREEMENT AND ITS PERFORMANCE SHALL BE GOVERNED BY, SUBJECT TO, AND
CONSTRUED IN ACCORDANCE WITH SWISS LAW. Any and all disputes arising in
connection with the execution or interpretation of this Agreement or breach
thereof which cannot be settled amicably shall be finally settled by
arbitration, which shall take place in London and be carried out by the
International Chamber of Commerce, in accordance with the ICC Rules of
Conciliation and Arbitration, which are in force at the relevant time. The
language to be used in such arbitration proceedings shall be English.
15.0 GENERAL LIMITATIONS OF LIABILITY
In no event, whether as a result of breach of this AGREEMENT or otherwise, shall
either PARTY be liable to the other for loss of profit or revenue, loss of
goodwill, claims of customers, or special, consequential or punitive damages of
any nature.
16.0 EXPORT CONTROL
Both PARTIES shall adhere to all applicable laws, regulations and rules relating
to the export of technical data to any proscribed country listed in such
applicable laws, regulations and rules of the United States. The obligations
under this section 16.0 shall survive the termination or expiration of this
AGREEMENT.
17.0 SIGNATURE
IN WITNESS WHEREOF, the PARTIES have had this AGREEMENT executed by their
respective authorized officers on the date(s) written below with the intent that
they be legally and equitably bound by its terms. This AGREEMENT shall not be
enforceable until stamped and initialed below by EM MARIN's Intellectual
Property Group.
EM Microelectronic - Marin SA
By: _____________________________
Title: ___________________________
__________________________________
RAINBOW TECHNOLOGIES, INC.
By: _____________________________
Date
<PAGE> 1
EXHIBIT 10(u)
MANUFACTURING AGREEMENT
THIS MANUFACTURING AGREEMENT (the "Agreement") is entered into and
effective as of the 30 day of September, 1997, by and between AlliedSignal Inc.,
a Delaware corporation, by and through its Communications Systems business unit
having a principal place of business at 1300 East Joppa Road, Baltimore,
Maryland 21286-5999 ("AlliedSignal") and Mykotronx, Inc., a California
corporation, having a principal place of business at 357 Van Ness Way, Suite
200, Torrance, California 90501 ("Mykotronx"). AlliedSignal and Mykotronx may be
individually referred to as a "Party" or collectively referred to as the
"Parties".
WHEREAS, the Parties have entered into in addition to this Agreement:
(a) an Asset Purchase Agreement (the "Purchase Agreement"), dated as of
September 30, 1997, which provides for the sale by AlliedSignal to Mykotronx of
certain assets including assets used in the manufacture and sale of the
"Products", as defined below, and certain ancillary components and parts used in
connection with the Products ("Ancillaries"); and (b) a Development Agreement on
such date ("Development Agreement") to develop a later generation product for
future sales (all three Agreements hereinafter referred to collectively as the
"Collective Agreements"). Capitalized terms used but not defined herein shall
have the meanings ascribed to them in the Purchase Agreement.
WHEREAS, the Parties have determined that it is mutually desirable for
AlliedSignal to continue to manufacture the Products for and in behalf of
Mykotronx.
WHEREAS, the Parties wish to enter into this Manufacturing Agreement
which shall set forth the terms and conditions upon which AlliedSignal shall
continue to manufacture Products for Mykotronx.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Parties agree as follows:
1. TERM OF AGREEMENT; TERMINATION
(a) This Agreement shall expire on December 31, 1999, subject to
earlier termination pursuant to the provisions of this Agreement.
(b) Mykotronx may, at its option, terminate this Agreement prior to
December 31, 1999, by giving written notice to AlliedSignal of its desire to
terminate this Agreement. Such notice shall include the effective date of the
termination which date shall be not less than 180 days after the date of such
notice. Such notice shall be given, if at all, at any time after June 30, 1998,
but not later than June 30, 1999.
(c) Any provisions hereof that by their nature would be expected to
survive the termination of this Agreement shall survive and not be affected by
the termination or expiration of this Agreement, including, without limitation,
Sections 13, 18, 19, 23 and 24.
2. MANUFACTURING
A. AlliedSignal shall manufacture and/or purchase the products for
Mykotronx listed in EXHIBIT A annexed to this Agreement and made a part hereof,
to the specifications and/or part number configurations identified opposite each
product (hereinafter referred to as the "Product " or "Products"), including the
Ancillaries used in connection with the Products set forth in EXHIBIT A.
B. The Product is a conceptual configuration and the subject of the
Development Agreement. Upon completion of development of the Product, EXHIBIT A
hereto shall be amended to add the Product to this Agreement as a Product.
3. LICENSE TO MANUFACTURE
For the term of this Agreement, Mykotronx does hereby grant to
AlliedSignal a non-exclusive, royalty-free, irrevocable right and license: (i)
to use all Intellectual Property transferred to Mykotronx by AlliedSignal
pursuant to the Purchase Agreement and (ii) to make Products, or have the
Products made, including purchasing the Ancillaries used in connection with the
Products.
<PAGE> 2
4. PROHIBITION ON THIRD PARTY SALES
AlliedSignal agrees to manufacture the Products and/or Ancillaries used
in connection with the Products exclusively for Mykotronx and further agrees not
to sell any of the Products and/or Ancillaries used in connection with the
Products to any third party unless directed to do so in writing by Mykotronx.
5. FORECASTS
Commencing not later than November 1, 1997, Mykotronx shall submit in
writing to AlliedSignal a forecast of Products and Ancillaries that Mykotronx
expects will be required for sale within the next six (6) months. The forecast
shall include the total quantity and type of Products and Ancillaries,
identified by part number, and such forecast shall be revised monthly. Forecasts
are for general planning purposes only and, accordingly, Mykotronx shall not be
responsible for forecasts that later turn out to be inaccurate.
6. PURCHASE ORDERS
A. Notwithstanding the provisions set forth in the paragraph entitled
FORECASTS, Mykotronx shall issue purchase orders ("Purchase Orders") for all
Products ordered which shall include the unit price, quantity, cumulative price,
anticipated delivery date, place of delivery and method of transportation and
carrier. Any terms and conditions contained in a Purchase Order that are
inconsistent with the terms and conditions set forth in this Agreement shall
have no force and effect unless set forth in writing executed by both Parties.
AlliedSignal agrees to accept mandatory flowdown clauses similar to those
accepted by Mykotronx in its prime contracts and to incorporate the terms and
conditions thereof in the Purchase Orders. In addition, the Parties agree to
negotiate in good faith to incorporate termination provisions similar to those
accepted by Mykotronx in its prime contract(s) with its customers for the
Products. Other additional terms and conditions shall have no force and effect.
B. Deliveries shall be made pursuant to reasonable manufacturing
schedules based on no less than a sixty (60) day lead time.
C. Mykotronx agrees to place Purchase Orders for a minimum quantity of
___ Units for delivery per month and shall not exceed a maximum quantity of ___
Units for delivery per month (except as contemplated otherwise in this Section
6.C). Any requirements for a quantity of less than ___ Units (but not less than
___ Units) or more than ___ Units (but not more than ___ Units) shall be priced
as provided on Part III of Exhibit B, and the delivery schedule shall be
adjusted if impacted by an order outside the _______ minimum-maximum quantity
range. "Units" shall mean, collectively, the Product embeddable _____ COMSEC
module, the Product high speed embeddable ____ COMSEC module, the ____, and the
Product (which is the subject of the Development Agreement). If the Product has
not been endorsed by the NSA by January 1, 1999, then, commencing in January
1999, and continuing on a month-to-month basis thereafter, Mykotronx shall be
relieved of its obligation to purchase a minimum number of Units until the first
calendar month after the month in which the Product receives NSA endorsement.
D. Payment for Products and/or Ancillaries ready for delivery shall be
made by Mykotronx on a net thirty (30) basis from receipt of the invoice from
AlliedSignal with respect to deliveries under the IDIQ and on a net forty-five
(45) basis for all other deliveries (including purchase orders for Mykotronx to
be shipped to its inventory). Invoices shall be transmitted to Mykotronx at the
time the Products are deemed "accepted" as provided in Section 12 hereof.
E. Notwithstanding anything which may be to the contrary herein,
Mykotronx shall deliver to AlliedSignal an initial Purchase Order hereunder not
later than November 1, 1997. Such initial Purchase Order shall cover Mykotronx'
orders for Products for the period October 1, 1997, through December 31, 1997,
and for each month in such period shall include orders for at least ____ Units
in the aggregate per month. In addition the Purchase Order for the month of
October 1997 shall include orders that reflect by AlliedSignal in such month
pursuant to the next sentence of this Section 6.E. For the period from October
1, 1997 through the date Mykotronx delivers the initial Purchase Order,
AlliedSignal shall continue to manufacture and ship Products in a manner that
is, at a minimum, sufficient to satisfy existing outstanding obligations under
the Customer Contracts, and Mykotronx shall be deemed to have ordered such
Products as if it had delivered a Purchase Order therefor.
<PAGE> 3
7. PRICING
A. Pricing for the Products and/or Ancillaries ("Transfer Price") shall
remain firm through December 31, 1999, as shown in Part I of EXHIBIT B annexed
hereto and made a part of this Agreement, except that such prices may be
adjusted to reflect an increase in the cost of material (applying burden rates
applicable thereto) in accordance with the formula set forth in Part Il of
EXHIBIT B. In addition, in the event that any raw materials or component parts
are supplied by Mykotronx, an appropriate decrease will be made in the transfer
price.
B. The price to be paid by Mykotronx to AlliedSignal for the Presidio
module on a pass-through basis shall be fixed at $____ per unit; provided,
however, that in the event that any materials relating to the Presidio module
are supplied by Mykotronx, an appropriate decrease will be made in such $____
base transfer price net of the amount, if any, accruing to the benefit of
AlliedSignal pursuant to the next sentence of this Section 7.B. In the event the
Presidio module cost is less than or exceeds the $____ unit cost, Mykotronx and
AlliedSignal shall share any price decrease benefit and/or price increase cost
on an equal basis below and above such unit cost, but AlliedSignal's maximum
liability or benefit under this provision for Presidio cost increases above or
decreases below the $____ per unit cost shall cumulatively not exceed $______.
Upon AlliedSignal incurring $______ in costs for its share of price increases in
excess of $____ per unit, Mykotronx shall thereafter be responsible for all such
costs of the Presidio module.
C. Upon completion of the development of the Product pursuant to the
Development Agreement, an initial Transfer Price shall be established for this
new Product which shall be determined in a manner consistent with the manner in
which the initial transfer prices hereunder were determined. In furtherance and
not in limitation of the foregoing, such price shall include AlliedSignal's
material costs plus burden (at 1997 rates) and labor costs plus burden at 1998
rates, plus 1.5% for warranty and 1% for administrative requirements, with no
other general and administrative expenses included in the Transfer Price of the
Product. After the initial Transfer Price has been determined, such initial
Transfer Price shall be added to Part I of EXHIBIT B hereto, and such price
shall remain firm through December 31, 1999, except that such price may be
adjusted to reflect an increase in the cost of material (applying burden rates
applicable thereto) in accordance with the formula set forth in Part II of
EXHIBIT B or as otherwise contemplated in Section 7.B, this Section 7.C or
Section 7.D. In addition, in the event that any raw materials or component parts
are supplied by Mykotronx, an appropriate decrease will be made in the transfer
price.
D. Notwithstanding anything which may be to the contrary herein, the
transfer price for the Product (with respect to orders placed for delivery
within the month ___ minimum/ ___ maximum Unit range) shall not exceed $ ____
per unit (the "Cap"), provided, however , that the Cap shall be increased on a
dollar for dollar basis to the extent that the cost of the Presidio module
exceeds $____ per unit. For Product Units that are ordered for delivery outside
of the monthly ___ minimum/ ___ maximum range, AlliedSignal will offer Transfer
Prices which shall be determined in a manner consistent with the 90% learning
curve methodology used to determine the ranges outside the ___ minimum/ ___
maximum ranges set forth in Part III of Section B.
E. Attached hereto as Exhibit C is a list of the elements included in
the build up of the Transfer Price. If any element relating to price has been
included in the build up of the Transfer Price, then, notwithstanding any
provision which may be to the contrary herein, Mykotronx shall not be charged
separately for such cost elements. If it is determined that inadvertently
Mykotronx has been charged separately for a cost that is included in the
transfer price, then AlliedSignal shall give Mykotronx a credit for the amount
of such overcharge and shall thereafter cease to bill Mykotronx separately for
such charges.
8. CHANGES
Any changes to the drawings, designs or specifications of the Products
required by Mykotronx shall be communicated to AlliedSignal in writing. The
delivery date and the price of the Products shall be adjusted if any such
changes agreed upon by the Parties cause a delay in delivery or increase in the
costs of manufacture of the Products. Anything to the contrary notwithstanding,
AlliedSignal shall assume the costs of all changes cumulatively on a recurring
and non-recurring basis up to $______ (net of any such costs that are included
in the Transfer Price) and Mykotronx shall thereafter be responsible for the
costs incurred by AlliedSignal in implementing changes to the Products.
<PAGE> 4
9. SHIPMENTS, FACTORY RELOCATION; FACTORY QUALIFICATION
A. Method of transportation and carrier are to be in accordance with
the instructions contained in the Purchase Orders. All shipments shall be FOB
AlliedSignal shipping dock, Baltimore, Maryland, or such other FOB Origin point
designated by AlliedSignal. The cost of insurance and freight shall be paid for
by Mykotronx except for freight for shipment under the IDIQ which shall be
absorbed by AlliedSignal as part of the Transfer Price. Title and the risk of
loss, damage and destruction shall pass to Mykotronx at the FOB point. Shipments
shall be made directly to Mykotronx customers, per instructions to AlliedSignal
by Mykotronx as set forth in Purchase Orders.
B. In the event AlliedSignal elects to reorganize, merge, sell or
otherwise change the structure of the business organization manufacturing the
Products and/or the Ancillaries, AlliedSignal without the consent of any Party
may move the factory. In such event, AlliedSignal shall notify Mykotronx one
hundred twenty (120) days in advance of such move and AlliedSignal shall be
responsible for any required requalification related to the Products and/or
Ancillaries. For purposes of this Agreement, "AlliedSiginal Facility" shall mean
the current location of the manufacturing operations, which is 1300 East
Joppa Road, Baltimore, Maryland 21286, or such other location to which the
operations may be moved in accordance with this Section 9.B.
C. During the term of this Agreement, AlliedSignal shall maintain
facility clearance, COMSEC Account and Security clearance and controls as
required by the flow down provisions per DD 254 of the IDIQ for the AlliedSignal
Facility.
10. DELIVERY DATE-LIQUIDATED DAMAGES
A. Delivery will be accomplished within the time specified on the face
of the Purchase Order ("Due Date'), provided such date allows proper lead time
as set forth in this Agreement. Anything to the contrary notwithstanding,
AlliedSignal shall not be liable for any reasonable delay in production or
delivery, until it receives a fifteen (15) day advance notice ("Notice Period")
of such delinquency giving AlliedSignal sixty (60) days from the expiration of
the Notice Period to cure the delinquency ("Cure Period"), for a total of 75
days from the date the notice is received; provided, however, that the Notice
Period and Cure Period shall not apply to delays in production or delivery that
are the result of the relocation of the manufacturing operations as contemplated
in Section 9. Delivery shall be deemed complete when the Products are delivered
to the FOB point.
B. In the event AlliedSignal fails to cure the delinquency prior to the
expiration of the Notice Period and Cure Period, AlliedSignal shall pay to
Mykotronx as liquidated damages, a sum of one percent (1%) of the Transfer Price
of the Products and/or Ancillaries that were ordered by Mykotronx' customers and
remain unshipped for each month (beyond the seventy-five (75) day Notice and
Cure Period) that such Products so remain unshipped, not to exceed a total of
($_______) of liquidated damages in the aggregate. Anything to the contrary
notwithstanding, no liquidated damages under this section entitled DELIVERY
DATE-LIQUIDATED DAMAGES shall be due and owing: (1) for Products that remain
unshipped as of September 30, 1998 (which are addressed in the Development
Agreement); or (2) if the delays in delivery are caused by the U.S. Government
or any of its agencies or departments (which are not attributable to the
performance or non-perfonnance by AlliedSignal) or by force majeure events.
C. In the event AlliedSignal is obligated by the terms of this
Agreement to pay liquidated damages to Mykotronx, AlliedSignal shall pay such
sum on a net thirty (30) basis from receipt of Mykotronx' invoice for same,
provided AlliedSignal does not dispute such invoice.
11. FORCE MAJEURE
In the event a delay in production or delivery occurs which delay is
occasioned by: (a) acts of God, including but not limited to fire, floods or
unusually severe weather; (b) civil or military authority, war, hostility,
riots, government action in its contractual or sovereign capacity; (c) strikes
or other labor actions; or (d) where such delay is occasioned by other causes
beyond the control of AlliedSignal and without its fault or negligence, then the
date or dates for delivery of the equipment shall be extended for a period equal
to the time lost by reason of any such delay. Anything to the contrary
notwithstanding, AlliedSignal shall be responsible for delays caused by
subcontractors failing to make timely deliveries unless such delays are caused
by force majeure events, subject to the limitations set forth in paragraph B of
the section, entitled DELIVERY DATES-LIQUIDATED DAMAGES.
<PAGE> 5
12. INSPECTION AND ACCEPTANCE
Acceptance of Products shall take place at the AlliedSignal Facility:
(a) with respect to orders to be shipped to a Government customer when such
customer delivers to AlliedSignal a signed fonn DD 250 authorizing shipment of
Products and/or Ancillaries; (b) with respect to all other orders (excluding
orders delivered to the account of Mykotronx), when AlliedSignal signs-off on a
commercial shipper accompanied by a Certificate of Conformance, authorizing
shipment of the Products and/or Ancillaries, or (c) with respect to orders
delivered to the account of Mykotronx, when AlliedSignal signs off on a
Certificate of Conformance. Upon reasonable prior notice, during normal business
hours Mykotronx or its customers for the Products and/or Ancillaries may inspect
the Products and/or Ancillaries, including testing thereof, at the AlliedSignal
Facility.
13. WARRANTY
(a) AlliedSignal warrants to Mykotronx' customers that the Products it
delivers hereunder will be free from defects in material and workmanship at the
time of acceptance. This Warranty will terminate one (1) year after the date of
such acceptance or such longer period as is required by the Indefinite
Delivery-Indefinite Quantity ("IDIQ") contract with the NSA ("Warrantv Period").
Notification of any such defect must be given by Mykotronx to AlliedSignal
within the Warranty Period. AlliedSignal's obligation under this Warranty is
limited to repairing or replacing any Product which is determined by
AlliedSignal to be defective.Repair or replacement will be accomplished at the
AlliedSignal Facility. Defective items returned to AlliedSignal pursuant to this
Warranty will be delivered to the AlliedSignal Facility, freight prepaid.
AlliedSignal will return such items to Mykotronx or its customer at Mykotronx's
option, freight prepaid. Products replaced will become the property of
AlliedSignal.
(b) In addition, for so long as AlliedSignal is manufacturing Products
for Mykotronx hereunder, if and as requested by Mykotronx, AlliedSignal shall
repair or replace out-of-warranty Products on the terms and conditions provided
in Section 14.C.
(c) This Warranty does not cover components that are expendable in
normal use and thus have an unpredictable service life, such as batteries.
(d) Products that have been repaired or replaced during the Warranty
Period are warranted for the remainder of the unexpired portion of the original
Warranty Period or as otherwise required by the IDIQ.
(e) If AlliedSignal does not find any defects in workmanship or
material, or if the Warranty Period has expired, AlliedSignal's regular charges
shall apply and Mykotronx shall pay all such charges including transportation
costs.
(f) AlliedSignal is released from all obligations under its Warranty in
the event repairs or modifications are made by persons other than its own
authorized personnel unless such work is authorized in writing by AlliedSignal.
THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, WHICH ARE HEREBY EXPRESSLY DISCLAIMED. ALLIEDSIGNAL'S LIABILITY UNDER
THIS WARRANTY IS EXPRESSLY LIMITED TO THE REPAIR OR REPLACEMENT, AT ITS OPTION,
OF ANY PRODUCT CONTAINING A DEFECT IN MATERIAL OR WORKMANSHIP AT THE TIME OF
DELIVERY. IN NO EVENT SHALL ALLIEDSIGNAL BE LIABLE FOR DIRECT, INDIRECT,
INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR OTHER DAMAGES RESULTING FROM DEFECTS IN
MATERIAL OR WORKMANSHIP IN THE PRODUCTS DELIVERED. THE SOLE REMEDY SHALL BE
REPAIR OR REPLACEMENT FOR ANY SUCH DEFECTS UNDER THE TERMS OF THIS WARRANTY.
14. SUPPORT AND TRANSITION SERVICES
A. AlliedSignal shall maintain a dedicated hotline to handle customer
inquiries for the Products. Such hotline shall be open 24 hours a day seven days
a week, but shall be manned by one person between the hours of 8 A.M. and 4:00
P.M. weekdays. Calls received on a voice recorder during time periods in which
the telephone is not manned shall be addressed on the next business day.
B. In-warranty service during the term of this Agreement shall be
performed by AlliedSignal for the Products at no additional cost to Mykotronx
other than as included in the Transfer Prices.
<PAGE> 6
C. Out-of-warranty service during the term of this Agreement shall be
performed by AlliedSignal for the Products to be billed to Mykotronx and paid to
AlliedSignal at the rate of $___ per Unit in 1997 and 1998 and $___ per Unit in
1999. Prior to performing any out-of-service warranty repair AlliedSignal shall
test/troubleshoot the unit in a manner consistent with its past practices..
D. The furnishing of personnel for travel to a customer location, if
necessary, shall be performed by AlliedSignal during the term of this Agreement
to be billed to Mykotronx and paid to AlliedSignal at the then existing hourly
rates as set forth in AlliedSignal's then current forward pricing rates for the
personnel traveling, in addition to reasonable expenses incurred for travel,
meals and lodging.
E. AlliedSignal shall provide to Mykotronx at no cost office space,
telephone service and access to office equipment and supplies reasonably
necessary to support Mykotronx personnel at AlliedSignal's manufacturing site
for the purpose of understanding the manufacturing processes of the Product and
the acquired assets. In addition, Mykotronx will have access to AlliedSignal
employees in order to facilitate its understanding thereof.
15. TRANSFER OF EQUIPMENT/RECORDS
A. The Personal Property as defined in the Purchase Agreement may be
purchased by Mykotronx upon the expiration of this Agreement as provided in
section 13.5 of the Purchase Agreement.
B. During the term of this Agreement, AlliedSignal shall provide when
issued the following production detail and status reports:
Master Production Schedule
Business Requirement Plan
MRP Exception Report
Linearity Report
Drill Down Report
Scrap Report
ICAT Meeting Report
Field Service\Hotline Database
16. PRODUCT DEFECTS OR RECALL
AlliedSignal, at its cost, shall be responsible for the correction of
any design defects found in Products shipped by AlliedSignal, including the
costs of recalling the Products and engineering services to make such
corrections.
17. ORDERLY TRANSITION
Upon the expiration of this Agreement AlliedSignal shall provide, at no
additional cost, reasonable assistance to Mykotronx in effectuating an orderly
transition of the acquired assets to a location designated by Mykotronx. Such
activities shall be arranged so as to minimize any interruption of
AlliedSignal's normal business operations. Mykotronx shall assume the costs of
such transition, including the costs of crating, packing, transportation,
insurance, indexing and cataloging information and such other costs incurred in
transferring a product line to another location.
18. LIMITATION ON DAMAGES
A. Notwithstanding anything to the contrary in the Collective
Agreements, AlliedSignal's liability under the clauses entitled: (a) PRICING,
and DELIVERY DATE-LIQUIDATED DAMAGES of this Agreement and (b) PRODUCT DELIVERY
DATE-LIQUIDATED DAMAGES of the Development Agreement shall not exceed ($______)
in the aggregate.
B. IN NO EVENT SHALL EITHER PARTY HERETO BE LIABLE TO THE OTHER PARTY
HERETO FOR INDIRECT, INCIDENTALS CONSEQUENTIAL OR EXEMPLARY DAMAGES THAT ARE
CLAIMED TO BE INCURRED BY THE OTHER PARTY WHETHER SUCH CLAIM ARISES UNDER
CONTRACT, TORT (INCLUDING STRICT LIABILITY) OR OTHER THEORY OF LAW RELATED TO
PERFORMANCE HEREUNDER OR AN ALLEGED BREACH OF A CONTRACT HEREUNDER.
<PAGE> 7
C. The terms "indirect, incidental, consequential or exemplary damages"
as used herein shall include, but is not limited to, punitive damages, loss of
use, loss of business reputation, increased expense of operation, loss of
profit, cost of money and loss of use of capital or revenue arising at any time.
D. A claim under this Agreement, the Purchase Agreement, or the
Manufacturing Agreement shall preclude a claim on the same subject matter under
any of the other three Agreements.
19. NO SET-OFF
All monies owed for orders placed under a Purchase Order shall be due
and payable under the terms of this Agreement and Mykotronx shall not set off
said sum due AlliedSignal under any Purchase Order from sums, whether liquidated
or not, that are or may be due Mykotronx which arise out of a different
transaction or Purchase Order with AlliedSignal, its divisions, subsidiaries or
affiliates.
20. FURTHER ASSURANCES
The Parties covenant and agree that, subsequent to the execution and
delivery of this Agreement and without any additional consideration, each of the
Parties shall execute and deliver any further legal instruments and perform such
acts which are or may become necessary to effectuate the purposes of this
Agreement.
21. RELATIONSHIP
AlliedSignal is an independent contractor engaged by Mykotronx in the
manufacture of Products. Nothing in the Agreement shall constitute AlliedSignal
as an employee, agent or general representative of Mykotronx. This Agreement
shall not constitute appointment of either Party as the legal representative or
agent of the other, nor shall either Party have the right or authority to
assume, create or incur any liability or any obligation of any kind, express or
implied, against, or in the name of, or on behalf of, the other Party.
22. INSOLVENCY
Either Party may cancel this Agreement in the event of the suspension
of the other Party's business, insolvency of the other Party, the institution of
bankruptcy, reorganization, arrangement or liquidation proceedings involving or
affecting the other Party, or any assignment for the benefit of creditors of the
other Party, or receivership that the other Party places itself in or may be
placed in.
23. CHOICE OF LAW
This Agreement shall be governed, construed and enforced under the laws
of the State of New York, excluding its conflict of laws provisions.
24. RESOLUTION OF DISPUTES
In the event of a dispute relating to this Agreement, the parties shall
make a good faith effort to settle any differences without resorting to
arbitration. If settlement of the dispute is not possible either party may
invoke arbitration. However, the party wishing to initiate arbitration shall
give thirty (30) days prior notice to the other party. During this thirty (30)
day period selected upper management personnel shall further attempt to resolve
the dispute. Any unresolved dispute arising out of or relating to this
Agreement, including its interpretation, validity, scope and enforcability,
shall be resolved by arbitration to be held exclusively in the City of New York,
New York. Such arbitration shall be the parties' exclusive remedy. The
arbitration shall apply the law of the State of New York to the dispute,
exclusive of its conflict of laws and shall be conducted in accordance with the
then-existing Commercial Arbitration Rules of the American Arbitration
Association. The arbitrator shall be empowered to assess compensatory damages
except in areas where this Agreement exempts any party from liability or limits
such damages. The judgment of the arbitrator shall be final and binding on the
parties and any party may enter the arbitration award as a final judgment in a
court of competent jurisdiction with power to enforce the arbitration award. The
parties shall pay their own arbitration expenses and shall equally share the
arbitrator's costs and fees and the arbitrator shall allocate such costs and
fees equally between the parties as part of the award.
<PAGE> 8
25. ASSIGNMENT
This Agreement may not be assigned without the prior written consent of
the other Party which consent shall not be unreasonably withheld by any party,
provided, however , that without any such consent (i) AlliedSignal may assign
any of its rights hereunder to any wholly owned subsidiary of AlliedSignal or to
any purchaser of substantially all of the assets of the business unit to which
the Products relate, and
(ii) Mykotronx may assign any of its rights hereunder to any
wholly-owned subsidiary of Rainbow or to any purchaser of substantially all of
the assets of Rainbow. In addition, AlliedSignal may assign to a bank or lending
institution any proceeds due under this Agreement without the consent of
Mykotronx.
26. HEADINGS AND DEFINITIONS
The headings of the articles, sections or paragraphs used in this
Agreement are included for convenience only and are not to be used in construing
or interpreting the Agreement.
27. SEVERABILITY
In the event that any provision of this Agreement is held to be invalid
or unenforceable in a court of competent jurisdiction, the provision shall be
modified as necessary to render it enforceable with a meaning substantially
meeting the intent of the Parties hereto or, if such modification is not
possible, stricken from the Agreement. Such holding shall not affect the
validity or enforceability of any other provision herein.
28. AMENDMENT
This Agreement may be amended only by written agreement duly executed
by the Parties hereto.
29. WAIVERS
Any waiver of rights hereunder must be set forth in writing. A waiver
of any breach or failure to enforce any of the terms and conditions of this
Agreement shall not in any way affect, limit or waive either Party's rights at
any time to enforce strict compliance thereafter with every term or condition of
this Agreement
30. COMMUNICATIONS AND NOTICE
Any notice or communication required under this Agreement shall be
given in writing to the following addresses and shall be deemed received within
three (3) business days after the date sent by first class, registered or
certified mail:
If to AlliedSignal: If to Mykotronx:
AlliedSignal Communications Systems Mykotronx, Inc.
1300 East Joppa Road 357 Van Ness Way, Suite 200
Baltimore, Maryland 21286-5999 Torrance, California 90501
Attn: Director of Contracts Attn: Director of Contracts
with a copy to:
Mykotronx, Inc.
357 Van Ness Way, Suite 200
Torrance, California 90501
Attn: Program Manager
31. KEY EMPLOYEES
AlliedSignal shall dedicate the "Manufacturing Key Personnel" (as
defined in the letter agreement, dated the date hereof, between AlliedSignal and
Mykotronx) to the performance of AlliedSignal's obligations hereunder to the
extent such obligations require such individual's full-time performance. In the
event any Manufacturing Key Personnel inform AlliedSignal of plans to leave the
employ of AlliedSignal, AlliedSignal shall use reasonable efforts to retain such
person; provided, however , that the foregoing shall not require AlliedSignal to
offer any bonuses or increase salaries or benefits other than at AlliedSignal's
discretion. Further, the foregoing shall not prevent AlliedSignal, in its sole
discretion, from offering any Manufacturing Key Personnel a promotion, or
prevent any Manufacturing Key Personnel from accepting any
<PAGE> 9
promotion or transfer (within AlliedSignal or otherwise); provided, however,
that the General Manager of the Communications Systems division of AlliedSignal
shall, in any event, use reasonable efforts to balance the needs of the
Manufacturing Key Personnel and the needs of the project in a manner that is
intended to be equitable to all of the parties concerned. In the event any
Manufacturing Key Personnel gives AlliedSignal notice that he or she has elected
to leave AlliedSignal's employ, AlliedSignal shall give notice to Mykotronx and
Mykotronx shall no longer be subject to the non- solicitation clause of the
Asset Purchase Agreement with respect to such person. AlliedSignal shall use
reasonable efforts, as quickly as is reasonably practicable, to replace any
Manufacturing Key Personnel who leaves his or her current position with an
individual of similar qualifications.
32. ENTIRE AGREEMENT
This Agreement, the Confidentiality Agreement referred to in Section
15.3 of the Purchase Agreement, and the other agreements and documents executed
and delivered by the parties hereto and/or their affiliates simultaneously
herewith including without limitation the Collective Agreements constitute the
entire understanding between the Parties and supersedes any prior written or
oral agreement or understanding with respect to the manufacturing of Products
for Mykotronx. No modification of this Agreement, or waiver or addition to any
of its terms and conditions, shall be binding upon either Party unless made in
writing and signed by the Parties' authorized representatives.
IN WITNESS WHEREOF the Parties have caused this Manufacturing Agreement
to be executed as of the 30th day of September 1997.
AlliedSignal Inc. Mykotronx, Inc.
By: By:
---------------------------------- ----------------------------------
Print Name: Paul J. Hurley Print Name: Avi Margalith
Title: VP & General Manager Title: President
<PAGE> 1
EXHIBIT 10(v)
DEVELOPMENT AGREEMENT
This DEVELOPMENT AGREEMENT ("Agreement") dated as of September 30, 1997 is
entered into by and between AlliedSignal Inc., a Delaware corporation, by and
through its Communications Systems business unit having a principal place of
business at 1300 East Joppa Road, Baltimore, Maryland 21286-5999
("AlliedSignal") and Mykotronx, Inc., a California corporation, having a
principal place of business at 357 Van Ness Way, Suite 200, Torrance, California
90501 ("Mykotronx") and a wholly-owned subsidiary of Rainbow Technologies Inc.
("Rainbow"), AlliedSignal and Mykotronx may be individually referred to as a
"Party" or collectively referred to as the "Parties".
WHEREAS, the Parties have entered into in addition to this Agreement:
(a) an Asset Purchase Agreement ("Purchase Agreement"), dated September 30, 1997
(the "Closing Date"), for sale by AlliedSignal to Mykotronx of certain assets
including assets used in the design, manufacture and sale of the Product line
(the "Product"); and (b) a Manufacturing Agreement ("Manufacturing Agreement")
in which AlliedSignal will manufacture the Products for Mykotronx for a period
of time (all three agreements hereinafter referred to collectively as the
"Collective Agreements"); and
WHEREAS, terms of the Purchase Agreement and the Manufacturing
Agreement are incorporated herein by reference.
WHEREAS, the Parties have further determined that it is mutually
desirable for AlliedSignal to develop an enhanced Product for sale by Mykotronx;
and
WHEREAS, the Parties wish to enter into this Development Agreement
which shall set forth the terms and conditions upon which AlliedSignal shall
develop the Product for Mykotronx;
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Parties agree as follows:
1.0 GENERAL DEFINITIONS
A. "The Product" as used in this Agreement shall mean the equipment
developed under this Agreement in accordance with the Product Specification,
attached hereto as EXHIBIT A, and fully-endorsed by the NSA.
B. "Technical Information" means any and all tangible information
including, but not limited to, designs, drawings, manufacturing processes,
software code, and software documentation relating exclusively to the Product.
2.0 LICENSES GRANTED
A. For the term of this Agreement, Mykotronx grants and agrees to grant
to AlliedSignal a nonexclusive, royalty-free license to use all intellectual
property transferred to Mykotronx by AlliedSignal pursuant to the Purchase
Agreement ("Intellectual Property") solely for the purpose of developing the
Product. Mykotronx shall make available to AlliedSignal all necessary
Intellectual Property required to develop the Product.
3.0 PRODUCT DEVELOPMENT
A. AlliedSignal shall develop the Product, and complete the upgrade to
the High Speed Wireline Adapter adding an unbalanced interface, both in
accordance with the Statement of Work and Development Schedule attached hereto
as EXHIBIT B.
B. Mykotronx shall have the right, at its sole option and without
obligation to provide the Product development assistance to AlliedSignal, to
monitor the development of the Product for the purpose of understanding, the
technical aspects of the Product and to facilitate the transmission of
AlliedSignal Product know-how to Mykotronx.
1
<PAGE> 2
(i) The employees listed below shall act as each Parties
technical correspondent in transmitting and receiving THE PRODUCT
know-how.
AlliedSignal: Michael Hayes
Mykotronx: Steve Sappington
(ii) Subject to any government regulations, AlliedSignal shall
permit personnel of Mykotronx access to AlliedSignal's Facility and
shall further provide, at no cost to Mykotronx, office space, telephone
service and access to office equipment and supplies reasonably
necessary to support Mykotronx personnel.
C. The development of the Product shall be completed by no later than
September 30, 1998 at which time AlliedSignal shall have shipped or have ready
for shipment fifty (50), NSA-endorsed Products ("Delivery Date").
4.0 KEY PERSONNEL
A. AlliedSignal shall dedicate the "Development Key Personnel" (as
defined in the letter agreement, dated the date hereof, between AlliedSignal and
Mykotronx) to the development of the Product provided such development requires
full-time performance. In the event any Development Key Personnel inform
AlliedSignal of plans to leave the employ of AlliedSignal, AlliedSignal shall
use reasonable efforts to retain such person; provided, however, that the
foregoing shall not require AlliedSignal to offer any bonuses, or increase
salaries or benefits other than at AlliedSignal's discretion. Further, the
foregoing shall not prevent AlliedSignal, in its sole discretion, from offering
any Development Key Personnel a promotion, or prevent any Development Key
Personnel from accepting any promotion or transfer (within AlliedSignal or
otherwise); provided, however, that the General Manager of the Communication
Systems division of AlliedSignal shall, in any event, use reasonable efforts to
balance the needs of the Development Key Personnel and the needs of the
development of the Product in a manner that is intended to be equitable to all
of the Parties concerned. In the event any Key Development Personnel gives
AlliedSignal notice that he or she has elected to leave AlliedSignal's employ,
AlliedSignal shall give notice to Mykotronx and AlliedSignal agrees that
Mykotronx will not be bound to the non-solicitation clause of the Purchase
Agreement with respect to such individual.
5.0 DEVELOPMENT PRICE
A. Mykotronx shall reimburse AlliedSignal for costs incurred by
AlliedSignal for development and transition to production of the Product after
the Closing Date up to an amount not to exceed _______________ ($____________)
(the "Development Price").
B. The Development Price shall be paid by Mykotronx to AlliedSignal in
accordance with the following fee schedule:
(i) The Product development costs (as determined by
AlliedSignal in accordance with its past practice), which are
anticipated to be approximately $__________, are payable within 30 days
of the Closing Date;
(ii) an amount equal to $_________ less the amount paid in
subsection (i) upon completion of milestone 2.3(2) as set forth in
EXHIBIT B;
(iii) $______ upon completion of milestone 2.3 (3 ) as set
forth in EXHIBIT B;
(iv) $______ upon completion of milestone 2.3 (4 and 5) as set
forth in EXHIBIT B; and
(v) up to $________ upon complete of milestone 2.3 (6) as set
forth in EXHIBIT B and full endorsement of the Product by the NSA.
C. Except for the scheduled payment identified in subsection (i) all
payments shall be net 30 days upon submission of an invoice by AlliedSignal for
each milestone identified in subsections ii-v, and each such invoice shall be
accompanied by a statement of the incurred costs described in the invoice
relating to direct material, labor, applicable labor overhead and material
burden consistent with AlliedSignal's disclosed practices and 1% for
administration requirements.
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<PAGE> 3
D. As soon as practicable after the payment of the Development Price
set forth above, AlliedSignal shall determine any variances incurred in the
amount of burden included in such payments. If the burden variances in the
aggregate is positive, AlliedSignal shall pay the amount of such positive
variance to Mykotronx. If the burden variance in the aggregate is negative,
Mykotronx shall pay the amount of such negative variance to AlliedSignal;
provided, however, the amount of the total Development Price including burden
variance shall not exceed ______________.
6.0 CHANGES
A. Any changes to either of Exhibits A or B requested by Mykotronx
shall be communicated in writing to AlliedSignal ("Changes"). AlliedSignal shall
provide Mykotronx the additional costs associated with each Change and the time
necessary for AlliedSignal to implement the requested Change. Upon receipt of
Mykotronx's written approval of the additional development costs and development
time for the changes, AlliedSignal will implement the Change and Mykotronx shall
reimburse AlliedSignal for the agreed-to development costs. The Statement of
Work will be amended to reflect the Change and the Delivery Date will be
modified as mutually agreed to by the Parties. Notwithstanding Mykotronx's cap
to the Development Price, any Change that causes an increase in the Development
Price by $_____ in the aggregate shall be paid by Mykotronx. If any Change will
cause a delay in the Delivery Date as determined by AlliedSignal, the Delivery
Date shall be adjusted to reflect the time delay caused by the Change. Nothing
in this section is intended to relieve AlliedSignal of its obligation to
complete the development of an NSA fully-endorsed Product.
B. All Changes to this Agreement shall be coordinated through the
Contracts Department of the Parties.
C. No order or statement by the Government or conduct of Government
personnel shall constitute any Change to this Agreement.
7.0 RESERVED
8.0 PRODUCT DELIVERY DATE-LIQUIDATED DAMAGES
A. In the event AlliedSignal fails to complete the development of the
Product as set forth in section 3.0 (C), above, by the Delivery Date,
AlliedSignal shall pay to Mykotronx as liquidated damages $______ for each month
through December 1998 that the Product development is not complete, and $_______
for each month thereafter that the Product development is not complete. The
total amount of liquidated damages payable under this Section shall not exceed
$_______.
B. Anything to the contrary notwithstanding, the Delivery Date shall be
(1) delayed for a period of three months if in the calendar year 1998 Mykotronx
receives gross sales revenues of at least $___ million from sales of Products
and/or Ancillaries; provided, however, at least $__ million of such sales occurs
in the second half of 1998; or (2) delayed for the period of time caused by the
U.S. Govermnent or any of its agencies or departments (which cause is not
attributable to the performance of AlliedSignal or its complicance with the
requirements of the NSA endorsement process) or by force majeure events.
C. In the event AlliedSignal is obligated by the terms of this
Agreement to pay liquidated damages to Mykotronx, AlliedSignal shall pay such
sum on a net thirty (30) basis from receipt of the invoice from Mykotronx,
provided, however, AlliedSignal does not dispute the invoice.
9.0 LIMITATION ON DAMAGES
A. Notwithstanding anything to the contrary in the Collective
Agreements, AlliedSignal's liability under the clauses entitled: (a) PRODUCT
DELIVERY DATE-LIQUIDATED DAMAGES of this Agreement; and (b) PRICING and (c)
DELIVERY DATE-LIQUIDATED DAMAGES of the Manufacturing Agreement shall not exceed
______________ dollars ($_____________) in the aggregate.
B. IN NO EVENT SHALL EITHER PARTY HERETO BE LIABLE TO THE OTHER PARTY
HERETO FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES THAT ARE
CLAIMED TO BE INCURRED BY THE OTHER PARTY WHETHER SUCH CLAIM ARISES UNDER
CONTRACT, TORT (INCLUDING STRICT LIABILITY) OR OTHER THEORY OF LAW RELATED TO
PERFORMANCE HEREUNDER OR AN ALLEGED BREACH OF A CONTRACT HEREUNDER.
3
<PAGE> 4
C. The terms "indirect, incidental, consequential or exemplary damages"
as used herein shall include, but is not limited to, punitive damages, loss of
use, loss of business reputation, increased expense of operation, loss of
profit, cost of money and loss of use of capital or revenue arising at any time.
D. A claim under this Agreement, the Purchase Agreement or the
Manufacturing Agreement shall preclude a claim on the same subject matter under
any of the other three agreements.
10.0 RIGHTS IN TECHNICAL INFORMATION
A. Any and all Technical Information developed by AlliedSignal in the
development of the Product, shall be the sole and exclusive property of
Mykotronx, and AlliedSignal hereby assigns to Mykotronx all such Technical
Information. AlliedSignal will, at the expense of Mykotronx, and at its
reasonable request, perform all acts and execute all papers necessary or
desirable to perfect Mykotronx's intellectual property rights in, and title to,
any such Technical Information. AlliedSignal agrees that, for any works of
authorship created by AlliedSignal in the course of this Agreement, those works
that come under one of the categories of "Works Made for Hire" in 17 U.S.C.
Section 101 shall be considered Works Made for Hire. For any works of authorship
that do not come under such categories, AlliedSignal hereby assigns and agrees
to assign all right, title, and interest it has to any copyright in such works
and will execute or cause to be executed at Mykotronx's expense any documents
required to establish Mykotronx's ownership of such copyright.
11.0 TERM
A. This Agreement is effective as of the date first set forth above
and, unless sooner terminated under the provisions below, will continue until
completion of AlliedSignal's obligations hereunder. Any clause that by its
nature should survive termination of this Agreement shall survive termination,
including, but not limited to, the clauses entitled LIMITATION ON DAMAGES,
RIGHTS IN TECHNICAL INFORMATION, RESOLUTION OF DISPUTES, NOTICES, ASSIGNMENT and
GOVERNING LAW.
12.0 INSOLVENCY
Either Party may cancel this Agreement in the event of the suspension
of the other Party's business, insolvency of the other Party, the institution of
bankruptcy, reorganization, arrangement or liquidation proceedings involving or
affecting the other Party, or any assignment for the benefit of creditors of
the other Party, or receivership that the other Party places itself in or may be
placed in.
13.0 RELATIONSHIP
A. AlliedSignal is an independent contractor engaged by Mykotronx in
the development of the Product. Nothing in this Agreement shall constitute
AlliedSignal as an employee, agent or general representative of Mykotronx. This
Agreement shall not constitute appointment of either Party as the legal
representative or agent of the other, nor shall either Party have the right or
authority to assume, create or incur any liability or any obligation of any
kind, express or implied, against, or in the name of, or on behalf of the other
Party.
14.0 RESOLUTION OF DISPUTES
A. In the event of a dispute relating to this Agreement, the Parties
shall make a good faith effort to settle any differences without resorting to
arbitration. If settlement of the dispute is not possible either Party may
invoke arbitration. However, the Party wishing to initiate arbitration shall
give thirty (30) days prior notice to the other Party. During this thirty (30)
day period selected upper management personnel shall further attempt to resolve
the dispute. Any unresolved dispute arising out of or relating to this
Agreement, including interpretation, validity, scope and enforceability, shall
be resolved by arbitration to be held exclusively in the city of New York, New
York. Such arbitration shall be the Parties' exclusive remedy. The arbitration
shall apply the law of the State of New York to the dispute, exclusive of its
conflict of laws and shall be conducted in accordance with the then-existing
Commercial Arbitration Rules of the American Arbitration Association. The
arbitrator shall be empowered to assess compensatory damages except in the areas
where this Agreement exempts any Party from liability or limits such damages.
The judgment of the arbitrator shall be final and binding on the Parties and any
Party may enter the arbitration award as a final judgment in a court of
competent jurisdiction with power to enforce the arbitration award. The Parties
shall pay their own arbitration expenses and shall equally share the
arbitrator's costs and fees and the arbitrator shall allocate such costs and
fees equally between the Parties as part of the award.
4
<PAGE> 5
15.0 FORCE MAJEURE
A. In the event a delay in development occurs which delay is occasioned
by: (a) acts of God, including, but not limited to, fire, floods, unusually
severe weather; (b) civil or military authority, war, hostility, riots,
government action in its contractual or sovereign capacity; (c) strikes or other
labor actions; or (d) where such delay is occasioned by other causes beyond the
control of AlliedSignal and without its fault or negligence, then the Delivery
Date shall be extended for a period equal to the time lost by reason of any such
delay. Anything to the contrary notwithstanding, AlliedSignal shall be
responsible for delays caused by subcontractors failing to make timely
deliveries unless such delays are caused by force majeure events, and such
delays further subject to the limitations set forth in the section entitled
PRODUCT DELIVERY DATE-LIQUIDATED DAMAGES.
16.0 NOTICES
A. Any notice required or permitted hereunder shall be in writing and
shall be sufficiently given when mailed postpaid registered or certified mail
and addressed to the party for whom it is intended at its record address, and
such notice shall be effective as of the date it is deposited in the mail. The
record address of the Parties for this purpose is:
AlliedSignal Communications Systems
1300 East Joppa Road
Baltimore, Maryland 21286-5999
Attn: Director of Contracts
Mykotronx Inc.
357 Van Ness Way, Suite 200
Torrance, California 90501
Attn: Manager of Contracts
Attn: Program Manager
17.0 ASSIGNMENT
A. This Agreement may not be assigned without the prior written consent
of the other Party which consent shall not be unreasonably withheld by any
Party, provided however, that without such consent (i) AlliedSignal may assign
any of its rights hereunder to any wholly-owned subsidiary of AlliedSignal or to
any purchaser of substantially all of the assets of the business unit to which
this Agreement relates, and ii) Mykotronx may assign any of its rights hereunder
to any wholly-owned subsidiary of Rainbow or to any purchaser of substantially
all of the assets of Mykotronx.
18.0. WAIVER
A. The failure of either party at any time to require performance by
the other party of any section of this agreement shall not affect the full right
to require such performance at any time thereafter, nor shall the waiver by
either party of a breach of any section hereof be taken or held to be a waiver
of any succeeding breach of such article, or as a waiver of the section itself.
19.0 SEVERABILITY
A. In the event any article or portion thereof in this agreement is
finally determined by a court of competent jurisdiction to be unenforceable or
void, then such article or portion thereof shall be deemed deleted and the
balance of the articles of this agreement shall remain in full force aria
effect.
20.0 GOVERNING LAW
A. This Agreement shall be interpreted and construed in accordance with
the laws of the State of New York, disregarding its conflict of laws principles
which may require the application of the laws of another jurisdiction.
21.0 HEADINGS
A. Article, sub-article and Attachment headings of this Agreement are
for convenience only and are not to be construed as part of this Agreement or as
defining or limiting in any way the purpose and intent of the provisions
thereof.
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22.0 ENTIRE AGREEMENT
A. The Collective Agreements constitute the entire agreement between
the Parties relating to the development and NSA endorsement of the Product and
supersedes any and all prior written or oral understandings, commitments or
agreements relating thereto. This agreement may not be amended or modified
except by a writing duly signed by the authorized representatives of the parties
hereto.
IN WITNESS WHEREOF, AlliedSignal and Mykotronx have caused this
Agreement to be executed by their respective duly authorized representatives on
the dates indicated below.
AlliedSignal Inc. Mykotronx Inc.
By: By:
----------------------------- -----------------------------
Print Name: Paul J. Hurvey Print Name: Avi Margalith
Title: Vice President Title: President
Date: 9-30-97
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EXHIBIT 10(w)
Agreement for ASIC Design and Purchase of Products
between
IBM Microelectronics 1000 River Street Essex Junction, Vermont
and
Rainbow Technologies, Inc. and its wholly owned subsidiary, Mykotronx, Inc.
Agreement Number: X0617
Commencement Date:
IBM Customer Account Representative:
Dan Fitzpatrick
Mykotronx, Inc. Rainbow Technologies, Inc
357 Van Ness Way 50 Technology Drive
Suite 200 Irvine, California 92618
Torrance, California 90501
This agreement ("Agreement") is entered into by and between International
Business Machines Corporation, incorporated under the laws of the State of New
York ("IBM") and Rainbow Technologies, Inc. incorporated under the laws of the
State of Delaware ("Buyer") and its wholly owned subsidiary, Mykotronx, Inc.
("Mykotronx"), incorporated under the laws of the State of California.
This Agreement and its attachments ("Attachments) sets forth the terms and
conditions pursuant to which semiconductor products will be designed,
manufactured, sold and purchased. The terms and conditions by which IBM licenses
to Mykotronx the IBM Design Kits specified in Attachment A are governed by the
IBM Design Kit License initially executed by IBM and Mykotronx on May 9,1997.
The product is being designed by Mykotronx on behalf of Buyer.
1.0 DEFINITIONS
1.1 "ASIC(s)" means application specific integrated circuits.
1.2 "ASIC Tool Kits" means any computer aided design software and
data provided by IBM and used by Mykotronx for the purpose of
designing or checking ASIC designs, as updated or enhanced
from time to time by IBM.
1.3 "Buyer Deliverable Items" means any information and materials
supplied to IBM by Buyer and/or Mykotronx, as set forth in
Attachment B, including, without limitation, software,
schematics, netlists, microcode, designs or techniques, as
accepted by IBM and utilized in the design of or otherwise
incorporated into a Product.
1.4 "Engineering Change" means a mechanical or electrical change
to the Product which affects form, fit, function or
maintainability.
1.5 "IBM Deliverable Items" means the information, materials and
tools supplied to Mykotronx by IBM, as set forth in Attachment
B, including, without limitation, IBM Design Kits, ASIC Tool
Kits and Prototype devices.
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1.6 "IBM Design Kits" means any IBM computer aided design software
and data (including libraries) provided to Buyer or Mykotronx
for the purpose of designing or testing ASIC designs, as
updated and enhanced from time to time. The term "IBM Design
Kits" includes ASIC Tool Kits.
1.7 "Initial ASIC Design Review Checklist" ("IDR") means a report
in form and content as regularly used by IBM to make a
preliminary assessment of the feasibility of Buyer's proposed
Product design.
1.8 "Milestones" means completion of the (i) initial design review
("IDR Milestone"), (ii) pre-layout and timing analysis ("RTL
Milestone"), and (iii) the release to manufacturing ("RTM
Milestone") stages of work and the payment milestones
("Payment Milestones") set forth in Section 2.0 of Attachment
C.
1.9 "Non-recurring Engineering Charges" ("NRE Charges") means the
costs for NRE Services.
1.10 "Non-recurring Engineering Services" ("NRE Services") means
engineering services provided by IBM to develop Products to be
manufactured under this Agreement, which shall include
delivery of Prototypes as specified in Attachment C.
1.11 "Product(s)" means production units of the ASIC product(s) to
be sold and purchased under this Agreement as specified in
Attachment A and as may be amended by the parties to include
additional Products. Products shall not include Prototypes.
1.12 "Product Specifications" means the specifications for each
Product including, without limitation, the post-layout
electronic data interchange format ("EDIF") and timing
requirements (including clock skew requirements), a statement
of Post-layout test coverage and I/O placement; as documented
in the RTM, expressly or by specific incorporation.
1.13 "Prototype Acceptance" means Buyer's written approval that
Buyer's Prototype evaluation demonstrates Prototype
conformance to Product Specifications.
1.14 "Prototype device(s)" or 'Prototypes" means a preliminary
version of a Product which may or may not be functional and
which is not suitable for production in commercial quantities.
1.15 "Purchase Order Lead Time" means the required minimum amount
of time between IBM's receipt of the Purchase Order issued by
Buyer and the requested shipment date necessary to accommodate
manufacturing cycle time, as specified in Attachment C.
1.16 "Release to Layout Checklist" ("RTL") means a performance
approval report in form and content as regularly used by IBM
to document completion of the pre-layout Level Sensitive Scan
Design ("LSSD") and timing analysis milestone of the SOW.
1.17 "Release to Manufacturing Checklist" ("RTM") means a
performance approval report in form and content as regularly
used by IBM to document the design review milestone at the
completion of the post- layout timing analysis.
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1.18 "Scheduled Shipment Date" means the date for shipment of
Product requested by Buyer in a Purchase Order and accepted by
IBM in accordance with Section 6.0 of this Agreement.
1.19 "Shipment Date" means the date for shipment of Product
requested by Buyer in a Purchase Order.
1.20 "Statement of Work" or "SOW" means a statement of work as set
forth in Attachment A that identifies the respective design
obligations that the parties agree to complete for the
development of particular Products.
2.0 TERM OF AGREEMENT - This Agreement shall become effective on the date
it is executed by the parties (the "Commencement Date"). The term of
this Agreement will begin an the Commencement Date and will be
effective for a period of three (3) years after the date of execution
(the "Contract Period"), subject, however, to earlier termination as
permitted under Section 13.0.
3.0 WORK SCOPE
3.1 IBM will provide Buyer with engineering support and assistance
and Buyer (or Mykotronx) will provide IBM with the Buyer
Deliverable items and cooperate with IBM in the use of IBM
Deliverable Items to enable IBM to manufacture Products, in
accordance with the SOW. The Products are designed for
verification on IBM ASIC tools and to be manufactured by IBM
under this Agreement. The terms and conditions by which IBM
licenses the IBM Design Kits to Mykotronx are exclusively
governed by the IBM Design Kit License Agreement, which is
hereby incorporated by reference.
3.2 IBM will assign field design center engineering support to
Mykotronx regarding the use of the ASIC Tool Kit and IBM's
ASIC design methodology. This support may be provided to
Mykotronx on-site as mutually agreed to by IBM and Buyer. The
support obligations of IBM shall end when IBM has provided the
items in Attachment B under "IBM Deliverable Items".
3.3 In the event that multiple Products are developed under this
Agreement or this Agreement is amended to include other
Products, each such Product shall be developed under and
subject to a separate SOW, separate development checklist and
separate Product pricing.
3.4 Buyer will not utilize Products in conjunction with any
medical implantation or other direct life support applications
where malfunction may result in injury, harm or death to
persons, or used in conjunction with aviation, nuclear
materials, or other ultra-hazardous activities (collectively,
"Ultra-hazardous Uses"). Buyer agrees to require the same
commitment from its own customers in all contracts or sale
documents under which the customer sells the Product or a
device incorporating the device.
4.0 ASIC PRODUCT DESIGN
4.1 IBM's ASIC development checklists shall document the
development of each of Mykotronx Product design.
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4.1.1 The IDR will be used to make a preliminary
feasibility assessment of each of Mykotronx proposed
Product design and to advise Mykotronx of any areas
where Buyer's design(s) do not conform to IBM design
requirements.
4.1.2 The RTL shall include, expressly or by specific
incorporation, the design specifications for each
Product required by Mykotronx to successfully place,
route, time and conform to LSSD and provide static
timing analysis. The RTL shall also document the fact
that such information is available to Mykotronx and
has been communicated to Mykotronx before each
Product netlist is released to layout. Mykotronx'
signature on the RTL shall record Mykotronx'
acknowledgment of satisfactory completion of all work
on such Product through such Milestone.
4.1.3 Mykotronx' signature on the RTM shall record
Mykotronx' acknowledgment of (i) satisfactory
completion of all work on such Product through the
RTM Milestone and (ii) the specifications to which
IBM's warranty obligations, set forth in Section
14.0, apply. To the extent that specifications and
test parameters contained in the RTM vary those set
forth in the RTL, the specifications contained in the
RTM shall govern.
4.1.4 Mykotronx' signature on the RTL and RTM checklists
shall not be unreasonably withheld.
4.2 All Milestone and Prototype delivery schedules are estimates
only.
4.3 Any data relating to a Product design that Mykotronx is to
furnish to IBM must be compatible with IBM tools, with which
IBM will verify all design and engineering work for
conformance to IBM's technology ground rules.
4.4 Buyer may request changes to any Product design during the
course of the SOW by submitting a written request to IBM. Upon
receipt by IBM of any such request, IBM shall promptly inform
Buyer of the effect of the requested change on the SOW
including estimated completion of the design work to
incorporate any requested changes and applicable price
increase(s), if any. IBM may, however, continue work without
regard to the requested change until both parties have agreed
in writing to adjustment in price and estimated completion
date terms, unless Buyer specifically notifies IBM in writing
to halt work.
4.5 Buyer may, for the applicable unit price specified in Section
4.0 of Attachment C, order Prototypes in addition to the
quantity included in the NRE Charges at any time before five
(5) working days prior to RTM signoff. Subject to the RTM
signoff and adequate yield from the initial wafer lot, IBM
shall use reasonable efforts to deliver such additional
Prototypes within two (2) weeks of the estimated delivery date
for Prototypes.
4.6 Subject to the terms and conditions of this Agreement, both
parties will exercise reasonable diligence in performing the
design activities set forth in the SOW for each Product.
4.7 IBM agrees to provide Products to Mykotronx as requested by
Mykotronx and accepted by IBM subject to the provisions of
Section 5.0 and Section 6.0.
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4.8 All computer data provided to IBM by Mykotronx will be free
from any virus, worm or other routines that would permit
unauthorized access or otherwise harm software, hardware or
data.
5.0 PRODUCT DEMAND FORECASTS
5.1 The first Product demand forecast agreed to by Buyer and IBM
is set forth in Attachment C. The forecast covers twelve (12)
months broken out by Product and month. During the term of
this Agreement, Buyer will provide IBM with updated Product
demand forecasts on a quarterly basis covering a rolling
twelve (12) month period (not to extend beyond the Contract
Period), which will be reviewed for approval by IBM within ten
(10) days of receipt by IBM. Updated forecasts shall be in
substantially the same format as the first forecast in
Attachment C. Forecasts shall be provided to IBM's Customer
Account Representative as identified above. Forecasts shall
constitute good faith estimates of Buyer's anticipated
requirements for Products for the periods indicated based on
current market conditions, and IBM's acceptance shall
constitute IBM's good faith intention to quote and supply such
requirements if requested and ordered by Buyer in accordance
with this Section 5.0. Notwithstanding the foregoing, Product
demand forecasts accepted by IBM shall not contractually
obligate IBM to supply, nor contractually obligate Buyer to
purchase, the quantities of units of Product set forth in such
forecasts.
5.2 Buyer may request Products that exceed Product demand
forecasts previously accepted by IBM. Such requests are
subject to rejection by IBM for any reason, including, without
limitation, resource availability.
6.0 PURCHASE ORDERS
6.1 Buyer shall order NRE Services by issuing written purchase
orders. Purchase orders for NRE Services will be deemed
accepted by IBM unless rejected in writing by IBM, specifying
the reasons for rejection, within fourteen (14) calendar days
after IBM's receipt of such purchase order.
6.2 Buyer shall order Products by issuing written purchase orders.
Purchase orders for Products must be received by IBM in
advance, with at least the Purchase Order Lead Time specified
in Attachment C, to allow IBM to meet Buyer's requested
Shipment Date.
6.2.1 Requested Shipment Dates will be deemed accepted
(subject to the Purchase Order Lead Time) by IBM if
the purchase order requesting such Shipment Date is
accepted by IBM. If so accepted, a requested Shipment
Date shall constitute a Scheduled Shipment Date.
Buyer agrees to accept delivery of Products up to
thirty (30) days in advance of the Scheduled Shipment
Date.
6.2.2 Subject to IBM's written acceptance, Buyer may from
time to time request an improved Scheduled Shipment
Date. IBM will accept requests for improved Scheduled
Shipment Dates to the extent that request results in
no additional expense to IBM. If such a request will
result in additional expense to IBM, then IBM will
quote the added charges to Buyer. IBM shall not act
on the request without the express written
authorization of Buyer. Upon shipment of Product on
or before the agreed to date such charges shall
become due and payable in accordance with the payment
provisions of Section 9.0 of this Agreement.
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6.3 Purchase orders for Products will be deemed accepted by IBM
unless rejected in writing by IBM, specifying the reasons for
rejection, within fourteen (14) calendar days after IBM's
receipt of such purchase order. Purchase orders for Products
may be rejected by IBM if such purchase order requests a
quantity of Products that (i) exceeds the most recent Product
demand forecast accepted by IBM or (ii) a Shipment Date IBM
deems unacceptable, or (iii) does not comply with the terms
and conditions of this Agreement, or if Buyer is in breach of
this Agreement.
6.4 Purchase orders issued to IBM shall include the following:
6.4.1 NRE Services and/or Product(s) being ordered;
6.4.2 quantity of units of Product requested (in increments
of the minimum ship pack quantity set forth in
Attachment C ("SPQ") only);
6.4.3 NRE Charges and/or unit price per Attachment C;
6.4.4 billing address;
6.4.5 shipping instructions, including carrier, destination
address and requested shipment dates;
6.4.6 reference to this Agreement and Agreement Number.
6.5 This Agreement shall take precedence over and govern in case
of any additional, different or conflicting terms and
conditions in any purchase order(s) or any other form of
either party. Purchase orders and other forms of either party
may not vary the terms of this Agreement. Additional,
different or conflicting terms and conditions on a purchase
order or other form shall be of no effect.
6.6 Notwithstanding any other provision of this Agreement, in the
event that IBM's ability to supply the Product is constrained
(except as caused by Buyer) for reasons which include, but are
not limited to, component availability, and the Scheduled
Shipment Date cannot be met, IBM will reduce the quantities of
Products to be supplied to Buyer in proportion to the
reduction in quantities of products of the same technology or
utilizing the same manufacturing process to be supplied to
satisfy others. In the event of such constraint, IBM will
provide Buyer written notice of the constraint and the
quantity of Products to be supplied by the Scheduled Shipment
Date. Such notice shall include estimated date for delivery of
the balance of the order. Within ten (10) business days after
the date of the notice, Buyer shall have the right to notify
IBM, in writing, that it is canceling the balance of the order
which IBM will not ship by the Scheduled Shipment Date, except
that Buyer shall remain responsible for compensating IBM at a
rate to be agreed upon, for any work in process on that
portion of the order. Such cancellation or receipt of such
allocated supply and later delivery of all undelivered ordered
quantities after the constraint ends shall constitute Buyer's
exclusive remedy in the event of such supply constraint.
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7.0 PRICING
7.1 Buyer shall pay IBM the NRE Charge applicable to such Product
as set forth in Attachment C, as well as other sums for
special services as are separately listed or referenced in
Attachment C.
7.2 The unit price for each unit of Product ordered shall be
calculated at the time the applicable purchase order is
accepted using the Product's Price Quantity Matrix set forth
in Attachment C. The quantity used as an input into such Price
Quantity Matrix shall be the cumulative quantity of units of
Product as set forth on the purchase orders accepted by IBM in
the year of purchase, including the units of Product requested
in the purchase order that is the subject of such price
calculation. If Buyer fails to purchase _________ units of
Product in the first year of production, then Buyer agrees to
pay IBM the total amount it would have paid had it purchased
the units, pursuant to Attachment C, within thirty (30)
days after receipt of an invoice from IBM.
7.3 Price is based on the description of the Product, as set forth
in Attachment A. IBM reserves the right to re-quote Product
prices if changes in the Product design require a different
chip size, package option, manufacturing technology or other
similar change from the Product description set forth in
Attachment A, but in no event shall IBM required to charge
Buyer a price below IBM's full cost for the Product. Prices
may not be increased due to fluctuations in yield or rejection
rates or as a result of IBM changing the location of
manufacture.
8.0 TITLE AND SHIPMENT
8.1 Title and risk of loss for a Product pass to Buyer when IBM
delivers the Product to the carrier.
8.2 Products shall be shipped from the manufacturing location FOB
for domestic U.S. destinations and ExWorks (as defined in the
1990 INCO Terms) for international shipments. Products shall
be shipped in increments of the minimum SPQ.
8.3 In no event shall IBM be deemed to assume any liability in
connection with any shipment, nor shall the carrier be
construed as an agent of IBM.
9.0 INVOICING, PAYMENT TERMS, TAXES
9.1 NRE Charges shall accrue and be invoiced on the schedule set
forth in Section 2.0 of Attachment C. IBM shall invoice Buyer
for all units of Product upon shipment. All payments under
this Agreement shall be due within thirty (30) days of the
date of invoice. If Buyer's account becomes in arrears or if
Buyer exceeds its credit limit with IBM, in addition to any
other right under this Agreement, IBM reserves the right to
cease development work or stop shipment to Buyer or ship to
Buyer on a cash-in-advance basis until Buyer's account is
again current.
9.2 IBM reserves a purchase money security interest in Products
purchased under this Agreement in the amount of the price and
in Buyer's proceeds from the same, including, without
limitation, accounts receivable. Purchase money security
interests will be satisfied by payment in full. Buyer agrees
to execute UCC-1 financing statements or other appropriate
documents to be filed in order to perfect IBM's security
interest.
9.3 Buyer is responsible for all taxes related to Products except
for taxes based on IBM's net income.
9.4 Buyer shall provide IBM with a copy of a valid reseller's
exemption certificate for Products purchased for resale for
each applicable
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taxing jurisdiction. Based on such certificate, and where the
law permits, IBM will treat Buyer as exempt from applicable
state and local sales tax for Products purchased hereunder.
Buyer shall notify IBM promptly in writing of any modification
or revocation of its exempt status. Buyer shall reimburse IBM
for any and all assessments resulting from a refusal by a
taxing jurisdiction to recognize any Buyer reseller's
exemption certificate, or from Buyer's failure to have a valid
reseller's exemption certificate. If Buyer purchases Product
under this Agreement for internal use, Buyer agrees to notify
IBM and pay applicable sales tax.
10.0 INTEREST ON OVERDUE PAYMENTS Buyer will be liable for interest on any
overdue payment under this Agreement commencing on the date such
payment becomes due at an annual rate equal eighteen percent (18%) per
year.
11.1 CANCELLATION CHARGES, RESCHEDULING AND ORDER CHANGE PROVISIONS
11.1 Buyer may cancel a purchase order or any portion thereof upon
written notice to IBM. If Buyer cancels a purchase order for
NRE Services or Prototypes, or if Buyer unreasonably withholds
its signature from the RTL or RTM, IBM will cease further work
in connection with the Product and invoice Buyer for the total
of all unpaid NRE Charges applicable to the next Payment
Milestone (Section 2.0 of Attachment C), an NRE cancellation
charge pursuant to Section 3.0 of Attachment C and the
applicable unit price for any canceled Prototype devices that
were ordered pursuant to Section 4.5 of this Agreement. For
purchase orders for units of Product, a cancellation charge as
specified in Section 9.0 of Attachment C will immediately
become due for each cancelled unit.
11.2 For a purchase order for production units which is more than
thirty (30) days, but less than the Purchase Order Lead Time,
from its Scheduled Shipment Date, Buyer may request in writing
a one-time deferral of the Scheduled Shipment Date for not
more than ninety (90) days, with no cancellation charge
imposed. However, if this purchase order is subsequently
deferred or canceled, then the cancellation charge specified
in Section 9.0 of Attachment C will be due.
11.3 Cancellation charges shall not apply to those orders canceled
by Buyer pursuant to paragraph 6.6 above.
12.0 ENGINEERING CHANGES
12.1 IBM may implement Engineering Changes required to satisfy
governmental standards, protect Product, system or data
integrity, or for environmental, health or safety reasons
("Mandatory Engineering Changes").
12.2 For all previously shipped Product not incorporating Mandatory
Engineering Changes, IBM may provide replacement Products
(including parts, materials and documentation) at the expense
of the party at fault. Buyer must use reasonable efforts to
install Mandatory Engineering Changes on all Buyer installed
Products and Products in its inventory. If IBM requests the
return of Products displaced by installation of replacement
Products, Buyer will promptly return any displaced Products to
IBM after installation of such replacement Products, at IBM's
expense.
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12.3 In addition to Mandatory Engineering Changes, IBM may
implement Engineering Changes that result in cost reductions
to the Product ("Elective Engineering Changes") with prior
approval from Buyer. Such approval shall not be unreasonably
withheld. IBM shall give Buyer prompt notice of Elective
Engineering Changes.
12.4 IBM may make available other Engineering Changes ("Optional
Engineering Changes"). The cost of any Optional Engineering
Changes that Buyer desires to implement will be borne by Buyer
and will be determined through a request for quote process.
13.0 TERMINATION OF AGREEMENT
13.1 If either party is in material default of a provision of this
Agreement and such default is not corrected within thirty (30)
days of receipt of written notice, this Agreement may be
terminated by the party not in default.
13.1.1 If Buyer terminates due to IBM default, all
previously accepted purchase orders shall be
automatically canceled without charge to Buyer,
except for any specific purchase order(s) that the
parties mutually agree not to cancel.
13.1.2 If IBM terminates due to Buyer default, at IBM's
discretion, all previously accepted purchase orders
shall be automatically canceled and adjustment
charges and cancellation charges will apply in
addition to any other amounts then due.
13.2 Notwithstanding the provisions of Section 13.1, either party
shall have the right to terminate this Agreement immediately
if:
13.2.1 The other party files a petition in bankruptcy,
undergoes a reorganization pursuant to a petition in
bankruptcy, is adjudicated a bankrupt, becomes
insolvent, becomes dissolved or liquidated, files a
petition for dissolution or liquidation, makes an
assignment for benefit of creditors, or has a
receiver appointed for its business; or
13.2.2 The other party is subject to property attachment or
court injunction or court order which has a
substantial negative effect on its ability to fulfill
its obligations under this Agreement.
13.3 IBM may terminate this Agreement, or its obligations with
respect to specifically affected Products, immediately if:
13.3.1 Buyer unreasonably withholds its consent for IBM to
make Elective Engineering Changes under Section 12.0;
or
13.3.2 IBM receives a claim or charge, or IBM otherwise has
a reasonable basis to believe any time during the
term of this Agreement, that any of the Buyer
Deliverable Items infringe third party intellectual
property rights.
13.4 In the event this Agreement is terminated pursuant to Section
13.1.2, 13.2 or 13.3, all amounts due and payable to the
non-terminating party as of the date of such termination shall
become immediately due and payable.
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13.5 Either party may terminate this Agreement without cause upon
one (1) year's prior written notice to the other. If Buyer is
the terminating party, all previously accepted purchase orders
will be filled, but IBM shall not be obligated to accept
further purchase orders after receiving notice. If IBM is the
terminating party, IBM will continue to accept new purchase
orders pursuant to Section 6.0 during the notice period.
13.6 All Products shipped against accepted purchase orders will be
subject to the terms and conditions of this Agreement
notwithstanding any termination or expiration of the term of
this Agreement. All amounts due for Prototypes or Product
delivered or NRE Services performed under this Agreement prior
to termination or expiration shall be paid in accordance with
the terms and conditions of this Agreement, notwithstanding
any such termination or expiration of this Agreement.
14.0 WARRANTIES
14.1 IBM warrants that each unit of Product after delivery will be
free from defects in material and workmanship and will conform
to the Product Specifications as set forth in the RTM for the
applicable period set forth in Attachment C. Delivery to Buyer
of each unit of Product is deemed to occur five (5) days after
shipment from IBM. Buyer acknowledges that the functionality
of Products is contingent upon Buyer's designs and, therefore,
the warranty of this Section 14.1 does not apply to the
functionality of Products fabricated hereunder. This warranty
does not include repair of damage resulting from failure to
provide a suitable installation environment, or any use for
other than the intended purpose, accident, disaster, neglect,
misuse, transportation, alterations, or non-IBM repairs or
activities.
14.2 Any unit of Product that fails to conform to the warranty of
Section 14.1, while under warranty, may be returned,
transportation prepaid by Buyer, to the location IBM
designates for repair, replacement or credit, at IBM's
discretion. IBM will repair or replace such units or provide a
credit to Buyer for the purchase price paid for such units by
Buyer. IBM will ship replacement units back to Buyer,
transportation prepaid by IBM, and such units of Product will
be considered newly delivered for warranty purposes.
14.3 Should any unit of Product returned to IBM hereunder be found
by IBM to be free from defects or non-conformities, IBM will
return such unit of Product to Buyer transportation prepaid by
IBM. Payment for such unit of Product will be due and payable
by Buyer upon receipt of the invoice.
14.4 Prototypes provided by IBM under this Agreement are provided
on an "AS IS" basis, without warranty of any kind.
14.5 No course of dealing, course of performance, usage of trade,
or Product or Prototype description shall be deemed to
establish a warranty, express or implied.
14.6 THE FOREGOING WARRANTIES MADE BY IBM ARE EXCLUSIVE AND IN LIEU
OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED INCLUDING, WITHOUT
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LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, AND ANY IMPLIED WARRANTIES
OF NON-INFRINGEMENT.
15.0 CONFIDENTIAL INFORMATION - The existence and contents of this Agreement
are confidential to the parties and neither party shall disclose the
same without the prior written permission of the other party. If a
party wishes to exchange other confidential information, the exchange
will be made under the terms of the separate agreement for exchange of
confidential information (Agreement Number Vl793) as executed between
IBM and Mykotronx on May 8, 1997.
16.0 TRADEMARKS AND TRADE NAMES
16.1 Neither this Agreement, nor the sale of Products hereunder,
shall be deemed to give either party any right to use the
other party's trademarks or any of the other party's trade
names without specific, prior written consent.
17.0 INTELLECTUAL PROPERTY RIGHTS
17.1 Buyer represents, and IBM acknowledges Buyer's representation,
that all Buyer Deliverable Items for the Products are the
property of Buyer. Buyer represents and warrants it is the
rightful owner, or authorized licensee (with all requisite
rights to sublicense) of the Buyer Deliverable Items and all
other designs, information, and materials supplied to IBM
hereunder, and that no part of such materials knowingly
incorporate or infringe the intellectual property of any third
party.
17.2 IBM or its licensors shall retain and have all intellectual
property rights (including, without limitation, mask work
rights) associated with any intellectual property furnished by
IBM in connection with this Agreement, including without
limitation, (i) all base array layers, (ii) all IBM-licensed
library elements (including, without limitation, any
megafunctions or cores), and (iii) all design methodologies
and tools, (iv) all IBM-furnished modifications of any of the
foregoing. To the extent Buyer has access to such intellectual
property, Buyer shall use such intellectual property solely
for the purpose of designing Prototypes and Products for
manufacture pursuant to this Agreement. Buyer hereby conveys
to IBM any intellectual property rights Buyer may acquire
therein.
17.3 IBM shall own any masks made by IBM using logic data provided
by Buyer. IBM will use any tangible netlist tape(s), and
tangible GDS 11 tape(s) received from Buyer or generated
exclusively for Buyer hereunder, and any masks made from such
GDS 11 tape(s), only to manufacture Products for sale to
Buyer.
17.4 If in the course of performance under this Agreement either
party discovers or invents any process, pattern, device or
other invention, that party shall be deemed the owner of such
discovery or invention. In the event any such invention is
jointly discovered or invented by the parties, the parties
shall be deemed joint owners of such discovery or invention
without any duty of accounting.
17.5 The parties understand and agree that no license or other
right is granted herein to either party, directly or by
implication, estoppel
11
<PAGE> 12
or otherwise, with respect to any know-how, inventions,
patents, trade secrets, copyrights, mask works or other
intellectual property rights, except as may be required by IBM
to manufacture the Product(s). No additional license or other
right, express or implied, shall arise from the consummation
of this Agreement, or from any acts, statements or dealings
leading to such consummation.
18.0 INTELLECTUAL PROPERTY INDEMNIFICATION
18.1 IBM shall indemnify Buyer from and against any damages finally
settled or awarded by a court of competent jurisdiction
resulting from any direct infringement of any patents or
copyrights of a third party in any country in which IBM sells
similar products that expose IBM to similar liabilities as the
Product, arising as a result of any of IBM's manufacturing
process, equipment or testing, that is not specifically
required by Buyer's designs, specifications or instructions.
IBM shall defend at its own expense, including attorney's
fees, any suit brought against Buyer alleging such
infringement. In the event that Buyer becomes enjoined from
using Product in its inventory due to such infringement, IBM
at its option and expense, will secure for Buyer the right to
continue to use and market the Product or modify or replace
the Product with a non-infringing product. If IBM determines
that neither of the foregoing alternatives is reasonably
available, Buyer may return the Product in Buyer's inventory
to IBM for a credit equal to the price paid for the units of
Product affected. IBM shall have no obligation regarding any
claim based upon modification of the Product by Buyer or its
customers, use of the Product in other than its intended
operating environment or the combination, operation or use of
the Product with non-IBM products or equipment.
18.2 Buyer shall indemnify IBM from and against any damages finally
settled or awarded by a court of competent jurisdiction
resulting from any direct infringement of any patents or
copyrights of a third party in any country where Buyer uses
or distributes the Product, arising as a result of IBM's
compliance with any of Buyer's design, specifications,
instructions or modifications of the Product by Buyer and
shall defend at its own expense, including attorney's fees,
any suit brought against IBM alleging any such infringement.
18.3 The rights provided in Sections 18.1 and 18.2 are contingent
upon the parties seeking to enforce indemnification by giving
prompt written notice to the indemnifying party regarding any
claim, demand or action for which the indemnified party seeks
indemnification. The indemnified party is required to fully
cooperate with the indemnifying party at the indemnifying
party's expense and shall allow the indemnifying party to
control the defense or settlement of any such claim, demand or
action, including obtaining the written consent of the
indemnifying party prior to any settlement proposal or
settlement. IBM shall have the right to waive Buyer's
obligations under Section 18.2 and provide for its own
defense, at IBM's sole discretion and expense.
18.4 The purchase, receipt or possession of the Product from or
through IBM carries no license or immunity, express or
implied, under any patent of IBM covering the combination of
the Product with other products or the use of any such
combination, or under any patent or
12
<PAGE> 13
other intellectual property right of any third party
relating to the Product or its combinations with any other
products.
18.5 Except as expressly stated in this Agreement, this Section
18.0 states the entire liability of the parties and their
exclusive remedies with respect to infringement and all other
warranties against infringement of any intellectual property
rights, statutory, express or implied are hereby disclaimed.
19.0 INDEPENDENT PARTIES - Each party hereto is an independent contractor
and is not an agent of the other party for any purpose whatsoever.
Neither party shall make any warranties or representations on the other
party's behalf, nor shall it assume or create any other obligations on
the other party's behalf. IBM and Buyer agree to indemnify from and
against any damages finally awarded by a court of competent
jurisdiction resulting from any violation of this Section 19.0.
20.0 LIMITATION OF REMEDIES
20.1 IBM's entire liability and Buyer's exclusive remedy are set
forth in this Section:
20.1.1 In all situations involving non-conforming or
defective Products furnished under this Agreement as
set forth in Section 14.1, Buyer's exclusive remedy
is the replacement of the Products or a credit to
Buyer of the purchase price paid for such units by
Buyer, at IBM's sole discretion.
20.1.2 IBM's liability for actual damages for any cause
whatsoever (other than as set forth in Section
20.1.1), shall be limited to the greater of
________________ (__________) or the applicable unit
price for the specific units of Product that caused
the damages or that are the subject matter of, or are
directly related to, the cause of action. This
limitation will apply, except as otherwise stated in
this Section, regardless of the form of action,
whether in contract or in tort, including negligence.
This limitation will not apply to the payment of
costs, damages and attorney's fees referred to in
Section 18.0. This limitation will also not apply to
claims by Buyer for bodily injury or damage to real
property or tangible personal property caused by
IBM's negligence.
20.1.3 In no event will either party be liable to the other
party for any lost profits, lost savings, incidental
damages or other consequential damages, even if
advised of the possibility of such damages, except as
provided in Section 18.0. In addition IBM will not be
liable for any claim based on any third-party claim,
except as provided in Section 18.0. Similarly, IBM
will not be liable for any damages caused by
defective or non-conforming Products located outside
the fifty states of the United States, the District
of Columbia or Puerto Rico. In no event will IBM be
liable for any damages caused by Buyer's failure to
perform Buyer's responsibilities.
20.1.4 In addition, IBM shall have no liability when the
Products are used in conjunction with any
Ultra-hazardous Uses.
13
<PAGE> 14
21.0 SUBCONTRACT AND ASSIGNMENT
21.1 IBM has the right to subcontract its responsibilities under
this Agreement, provided that any subcontractor retained by
IBM is obligated in writing to the same obligations as set
forth herein with respect to IBM. In the event that IBM does
subcontract certain portions of its responsibilities, the term
"employee" as used herein shall be deemed to include such
subcontractor and/or its employees.
21.2 Customer shall not assign its rights under the Agreement or
delegate or subcontract its duties without prior written
consent from IBM. IBM shall be free to assign its rights under
the Agreement or delegate or subcontract its duties or
obligations under the Agreement without Customer's consent.
21.3 During the term of this Agreement and for one (1) year
thereafter, Buyer shall not solicit any IBM employee who is
directly engaged in performing activities under this Agreement
to fill out an application for employment; nor shall Buyer
solicit the employees of any third party engaged on behalf of
IBM in performing activities that are related to this
Agreement.
22.0 COMPETITIVE PRODUCTS AND SERVICES - Neither this Agreement nor any
activities hereunder will impair any right of IBM or Buyer to design,
develop, manufacture, market, service, or otherwise deal in, directly
or indirectly, other products or services including those which are
competitive with those offered by IBM or Buyer.
23.0 PROMOTIONAL ACTIVITY - Press releases and other like publicity,
advertising or promotional material which mention the other party by
name, this Agreement or any term hereof shall be agreed upon by both
parties in writing prior to any release.
24.0 FORCE MAJEURE - Except for payments due IBM, neither party shall be in
default or liable for any delay or failure of compliance with this
Agreement due to an act of nature, public enemy, freight embargo, or
other cause if such act of nature, public enemy, freight embargo, or
other cause is beyond the control of the non-performing party. A
non-performing party shall cure as soon as practicable.
25.0 NOTICES
25.1 All notices shall be in writing and shall be deemed delivered
when sent by certified mail return receipt requested.
IBM Corp. Rainbow Technologies, Inc
Dept. LJGV - 965-3J 50 Technology Drive
1000 River Street Irvine, California 92618
Essex Junction, VT 05452
Attn: Contract Administrator Attn: Director of Materials
25.2 Day to day activities under this Agreement will be directed by
the Technical Coordinators identified in Attachment A, who
will be responsible for maintaining technical liaison between
the parties. Either party may change its respective
representative designated for receipt of notices, or its
Technical Coordinator and their addresses designated for
notices by notifying the other party in the same manner as any
other notice.
14
<PAGE> 15
26.0 GENERAL PROVISIONS
26.1 This Agreement may be executed in any number of identical
counterparts, each of which shall be deemed to be an original,
and all of which together shall be deemed to be one and the
same instrument when each party has signed one such
counterpart.
26.2 The activities of each party and its employees, agents or
representatives while on the other party's premises (including
any design center) shall comply with the host company's
policies and procedures for such facilities, including
security procedures and visitation guidelines.
26.3 Each party will comply with all applicable federal, state and
local laws, regulations and ordinances including, without
limitation, the regulations of the U.S. Government relating to
the export of commodities and technical data insofar as they
relate to the activities under this Agreement. Buyer agrees
that machines, commodities, and technical data provided under
this Agreement are subject to restrictions under the export
control laws and regulations of the United States of America,
including, without limitation, the U.S. Export Administration
Act and the U.S. Export Administration Regulations. Buyer
hereby gives its written assurance that neither machines,
commodities or technical data provided by IBM under this
Agreement, nor the direct product thereof, will be exported,
or re- exported, directly or indirectly, to prohibited
countries or nationals thereof without first obtaining
applicable government approval. Buyer agrees it is responsible
for obtaining required government documents and approvals
prior to export of any machine, commodity, or technical data.
26.4 This Agreement shall be construed, and the legal relations
between the parties hereto shall be determined, in accordance
with the substantive laws of the State of New York, without
regard to the conflict of laws principles thereof. Any
proceedings to resolve disputes relating to this Agreement,
shall be commenced in the State of New York. The parties
hereto expressly waive any right they may have to a jury trial
and agree that any proceeding under this Agreement shall be
tried by a judge without a jury.
26.5 If any section or subsection of this Agreement is found by
competent judicial authority to be invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of any such section or subsection in every
other respect and the remainder of this Agreement shall
continue in effect so long as the redacted Agreement still
expresses the intent of the parties. If the intent of the
parties cannot be preserved, this Agreement shall be either
renegotiated or terminated.
26.6 No actions, regardless of form, arising out of this Agreement,
may be brought by either party more than two (2) years after
the cause of action has arisen, or, in the case of nonpayment,
more than two (2) years from the date the last payment was
due.
26.7 This Agreement may be modified only by a written amendment
signed by persons authorized to so bind Buyer and IBM. This
Agreement shall not be supplemented or modified by any course
of dealing, course of
15
<PAGE> 16
performance or trade usage. The term "this Agreement" as used
herein includes any applicable Attachments or future written
amendment(s) made in accordance with this Section.
26.8 Failure by either party to insist in any instance on strict
conformance by the other to any term of this Agreement or
failure by either party to act in the event of a breach will
not be construed as a consent to or waiver of any subsequent
breach of the same or of any other term contained in this
Agreement
26.9 All obligations and duties which by their nature survive the
expiration or termination of this Agreement shall remain in
effect beyond any expiration or termination, including,
without limitation, Sections 8.0, 9.0, 10.0, 13.6, 14.0, 15.0,
16.0, 17.0, 18.0. 19.0 and 20.0.
26.10 The headings in this Agreement are for convenience only and
are not intended to affect the meaning or interpretation of
this Agreement.
27.0 MYKOTRONX - Mykotronx shall be bound by those provisions of this
Agreement relevant to its performance of its obligations. However,
Mykotronx has no rights whatsoever under this Agreement. In no event
and under no circumstances shall Buyer make any claim or assert any
right against IBM in any way based upon the performance of Mykotronx
and IBM shall be able to exercise any and all rights available to it
under this Agreement, against Buyer, based upon failure or alleged
failure of Mykotronx to perform its obligations hereunder, as if Buyer
had been the party that was always responsible for those obligations.
In the event Mykotronx makes any claim against IBM arising from or in
any way relating to this Agreement, then IBM shall be able to rely
fully on and assert those provisions of this Agreement that limit its
liability (Section 20, for example) and that govern choice of law
(Section 26.4) and statute of limitations (Section 26.6). Additionally,
Buyer shall fully defend and indemnify IBM against such claim.
28.0 SOLE AGREEMENT - The parties acknowledge that each has read this
Agreement and its Attachments, understands them, and agrees to be bound
by their terms and conditions. Further, the parties agree that this
Agreement and its Attachments and the IBM Design Kit License Agreement,
are the complete and exclusive statement of the agreement between the
parties, which supersedes all proposals and all prior agreements, oral
or written, and all other communications between the parties relating
to the subject matter hereof.
Agreed to: Agreed to:
INTERNATIONAL BUSINESS MYKOTRONX, INC.
MACHINES CORPORATION B
By:
------------------------- -----------------------
Name: Peter D. Hansen Name: Fred Sharp
Title: VP North American Sales Title: Vice President
Dated: September 04, 1997 Dated: 21 -AVG q
Agreed to:
16
<PAGE> 17
RAINBOW TECHNOLOGIES, INC.
By:
-----------------------
Name: Ken Konechy
Title: Vice President
Dated: 2O-AUG-97
This agreement shall not bind either party to any obligations unless and until
it is executed in writing by both parties.
17
<PAGE> 1
EXHIBIT 21
10K-1999
Rainbow Technologies, Inc.
List of Subsidiaries
Rainbow Technologies North America, Inc.
Mykotronx, Inc.
Rainbow Technologies, Ltd. (UK)
Rainbow Technologies, SARL (France)
Rainbow Technologies, SA (France)
Rainbow Technologies, GmbH (Germany)
Rainbow Technologies, BV (Netherlands)
Rainbow Technologies, Pty., Ltd. (Australia)
Rainbow Technologies (Russia)
Rainbow Technologies Co., Ltd. (Taiwan)
Rainbow Information Technologies Co., Ltd. (China)
<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 22, 1999, 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, 1998.
/s/ Ernst & Young LLP
Orange County, California
March 30, 1999
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