<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
RAINBOW TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
RAINBOW TECHNOLOGIES, INC.
50 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 3, 1999
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN THAT the 1999 Annual Meeting of Shareholders of
Rainbow Technologies, Inc. (the "Company"), will be held on June 3, 1999 at 2:00
PM, Pacific Daylight Time at the Company's Headquarters, 50 Technology Drive,
Irvine, California 92618, 949-450-7300, (the "Annual Meeting") for the purposes
described below.
1. To elect a Board of Directors who shall hold office until the next
Annual Meeting of Shareholders or until their successors are duly
elected and shall have qualified.
2. To consider and vote upon a proposal to amend the 1990 Restated
Incentive Stock Option Plan.
3. To ratify the appointment of Ernst & Young, LLP as independent auditors
of the Company.
4. To transact such other business as may properly come before the Annual
Meeting.
Only Shareholders of record at the close of business on April 23, 1999 are
entitled to notice of and to vote at the Annual Meeting.
You are cordially invited to attend the Annual Meeting. However, if you are
not able to be present, please be sure that your shares are represented at the
Annual Meeting by indicating your voting instructions, dating and signing the
enclosed proxy card and returning it promptly in the enclosed, postage paid
envelope.
By Order of the Board of Directors
/s/ Walter Straub
-----------------------------------
Walter W. Straub
Chairman
April 23, 1999
<PAGE> 3
RAINBOW TECHNOLOGIES, INC.
50 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
------------------------
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of Rainbow Technologies, Inc. (the "Company") of proxies,
in the form enclosed, for use at the 1999 Annual Meeting of Shareholders of the
Company (the "Annual Meeting") to be held at the time and place and for the
purpose set forth in the attached Notice of Annual Meeting of Shareholders.
Mailing of this proxy statement and the accompanying proxy card is to
commence on May 4, 1999.
GENERAL INFORMATION
RECORD DATE AND SHARES OUTSTANDING
Shareholders of record at the close of business on April 23, 1999 (the
"Record Date") are entitled to notice of, and to vote at, the Annual Meeting. At
the Record Date, the Company had issued and outstanding 11,738,324 shares of
Common Stock.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a subsequent proxy relating to the same shares and
delivering it to the Secretary of the Company before the Annual Meeting, or
(iii) attending the Annual Meeting and voting in person (although attendance at
the Annual Meeting will not in and of itself constitute a revocation of a
proxy).
VOTING
Each share of Common Stock outstanding on the Record Date is entitled to
one vote. No shareholder will be entitled to cumulative votes. The six nominees
for election as Directors at the Annual Meeting who receive the highest number
of affirmative votes will be elected. The other matter submitted for shareholder
approval at the Annual Meeting will require the affirmative vote of a majority
of shares of the Company's Common Stock present or represented and entitled to
vote at the meeting.
SOLICITATION OF PROXIES
The cost of solicitation will be borne by the Company. The Company may
reimburse brokerage firms and other persons representing beneficial owners of
shares of Common Stock for their expenses in forwarding soliciting materials to
such beneficial owners. Proxies may be solicited by certain of the Company's
directors, officers, and regular employees, without additional compensation,
personally or by telephone or telegram.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Proposals of shareholders of the Company intended to be presented by such
shareholder at the Company's 2000 Annual Meeting must be received by the Company
no later than February 15, 2000 in order that they may be included in the proxy
statement related to that meeting.
1
<PAGE> 4
PROPOSAL 1: ELECTION OF DIRECTORS
NOMINEES
Six directors are to be elected to hold office until the next Annual
Meeting of Shareholders and until their successors are elected and qualified.
Unless otherwise directed, the proxy holders will vote the proxies received by
them for the six nominees named below. Management expects that each of the
nominees will be available for election, but if any of them is not a candidate
at the time the election occurs, it is intended that such proxy will be voted
for the election of another nominee to be designated by the Board to fill any
such vacancy.
The names of the nominees and certain information about them are set forth
below.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE POSITION
--------------- --- --------
<S> <C> <C>
Walter W. Straub........... 55 Chairman, President, Chief Executive Officer and Director
Peter M. Craig............. 54 Vice Chairman & Director
Richard P. Abraham......... 69 Director
Frederick M. Haney......... 58 Director
Marvin Hoffman............. 64 Director
Alan K. Jennings........... 69 Director
</TABLE>
All of the nominees of management are members of the Board of Directors at
the present time and have served continuously since the dates of their election
as described below.
Walter W. Straub, a co-founder of the Company, has been a director of the
Company since its inception in 1982, and President and Chief Executive Officer
of the Company since 1983. Since 1989, Mr. Straub has served as director of CAM
Data Systems, a manufacturer of computerized inventory control systems. Mr.
Straub received a B.S.E.E. in 1965 and an M.B.A. in Finance in 1970 from Drexel
University. In May 1993, Mr. Straub was elected to the Board of Trustees of
Drexel University.
Peter M. Craig has been a director of the Company since 1985, Vice Chairman
since December, 1995, Executive Vice President from 1992 to April 1999, and
Secretary of the Company from 1989 to April, 1999. Mr. Craig received a B.S.E.E.
from Case Institute of Technology in 1967 and a M.S.E.E. from the University of
Minnesota in 1975. Mr. Craig will resign from the Company effective April 30,
1999; however, he will remain on the Board of Directors.
Richard P. Abraham has been a director of the Company since 1988. He is
currently the President of Pacific Associates, a sole proprietorship engaged in
business consulting. Mr. Abraham is a member of the Board of Directors of
Quantum Manufacturing Technologies, (QMT) of Albuquerque, New Mexico, a majority
owned subsidiary of the Company. As a member of the Board of QMT, Mr. Abraham
has an option to purchase 109,400 shares of QMT's common stock at an option
price of $0.10, vesting over four years. Since 1987, Mr. Abraham has been a
General Partner of Weeden Capital Management and has also been a consultant to
Weeden & Co. Mr. Abraham received a B.S. and M.S. from Stanford University in
1954.
Dr. Frederick M. Haney has been a director of Rainbow since January, 1996.
He is President of Venture Management Company, Palos Verdes Estates, California.
From 1984 to 1991 he was founder and manager of 3i Ventures, California, a high
technology venture capital fund. Dr. Haney has extensive experience in strategic
planning, operations and finance in the information and computer industry. Dr.
Haney holds a Ph.D. in Computer Science from Carnegie-Mellon University.
Marvin Hoffman has been a director of the Company since 1990. From 1976 to
1998, he was the Chief Executive Officer and Chairman of the Board of XXCAL,
Inc., a corporation engaged in the business of providing high technology
computer and computer-related temporary personnel. Mr. Hoffman is currently CEO
of NTS/XXCAL IT Staffing and Managed Service Organization. In October of 1998,
XXCAL merged with National Technical Systems to form NTS/XXCAL IT Solutions
Group. He is also currently, and has been since 1988 and 1987, respectively, the
President of the Los Angeles City College Foundation and a director of RIMTECH,
a not-for-profit organization encouraging trade and joint ventures between
United
2
<PAGE> 5
States and Japanese businesses. Mr. Hoffman received a B.A. in Mathematics from
California State University Northridge in 1962.
Dr. Alan K. Jennings, a co-founder of the Company, has been a director of
the Company since its inception in 1982. From 1982 to 1992 he served as an
officer of the Company in various capacities. Since 1980, Dr. Jennings has been
the President of Dartex, Inc., a California corporation which provides technical
and management services. He received a B.S.E.E. from Stanford University in
1949, an M.S. in Mathematics from Oklahoma State University in 1951 and a Ph.D.
in Mathematics from Kansas University in 1954.
CORPORATE OFFICERS
The names of the Company's corporate officers who are not nominated for
election as members of the Board of Directors, and certain information about
them is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Aviram Margalith.................. 49 Chief Operating Officer
Patrick E. Fevery................. 43 Vice President Finance and Chief Financial Officer
Norman L. Denton, III............. 53 Executive Vice President Sentinel Business Unit
Paul A. Bock...................... 51 Senior Vice President Business Development
Richard L. Burris................. 54 Vice President Manufacturing
Laurie W. Casey................... 42 Vice President Strategic Marketing
James Kopycki..................... 57 President Mykotronx
</TABLE>
Dr. Aviram Margalith was appointed Chief Operating Officer of Rainbow in
September 1998. From 1997 to 1998, Dr. Margalith was Senior Vice President of
Rainbow and President of Mykotronx, a wholly owned subsidiary of Rainbow. Prior
to this appointment, Dr. Margalith was Vice President and General Manager of
Group Technologies Corporation of Tampa, Florida. His assignments at Group
Technologies included International operations, Federal Systems and President of
Metrum, Inc. of Denver, Colorado. Dr. Margalith holds a Ph.D., MSEE and BSEE
from Cage Western Reserve, Cleveland, Ohio in 1980, 1977 and 1975, respectively.
Patrick E. Fevery has been Vice President of Finance and Chief Financial
Officer of the Company since January 1992. From 1990 to 1992, Mr. Fevery was
Controller of the Company. From 1988 to 1990, Mr. Fevery was the Company's
Manager of Finance and Administration. Mr. Fevery received a Bachelor's Degree
in Business Administration from European University in Belgium in 1980, and a
Masters Degree in Business Administration from Claremont Graduate School in
Claremont, California in 1982.
Norman L. Denton, III was promoted to Executive Vice President of Sentinel
Business Unit in January 1999. From 1995 to January, 1999, Mr. Denton served as
Senior Vice President of Sales and Marketing. From 1992 to 1995, Mr. Denton was
Vice President of Sales and Marketing. From 1990 to 1992, Mr. Denton held
positions of Director of Sales and Marketing North America, and Director of
National Accounts Marketing at Rainbow. Mr. Denton attended University of
California at Berkeley and San Francisco State University.
Paul A. Bock was promoted to Senior Vice President Business Development in
December 1995, and has served as Vice President of Business Development since
1992. From 1988 to 1992, Mr. Bock held the positions of Director of Business
Development for the Company and Manager of National Sales and Major Accounts for
the Company. Mr. Bock received his B.S. degree in Political Science from
California State University Northridge in 1969.
Richard L. Burris has been Vice President of Manufacturing since 1992. From
1988 to 1992, Mr. Burris held the positions of the Company's Manufacturing
Manager and Director of Manufacturing. Mr. Burris received an AA from Fullerton
College in 1973.
Laurie W. Casey has been Vice President Strategic Marketing since December
1995. Ms. Casey joined Rainbow as Manager of Product Management & Planning in
1992. From 1990 to 1992, she was a Product Manager for Printronix Corporation.
Ms. Casey received her B.A. in Spanish in 1978 from the University of
3
<PAGE> 6
California at Santa Barbara, and obtained her Master's degree in International
Management from the American Graduate School of International Management in
1989.
James J. Kopycki was appointed President of Mykotronx and Senior Vice
President, Rainbow in January 1999. Prior to this appointment, Mr. Kopycki was
President and COO of Vanguard Integrity Professionals in Orange, California. Mr.
Kopycki received his B.S. degree in Industrial Management from University of
Illinois in 1966. Mr. Kopycki also graduated from the U.C.L.A. Executive
Management Program in 1986.
Except as stated, there are no arrangements or understandings by or between
any director or executive officer and any other person(s), pursuant to which he
or she was or is to be selected as a director or corporate officer,
respectively.
There is no family relationship by or between any director or corporate
officer of the Company.
BOARD MEETINGS AND COMMITTEES
The Board of Directors held four meetings during the Company's year ended
December 31, 1998. Each director attended all meetings of the Board of
Directors.
The Board of Directors of the Company has standing Audit, Compensation and
Stock Option Committees. The Board of Directors has no Nominating Committee nor
any committee performing the functions of a Nominating Committee.
The members of the Audit Committee are Mr. Jennings and Mr. Hoffman. The
Audit Committee held two meetings during fiscal 1998. The purpose of the Audit
Committee is to review with the management of the Company and with the Company's
independent auditors such matters as internal accounting controls and
procedures, the plan and results of the annual audit, and the recommendations of
the independent auditors with respect to their audit activities.
The members of the Compensation Committee are Mr. Abraham and Mr. Hoffman.
The Compensation Committee held two meetings during fiscal 1998. The
Compensation Committee is primarily responsible for establishing compensation
for the executive officers of the Company. Its activities are described in more
detail under "Report of the Compensation Committee on Executive Compensation"
below.
The Stock Option Committee is primarily responsible for establishing the
number of options granted to employees of the Company under the 1990 Restated
Stock Option Plan. The Stock Option Committee held four meetings during fiscal
1998. The members of the Stock Option Committee are Mr. Abraham and Mr. Hoffman.
Each member of each particular Committee attended all of the meetings of
each such Committee.
REPORT OF THE COMPENSATION COMMITTEE
The Company's executive compensation program is administered by the
Compensation and Stock Option Committees of the Board of Directors.
The Compensation Committee and the Stock Option Committee are each
comprised entirely of non-employee, independent members of the Board of
Directors. The Compensation Committee establishes the general compensation
policies of the Company and the compensation paid to the Chief Executive Officer
and other executive officers. The Stock Option Committee administers the 1990
Restated Incentive Stock Option Plan including review and approval of stock
option grants to all employees, including the Chief Executive Officer and other
executive officers.
GENERAL COMPENSATION PHILOSOPHY
The Company's compensation philosophy is that cash compensation should be
related to the performance of the Company and any long term incentive should be
closely aligned with the interests of shareholders. This
4
<PAGE> 7
philosophy is designed to attract, retain and motivate the high caliber of
executives required for the success of the business.
In determining executive compensation, the Compensation Committee compares
the compensation paid at companies in the computer hardware and software
industries, and places particular emphasis upon financial performance
comparisons including sales growth, net income growth, net income per share
growth, increase in cash flow and growth in shareholder value. The Committee
then structures cash compensation for the executive officers named in the
Summary Compensation Table to consist of (i) a base salary determined upon a
review of the Company's performance in the prior year, and (ii) bonus
compensation that is directly related to the Company's sales, quality and net
income performance in the current year.
In particular, the bonus compensation paid to executives is established by
the Compensation Committee each year following a review of the Company's
performance for the prior year. The bonus compensation is based directly on the
Company's current year operating performance goals, and is generally established
to equal 30% to 60% of the executive's total cash compensation for the year.
Long-term incentive compensation is realized through the granting of stock
options to key employees including the Chief Executive Officer and other
executive officers. The number of shares of Common Stock subject to a stock
option grant is based upon the employee's current and anticipated future
performance and ability to achieve strategic goals and objectives. Grants are
made annually and generally become exercisable during a four-year vesting
period, thus providing an incentive to remain in the Company's employ. Stock
options have value for the employee only if the price of the Company's stock
increases above the fair market value on the grant date and the employee remains
in the Company's employ for the period required for the stock option to be
exercisable.
CHIEF EXECUTIVE OFFICER COMPENSATION
Compensation for the Chief Executive Officer was set according to the
established compensation philosophy described above.
The Compensation Committee reviewed competitive base compensation
information reflecting the most recent compensation data and the Company's
performance in 1997 and goals for 1998. The bonus portion of the Chief Executive
Officer's compensation represents approximately 62% of the Chief Executive
Officer's total cash compensation. This reflects the Company's commitment to its
stated compensation philosophy. The Chief Executive Officer received a grant of
stock options based upon an evaluation of the Company's performance in 1997.
CONCLUSION
The committee believes that these policies and programs are competitive and
effectively align executive compensation with the Company's goal of maximizing
the return to shareholders.
Compensation Committee:
Richard P. Abraham
Marvin Hoffman
5
<PAGE> 8
EXECUTIVE COMPENSATION
The following tables set forth the annual compensation for the Chief
Executive Officer and the four other most highly compensated executive officers
of Rainbow Technologies, Inc.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------ ALL OTHER
NAME YEAR SALARY($) BONUS($) OPTIONS# COMPENSATION(1)($)
---- ---- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Walter W. Straub.................... 1998 195,600 317,500 22,100 13,600
1997 182,000 218,400 33,000 4,750
1996 172,600 218,400 33,000 4,500
Aviram Margalith.................... 1998 204,270 58,000 20,100 5,000
1997 190,590 62,000 82,500 4,750
1996 0 0 0 0
Patrick E. Fevery................... 1998 132,000 145,250 16,600 10,000
1997 125,000 80,000 22,500 4,750
1996 92,040 107,800 22,500 4,500
Norman L. Denton III................ 1998 219,632 32,800 17,600 10,000
1997 216,146 160,200 22,500 4,750
1996 213,588 96,200 22,500 4,500
Peter M. Craig...................... 1998 167,500 122,100 15,100 12,556
1997 164,128 144,300 22,500 4,750
1996 164,128 144,300 22,500 4,500
</TABLE>
- ---------------
(1) Company contribution under the Company's 401(K) Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------------
NAME GRANTED(1) IN 1998 ($/SH) DATE 5% 10%
---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Straub........... 12,935 1.74% 11.00 09/23/2008 $85,747 $217,299
9,605 1.35% 11.00 09/23/2008 $66,446 $168,387
100 0.01% 12.25 09/30/2008 $ 770 $ 1,952
Aviram Margalith........... 11,942 1.68% 11.00 09/23/2008 $82,613 $209,357
8,058 1.13% 11.00 09/23/2008 $55,744 $141,266
100 0.01% 12.25 09/30/2008 $ 770 $ 1,952
Patrick E. Fevery.......... 1,500 0.21% 14.33 06/14/2008 $13,521 $ 34,265
11,545 1.62% 11.00 09/23/2008 $79,866 $202,397
3,455 0.48% 11.00 09/23/2008 $23,901 $ 60,570
100 0.01% 12.25 09/30/2008 $ 770 $ 1,952
Norman L. Denton III....... 13,024 1.83% 11.00 09/23/2008 $90,098 $228,326
4,476 0.63% 11.00 09/23/2008 $30,964 $ 78,470
100 0.01% 12.25 09/30/2008 $ 770 $ 1,952
Peter M. Craig............. 11,637 1.63% 11.00 09/23/2008 $80,503 $204,010
3,363 0.47% 11.00 09/23/2008 $23,265 $ 58,957
100 0.01% 12.25 09/30/2008 $ 770 $ 1,952
</TABLE>
- ---------------
(1) No Option may be exercised prior to one year from date of grant, at which
time 28% of the grant is vested with 2% per month vesting thereafter.
6
<PAGE> 9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
NUMBER OF UNEXERCISED OPTIONS YEAR END 1998 (MARKET PRICE
SHARES AT YEAR END 1998 AT 12/31/98 AT $18.813/SH)
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Walter W. Straub..... 0 0 240,776 61,821 2,334,790 463,420
Aviram Margalith..... 13,496 90,987 19,050 70,051 146,056 562,297
Patrick E. Fevery.... 3,150 28,963 72,300 42,640 591,553 316,337
Norman L. Denton III. 12,000 136,500 127,653 46,131 1,158,350 344,852
Peter M. Craig....... 14,250 86,750 129,693 41,741 1,180,532 313,390
</TABLE>
DIRECTORS' COMPENSATION
For the year ended December 31, 1998, the Company had an Outside Directors'
Plan to compensate those directors of the Company who were not also employees of
the Company, for serving as directors. The Outside Directors' Plan provides for
outside directors to receive the sum of $2,500 per Board meeting. For the year
ended December 31, 1998, Richard P. Abraham, Marvin Hoffman, Frederick Haney and
Alan Jennings, outside directors of the Company, each received $10,000.
7
<PAGE> 10
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph shows a comparison of five-year cumulative return among
Rainbow Technologies, the NASDAQ Index, and the NASDAQ Computer and Data
Processing Index.
<TABLE>
<CAPTION>
NASDAQ COMPUTER &
RAINBOW NASDAQ INDEX DATAPROCESSING INDEX
------- ------------ --------------------
<S> <C> <C> <C>
Dec-93 100 100 100
Dec-94 74 98 121
Dec-95 114 138 185
Dec-96 98 170 228
Dec-97 153 209 280
Dec-98 149 293 502
</TABLE>
The graph assumes $100 was invested on December 31, 1993.
EMPLOYMENT AGREEMENTS AND
CHANGE OF CONTROL AGREEMENTS
In January 1999, the Company entered into employment agreements and change
of control agreements with Walter W. Straub, President and Chief Executive
Officer of the Company, Peter M. Craig, Vice Chairman and Executive Vice
President, Norman L. Denton III, Executive Vice President, Paul A. Bock, Senior
Vice President, Patrick Fevery, Vice President & Chief Financial Officer, Aviram
Margalith, Chief Operating Officer, Laurie Casey, Vice President Strategic
Marketing and Richard Burris, Vice President Manufacturing. The terms of the
employment agreements provide for a term of one year, and base salary and bonus
compensation to be determined by the Board of Directors. In the event of a
change of control, the agreements provide for severance payments equal to one
and one-half times salary and bonus paid in the prior year for Mr. Craig, Mr.
Denton, Mr. Bock, Mr. Fevery, Mr. Margalith, Ms. Casey and Mr. Burris, and three
times the salary and bonus paid in the prior year for Mr. Straub.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 23, 1999
with respect to share ownership of the Company's Common Stock by (i) each person
who owns beneficially more than 5% of the outstanding shares of Common Stock of
the Company, (ii) each director of the Company and (iii) executive officers
listed
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<PAGE> 11
in the Summary Compensation Table (iv) all officers and directors of the Company
as a group without naming them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNERSHIP(2) OF CLASS
---------------------------------------- ----------------- ----------
<S> <C> <C>
Walter W. Straub.......................................... 689,394 5.9%
Alan K. Jennings.......................................... 679,314 5.8%
Peter M. Craig............................................ 171,675 1.5%
Richard P. Abraham........................................ 59,850 *
Marvin Hoffman............................................ 48,350 *
Frederick Haney........................................... 23,175 *
Norman L. Denton III...................................... 135,903 *
Patrick Fevery............................................ 79,875 *
All officers and directors as a group (12 persons)........ 2,039,673 17.4%
</TABLE>
- ---------------
(1) c/o Rainbow Technologies, Inc., 50 Technology Drive, Irvine, CA 92618.
(2) For purposes of this table, "beneficial ownership" of any security as of a
given date includes the right to acquire such security within 60 days of
April 23, 1999. The total amount of these shares with respect to which all
of the above have rights to acquire beneficial ownership in 60 days are as
follows: Walter W. Straub 3,840, Alan K. Jennings 1,350, Peter M. Craig
2,520, Richard Abraham 1,350, Marvin Hoffman 1,350, Frederick Haney 1,350,
Norman L. Denton 2,941, Patrick E. Fevery 2,896, Aviram Margalith 3,300,
other officers as a group 6,946. To the knowledge of the Company, each
person named in the table has the sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
person or entity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At various times during 1998, the following individuals (none of whom was
or had been an officer or employee of the Company or any of its subsidiaries)
served on the Company's Compensation Committee: Richard P. Abraham, Marvin
Hoffman. There were no interlocks with other companies within the meaning of the
SEC's Proxy rules during 1998.
CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
During 1998, the Company paid $45,570 to NT/XXCAL, Inc. a corporation
engaged in providing high technology temporary computer and computer-related
personnel. Marvin Hoffman is the Chief Executive Officer and Chairman of the
Board of NT/XXCAL, Inc.
During 1998, the Company paid $18,323 to Fred Haney, a director of the
Company, for providing the Company with consulting services.
401(K) PROFIT SHARING PLAN AND TRUST.
In January 1990, the Board of Directors adopted and approved a 401(k)
Profit Sharing Plan and Trust effective January 1, 1990. Under the 401(k)
program, the Company is obligated to match each employee's contribution 50% per
dollar of salary contribution with a company matching maximum contribution of 6%
of salary deferral. The Company has the option to contribute an additional
discretionary amount based upon current or accumulated net profits. No such
discretionary contributions were made in 1998. Company contributions vest at the
date of the employee's commencement of service.
9
<PAGE> 12
PROPOSAL 2: APPROVAL OF AMENDMENT TO
1990 RESTATED INCENTIVE STOCK OPTION PLAN
Rainbow shareholders are being asked to approve the amendment of Rainbow's
1990 Restated Incentive Stock Option Plan (the "Option Plan") to increase the
number of shares of Rainbow Common Stock which may be issued, by 950,000 shares
of Rainbow Common Stock. As of April 21, 1999, options covering an aggregate of
2,742,759 shares of Rainbow's Common Stock were outstanding under the Option
Plan, and 10,685 shares remain available for future grant under the Option Plan.
In March 1999, the Board of Directors of Rainbow (the "Board") adopted subject
to shareholder approval, a proposal to amend the Option Plan to increase the
number of shares authorized for issuance under the Option Plan, by 950,000
shares. The Board adopted, these amendments to ensure that Rainbow continue to
grant stock options to employees at levels determined appropriate by the Board
and the Compensation and Option Committee of the Board.
VOTE REQUIRED
The affirmative vote of a majority of shares of the Common Stock present in
person or represented by proxy and entitled to vote at the Rainbow Special
Meeting will be required for the approval of this proposal. Abstentions will be
counted towards the tabulation of votes cast on the proposal and will have the
same effect as negative votes. Brokers non-votes will not be counted for any
purpose in determining whether the proposal has been approved.
DESCRIPTION OF THE OPTION PLAN
The essential features of the Option Plan are outlined below.
GENERAL
The Option Plan provides for the grant of incentive stock options.
Incentive stock options granted under the Option Plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code (the "Code"). See "Tax Information" for a discussion of the tax
treatment of incentive and non-qualified stock options.
PURPOSE
The Option Plan was adopted to promote the interests of the Company by
providing key employees incentives to exert special efforts for the success of
Rainbow. The Plan assists in retaining the services of top performing employees
and to attract new personnel to the Company. The demand for technology industry
professionals is strong and extremely competitive. A stock option plan is an
essential element of the Company's compensation program.
ADMINISTRATION
The Option Plan provides that it will be administered by the Board and
authorized the Board to delegate such administration to a committee of not fewer
than two members of the Board each of whom shall be disinterested within the
meaning of Rule 16b-3 under the Exchange Act of 1934. As used herein with
respect to the Option Plan the "Board" refers to the Compensation and Option
Committee as well as the Board of Directors itself. The Board has the power to
construe and interpret the Option Plan and, subject to the provisions of the
Option Plan, to determine the persons to and the dates on which options will be
granted, the number of shares to be subject to each option, the exercise price,
the type of consideration and other terms of the option. The Board has delegated
such administration to the Compensation and Option Committee.
ELIGIBILITY
Incentive Stock options may be granted under the Option Plan only to
selected employees (including officers) of Rainbow and its affiliates.
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STOCK SUBJECT TO THE OPTION PLAN
If options granted under the Option Plan expire or otherwise terminate
without being exercised, the Common Stock not purchased pursuant to such
options, again becomes available for issuance under the Option Plan. The current
number of shares authorized for issuance under the Option Plan is 2,753,444
shares. Under this proposal the Option Plan would be amended to increase the
number of shares authorized for issuance to 3,703,444.
FEDERAL AND CALIFORNIA INCOME TAX INFORMATION
Incentive stock options under the Option Plan are intended to be eligible
for the favorable federal and California income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal and California income tax consequences to
the optionee or Rainbow by reason of the grant or exercise of an incentive stock
option. However, the exercise of an incentive stock option may increase the
optionee's alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for more than two years from the date on which the option is granted and
more than one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be long-term capital gain or loss. Generally if the optionee disposes
of the stock before the expiration of either of these holding periods (a
"disqualification disposition"), at the time of disposition, the optionee will
realize taxable ordinary income equal to the lesser of (i) the excess of the
stock's fair market value on the date of exercise over the exercise price or
(ii) the optionee's actual gain, if any, on the purchase and sale. The
optionee's additional gain or any loss upon the disqualifying disposition, will
be a capital gain or loss which will be long-term or short-term, depending on
whether the stock was held for more than one year. Slightly different rules may
apply to optionees who acquire stock subject to certain repurchase options or
who are subject to Section 16(b) of the Exchange Act of 1934.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, Rainbow will generally be entitled (subject to the
requirement of reasonableness and perhaps in the future the satisfaction of a
withholding obligation) to a corresponding business expense deduction in the tax
year in which the disqualifying disposition occurs. Pursuant to Section 162(m)
of the Code for options granted on or after the May, 1994 Annual Meeting, or
options materially modified after January 1, 1994, Rainbow's business expense
deduction will be limited to $1 million for certain executive employees if such
an employee's recognition of ordinary income on such disqualifying disposition,
combined with all other compensation paid to the employee during the year of the
disqualifying disposition, exceeds $1 million.
THE BOARD OF DIRECTORS HAS RECOMMENDED A VOTE
FOR APPROVAL OF THE AMENDMENTS TO
RAINBOW'S 1990 RESTATED INCENTIVE STOCK OPTION PLAN
PROPOSAL 3: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
It is proposed that the shareholders approve the selection of Ernst & Young
LLP as independent auditors for the Company for the 1999 fiscal year. Ernst &
Young LLP have been the independent auditors for the Company since 1987, and
their reappointment has been recommended by the Board of Directors.
Representatives of Ernst & Young LLP are expected to be available at the
Annual Meeting to respond to appropriate questions and will be given the
opportunity to make a statement if they so desire. This proposal requires the
approval of at least a majority of the outstanding shares of Common Stock
entitled to vote at the Annual Meeting. In the event such approval is not
obtained, selection of independent auditors will be reconsidered by the Board of
Directors.
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RIGHTS OF DISSENTING SHAREHOLDERS
There are no rights of appraisal or similar rights of dissenters with
respect to any matter proposed to be acted upon at the 1999 Annual Meeting of
Shareholders.
OTHER MATTERS
The Company knows of no matters, other than those described herein, which
are to be brought before the Annual Meeting. However, if any other proper
matters are brought before the Annual Meeting, the persons named in the enclosed
proxy will vote in accordance with their judgment on such matters.
FINANCIAL STATEMENTS
Financial Statements of the Company are contained in the 1998 Annual Report
to Shareholders.
THE COMPANY FILES AN ANNUAL REPORT WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K. SHAREHOLDERS MAY OBTAIN A COPY OF THIS REPORT WITHOUT
COST BY WRITTEN REQUEST TO THE COMPANY'S SHAREHOLDER RELATIONS DEPARTMENT.
NOTICE TO BANKS, BROKERS/DEALERS
AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Company, at 50 Technology Drive, Irvine, California
92618, Attention: Secretary, whether other persons are the beneficial owners of
the shares for which proxies are being solicited and, if so, the number of
copies of the proxy statement, other soliciting material and Annual Report you
wish to receive in order to supply copies to the beneficial owners of shares of
Common Stock of the Company.
BY ORDER OF THE BOARD OF DIRECTORS:
/s/ Walter Straub
-----------------------------------
Walter W. Straub
Chairman
Irvine, California
April 23, 1999
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RAINBOW TECHNOLOGIES, INC.
Annual Meeting of Shareholders - June 3, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Rainbow Technologies, Inc. (the "Company") hereby
appoints Walter W. Straub, the President of the Company, or failing him, Peter
M. Craig, Vice Chairman of the Company, or instead of either of the foregoing
_______________________, as the nominee of the undersigned to attend and to act
for and on behalf of the undersigned at the annual meeting of shareholders of
the Company to be held on June 3, 1999 at 2:00 P.M. Pacific Time, and at any
adjournment or adjournments thereof, to the same extent and with the same power
as if the undersigned were personally present at said meeting or such
adjournment or adjournments thereof and, without limiting the generality of the
power hereby conferred, the nominees named above are specifically directed to
vote as indicated below.
1. ELECTION OF DIRECTORS.
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
below (except as marked to vote for each
to the contrary below) nominee listed below
Walter W. Straub Alan K. Jennings Marvin Hoffman
Peter M. Craig Richard P. Abraham Frederick M. Haney
(INSTRUCTION: To withhold authority to vote for any individual
nominee, strike a line through or otherwise strike the
nominee's name in the list above.)
2. PROPOSAL TO APPROVE AMENDMENT TO 1990 RESTATED INCENTIVE STOCK OPTION PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO APPROVE THE APPOINTMENT OF ERNST & YOUNG, LLP AS INDEPENDENT
AUDITORS OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 16
If there are amendments or variations to the matters proposed at the meeting or
at any adjournment or adjournments thereof, or if any other business properly
comes before the meeting, this proxy confers discretionary authority on the
proxy nominees named herein to vote on such amendments, variations or other
business.
Name: ____________________ No. of Shares: ____________________
Dated: _____________, 1999 ___________________________________
Signature
___________________________________
Signature if held jointly
Please sign exactly as name appears herein. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
NOTE: If no specification is made, this Proxy will be voted FOR on
Proposals 1 2 and 3.
