<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the Quarter ended SEPTEMBER 30, 2000 Commission file number: 0-16641
RAINBOW TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3745398
(State of incorporation) (I.R.S. Employer Identification No.)
50 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock, $.001 par value, outstanding as of
November 10, 2000 was 25,557,761.
<PAGE> 2
RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2000 (unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of Comprehensive Income for the three
and nine months ended September 30, 2000 and 1999 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 2000 and 1999 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 to 5 - Not applicable
Item 6. Exhibits and reports on Form 8K 16
SIGNATURES 16
</TABLE>
2
<PAGE> 3
INTRODUCTORY NOTE
The Quarterly Report on Form 10-Q 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
Company or any other person that the objectives or plans of the Company will be
achieved should not regard the inclusion of such information as a
representation.
3
<PAGE> 4
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
A S S E T S
Current assets:
Cash and cash equivalents ...................................... $ 18,529,000 $ 26,709,000
Marketable securities available-for-sale ....................... 1,086,000 1,173,000
Marketable securities trading .................................. 5,092,000 --
Accounts receivable, net of allowance for doubtful accounts
of $834,000 and $579,000 at September 30, 2000 and
December 31, 1999, respectively .............................. 41,603,000 28,671,000
Inventories .................................................... 24,090,000 12,033,000
Unbilled costs and fees ........................................ 3,138,000 2,916,000
Prepaid expenses and other current assets ...................... 15,764,000 7,155,000
------------- -------------
Total current assets ......................................... 109,302,000 78,657,000
Property, plant and equipment, at cost:
Buildings ...................................................... 6,605,000 7,497,000
Furniture ...................................................... 1,754,000 1,703,000
Equipment ...................................................... 16,875,000 17,060,000
Leasehold improvements ......................................... 1,734,000 1,641,000
------------- -------------
26,968,000 27,901,000
Less accumulated depreciation and amortization ................. 12,181,000 11,145,000
------------- -------------
Net property, plant and equipment ............................ 14,787,000 16,756,000
Long-term note receivable ...................................... 940,000 --
Goodwill, net of accumulated amortization of $14,162,000 and
and $12,764,000 in 2000 and 1999, respectively ................. 21,200,000 21,498,000
Product licenses, net of accumulated amortization of $2,053,000
and $1,749,000 in 2000 and 1999, respectively .................. 5,066,000 5,567,000
Other assets, net of accumulated amortization of $3,848,000 and
and $2,790,000 in 2000 and 1999, respectively .................. 11,351,000 8,060,000
------------- -------------
$ 162,646,000 $ 130,538,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 11,491,000 $ 8,900,000
Accrued payroll and related expenses ........................... 6,578,000 6,155,000
Other accrued liabilities ...................................... 11,712,000 6,927,000
Long-term debt, due within one year ............................ 209,000 239,000
Line of credit ................................................. 4,000,000 6,000,000
Payable to shareholders ........................................ -- 1,500,000
------------- -------------
Total current liabilities .................................... 33,990,000 29,721,000
Long-term debt, net of current portion ........................... 732,000 1,014,000
Other liabilities ................................................ 1,864,000 1,913,000
Commitments and contingencies .................................... -- --
Shareholders' equity:
Common stock, $.001 par value, 55,000,000 shares authorized,
25,329,888 and 23,367,958 shares issued and outstanding
in 2000 and 1999, respectively ............................... 25,000 23,000
Additional paid-in capital ..................................... 44,860,000 28,602,000
Accumulated other comprehensive loss ........................... (2,068,000) (1,173,000)
Retained earnings .............................................. 83,243,000 70,438,000
------------- -------------
Total shareholders' equity ..................................... 126,060,000 97,890,000
------------- -------------
$ 162,646,000 $ 130,538,000
============== =============
</TABLE>
See accompanying notes
4
<PAGE> 5
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Secure Software Distribution ............... $ 13,160,000 $ 14,393,000 $ 41,487,000 $ 43,822,000
Secure Communications ...................... 14,396,000 9,910,000 37,581,000 31,988,000
Internet Performance and Security .......... 11,181,000 2,326,000 25,022,000 4,552,000
Spectria ................................... 5,033,000 3,536,000 15,017,000 5,313,000
------------- ------------- ------------- -------------
Total revenues ........................... 43,770,000 30,165,000 119,107,000 85,675,000
Operating expenses:
Cost of Secure Software Distribution Revenues 3,907,000 4,102,000 12,132,000 12,694,000
Cost of Secure Communications Revenues ..... 10,912,000 8,117,000 29,575,000 28,133,000
Cost of Internet Performance and Security
Revenues ................................. 3,071,000 492,000 7,222,000 1,183,000
Cost of Spectria Revenues .................. 3,232,000 2,411,000 9,011,000 3,379,000
Selling, general and administrative ........ 11,484,000 8,508,000 32,622,000 23,013,000
Research and development ................... 3,141,000 3,029,000 8,602,000 8,488,000
Goodwill amortization ...................... 822,000 562,000 2,316,000 1,765,000
------------- ------------- ------------- -------------
Total operating expenses ................. 36,569,000 27,221,000 101,480,000 78,655,000
------------- ------------- ------------- -------------
Operating income ............................. 7,201,000 2,944,000 17,627,000 7,020,000
Gain on marketable securities ................ 67,000 -- 4,285,000 --
Asset impairment charge ...................... -- -- (2,173,000) --
Interest income .............................. 283,000 181,000 702,000 714,000
Interest expense ............................. (31,000) (46,000) (101,000) (143,000)
Other income (expense), net .................. (22,000) 342,000 383,000 751,000
------------- ------------- ------------- -------------
Income before provision for income taxes ..... 7,498,000 3,421,000 20,723,000 8,342,000
Provision for income taxes ................... 2,852,000 1,346,000 7,918,000 3,292,000
------------- ------------- ------------- -------------
Net income ................................... $ 4,646,000 $ 2,075,000 $ 12,805,000 $ 5,050,000
============= ============= ============= =============
Net income per share:
Basic ..................................... $ 0.18 $ 0.09 $ 0.52 $ 0.22
============= ============= ============= =============
Diluted ................................... $ 0.17 $ 0.09 $ 0.46 $ 0.21
============= ============= ============= =============
Shares used in computing net income per share:
Basic ..................................... 25,214,000 22,616,000 24,716,000 23,050,000
============= ============= ============= =============
Diluted ................................... 28,148,000 23,268,000 27,770,000 23,890,000
============= ============= ============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income ...................................... $ 4,646,000 $ 2,075,000 $ 12,805,000 $ 5,050,000
Other comprehensive income (loss):
Foreign currency translation adjustment ....... (1,793,000) 1,594,000 (1,067,000) (433,000)
Unrealized gain (loss) on securities .......... (44,000) (45,000) (382,000) (88,000)
------------ ------------ ------------ ------------
Other comprehensive income (loss),
before income taxes ......................... (1,837,000) 1,549,000 (1,449,000) (521,000)
Provision for income taxes related to other
comprehensive income (loss) ................. 699,000 (610,000) 554,000 206,000
------------ ------------ ------------ ------------
Other comprehensive income (loss), net of taxes (1,138,000) 939,000 (895,000) (315,000)
------------ ------------ ------------ ------------
Comprehensive income .......................... $ 3,508,000 $ 3,014,000 $ 11,910,000 $ 4,735,000
============ ============ ============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 12,805,000 $ 5,050,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization ....................................................... 4,014,000 3,374,000
Depreciation ....................................................... 2,505,000 2,363,000
Change in deferred income taxes .................................... (1,946,000) (1,340,000)
Allowance for doubtful accounts .................................... 250,000 437,000
Changes in operating assets and liabilities:
Accounts receivable ................................................ (12,962,000) (1,389,000)
Inventories ........................................................ (12,206,000) (930,000)
Unbilled costs and fees ............................................ (222,000) 511,000
Prepaid expenses and other current assets .......................... (164,000) (1,671,000)
Note receivable .................................................... (940,000) --
Accounts payable ................................................... 3,024,000 522,000
Accrued liabilities ................................................ (570,000) 248,000
Income taxes payable ............................................... 6,976,000 2,042,000
Deferred revenues .................................................. (408,000) (59,000)
Other .............................................................. (442,000) (535,000)
------------ ------------
Net cash (used in) provided by operating activities .............. (286,000) 8,623,000
Cash flows from investing activities:
Sale of marketable securities ...................................... -- 5,412,000
Purchases of property, plant, and equipment ........................ (3,328,000) (3,941,000)
Gain on marketable securities ...................................... (4,285,000) --
Asset impairment charge ............................................ 2,173,000 --
Net cash paid for acquisition of Systematic Systems Integration, Inc (1,765,000) (10,861,000)
Other non-current assets ........................................... (2,159,000) (635,000)
Capitalized software development costs ............................. (5,020,000) (826,000)
------------ ------------
Net cash used in investing activities ............................ (14,384,000) (10,851,000)
Cash flows from financing activities:
Exercise of Rainbow common stock options ........................... 8,672,000 998,000
Payment on line of credit .......................................... (2,000,000) --
Payment of long-term debt .......................................... (165,000) (206,000)
Investment by new partners in QM Technologies, Inc. ................ -- 610,000
Purchase and retirement of common stock ............................ -- (7,974,000)
------------ ------------
Net cash (used in) provided by financing activities .............. 6,507,000 (6,572,000)
Effect of exchange rate changes on cash .............................. (17,000) 528,000
------------ ------------
Net decrease in cash and cash equivalents ............................ (8,180,000) (8,272,000)
Cash and cash equivalents at beginning of period ..................... 26,709,000 29,900,000
------------ ------------
Cash and cash equivalents at end of period ........................... $ 18,529,000 $ 21,628,000
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid .................................................. $ 1,794,000 $ 470,000
Interest paid ...................................................... 125,000 140,000
</TABLE>
See accompanying notes.
7
<PAGE> 8
RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
1. Basis of presentation
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; develops and manufactures internet
security products to provide privacy and security for network communications;
and provides consulting services to assist clients in determining computer
network and Internet security requirements, and in designing and implementing
the appropriate network security solutions. 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 to the 2000 presentation.
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 revenue and the fair value for marketable
securities.
At June 30, 2000, the Company performed a review for impairment of the
long-lived assets related to QMT. Based on its evaluation, the Company
determined that all of the long-lived assets related to QMT were fully impaired
and as a result recorded an impairment charge of $2,200,000.
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and carried at fair value with the unrealized holding
gains and losses included in earnings. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity.
During the second quarter and third quarter of fiscal 2000, the Company acquired
securities and classified them as trading securities, as defined by SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Net
unrealized gain recognized in earnings for the three months ended September 30,
2000 and June 20, 2000 were $67,000 and $4,200,000, respectively.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position at September 30, 2000 and results of operations for the three and nine
months ended September 30, 2000 and 1999. The condensed consolidated financial
statements do not include footnotes and certain financial information normally
presented annually under generally accepted accounting principles and,
therefore, should be read in conjunction with the Company's December 31, 1999
Annual Report on Form 10-K. Results of operations for the three and nine months
ended September 30, 2000 are not necessarily indicative of results to be
expected for the full year.
The Company has subsidiaries in the United Kingdom, Germany, France, the
Netherlands, India, Russia, Australia, China and Taiwan. The Company utilizes
the currencies of the countries where its foreign subsidiaries operate as the
functional 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 Loss 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.
8
<PAGE> 9
2. 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 reflect the assumed conversion of all diluted
securities.
3. Government Contracts
The Company is both a prime contractor and a subcontractor under fixed-price and
cost-plus-fixed-fee 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 completed contracts.
To facilitate interim billings during the performance of its contracts, the
Company establishes provisional billing rates, which are used in recognizing
contract revenue and contract accounts receivable amounts in these financial
statements. These provisional billing rates are adjusted to actual at year-end
and are subject to adjustment after Government audit.
4. Inventories
Inventoried costs relating to long-term contracts are stated at actual
production costs, 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. Inventories
consist of the following:
<TABLE>
<CAPTION>
Inventories (in thousands) September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Finished goods $ 7,822 $ 4,804
Raw materials 10,864 1,648
Inventoried costs relating to long-term contracts,
net of amounts attributed to revenues recognized to date 3,672 4,535
Work in process 1,732 1,046
-------- --------
$ 24,090 $ 12,033
======== ========
</TABLE>
5. Acquisitions
On October 22, 1999, the Company completed the acquisition of InfoCal LLC
(InfoCal). InfoCal creates collaborative intranet/extranet applications,
knowledge portals and distance learning applications and specializes in
messaging strategy migration and implementation. The total transaction value was
$3,500,000, including $3,000,000 paid in cash and 36,530 shares of Rainbow
common stock valued at $500,000. In addition to the initial consideration, there
is contingent consideration of up to $500,000 in each of the 2000 and 2001
calendar years. The contingent payments are based upon achievement of certain
financial, revenue and strategic goals. Any additional consideration will be
recorded as goodwill. This acquisition has been accounted for using the purchase
method of accounting. Approximately $3,500,000 was allocated to goodwill and is
being amortized on a straight-line basis over ten years. Results of operations
for InfoCal are included in the Company's consolidated results of operations
beginning on October 22, 1999.
On September 16, 1999, the Company completed the acquisition of InfoSec Labs,
Incorporated (InfoSec). InfoSec has core competency in both enterprise and
Internet security solutions and security assessment and education programs. The
total transaction value was $3,100,000, including $1,600,000 paid in cash and
120,209 shares of Rainbow common stock valued at $1,500,000. This acquisition
has been accounted for using the purchase method of accounting. Approximately
$3,100,000 was allocated to goodwill and is being amortized on a straight-line
basis
9
<PAGE> 10
over ten years. Results of operations for InfoSec are included in the Company's
consolidated results of operations beginning on September 16, 1999.
On May 12, 1999, the Company completed the acquisition of Systematic Systems
Integration (Systematic) for an initial purchase price of $9,600,000 in cash
with an additional $1,500,000 accrued for at December 31, 1999, and paid in
January 2000. In addition, the purchase agreement provides for contingent
payments of up to $1,700,000. These payments are based upon the attainment of
certain revenue and gross margin goals for calendar year 2000. This acquisition
has been accounted for using the purchase method of accounting. The entire
purchase price has been allocated to goodwill and any additional consideration
paid will also be recorded as goodwill. The goodwill is being amortized on a
straight-line basis over ten years. Systematic is a California-based eCommerce
integration services firm that enables companies to seamlessly integrate diverse
software and hardware platforms, communication systems and Internet
technologies. Results of operations for Systematic are included in the Company's
consolidated results of operations beginning on May 12, 1999.
6. Other assets
Included in other assets are certain investments in early-stage companies. The
Company closely monitors the operations and cash flows of these companies to
evaluate their status and ensure that amounts reported for these investments do
not exceed net realizable value. If the Company determines that impairment in
the investment of any such company exists, an adjustment would be made to reduce
the investment amount to net realizable value.
Also included in other assets are capitalized software development costs. 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. These amounts are written-off
if it is determined that the projects cannot be brought to market.
7. Industry segments
The company operates in four industry segments. The first segment is the
development and sale of devices, which protect data and software from
unauthorized use (Secure Software Distribution segment). The second segment is
the development and sale of information security products to provide privacy and
security for voice communication and data transmission (Secure Communications
segment). The third segment is the development and sale of products which
accelerate performance of security servers and network equipment and products
that provide access control to computer networks, Internet Websites and virtual
private networks (Internet Performance and Security segment). The fourth segment
provides services that enable companies to integrate diverse software and
hardware platforms (Spectria segment). The identifiable assets, after applicable
eliminations, for each segment as of September 30, 2000 were $77,156,000,
$31,924,000, $28,535,000 and $25,031,000, respectively, compared with
$70,591,000, $31,452,000, $6,344,000 and $22,151,000 as of December 31, 1999.
8. Stock split
On September 19, 2000 the Company announced that its Board of Directors approved
a 2-for-1 split of its common stock. The effective date was October 9, 2000 and
the payout date was October 23, 2000. These financial statements have been
adjusted to reflect the impact of the stock split.
10
<PAGE> 11
RAINBOW TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors, which have affected the consolidated results of operations, and the
consolidated financial position of the Company during the periods included in
the accompanying condensed consolidated financial statements. This discussion
should be read in conjunction with the related condensed consolidated financial
statements and associated notes.
RESULTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues
Secure Software Distribution $ 13,160 $ 14,393
Secure Communications 14,396 9,910
Internet Performance and Security 11,181 2,326
Spectria 5,033 3,536
-------- --------
Total revenues $ 43,770 $ 30,165
======== ========
Operating Income
Secure Software Distribution $ 3,220 $ 2,139
Secure Communications 3,275 1,558
Internet Performance and Security 1,476 (970)
Spectria (770) 217
-------- --------
Total operating income $ 7,201 $ 2,944
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues
Secure Software Distribution $ 41,487 $ 43,822
Secure Communications 37,581 31,988
Internet Performance and Security 25,022 4,552
Spectria 15,017 5,313
--------- ---------
Total revenues $ 119,107 $ 85,675
========= =========
Operating Income
Secure Software Distribution $ 10,811 $ 6,799
Secure Communications 7,460 3,196
Internet Performance and Security 1,603 (3,766)
Spectria (2,247) 791
--------- ----------
Total operating income $ 17,627 $ 7,020
========= =========
</TABLE>
11
<PAGE> 12
REVENUES
Revenues from Secure Software Distribution for the three and nine months ended
September 30, 2000 decreased by 9% to $13,160,000 and 5% to $41,487,000,
respectively, when compared to the same periods in 1999. Revenues from U.S. and
Europe decreased by 17% and 5%, respectively, while revenues from Asia-Pacific
increased by 130% for the three months ended September 30, 2000 when compared to
the same period in 1999. The decrease in revenues was primarily due to decreased
demand in North America and Europe for business software applications. The
increase in Asia-Pacific revenues was due to additional sales generated
primarily in China. The average selling price per product for the three months
ended September 30, 2000 increased 2% as compared to the same period in 1999.
The average selling price per product for the nine months ended September 30,
2000 was consistent with the average selling price per product for the nine
months ended September 30, 1999. Unit volume for the three and nine months ended
September 30, 2000 decreased 10% and 6%, respectively, when compared to the
corresponding periods in 1999.
Secure Communications revenues for the three and nine months ended September 30,
2000 increased 45% to $14,396,000 and 17% to $37,581,000, respectively, when
compared to the same periods in 1999. The revenue growth was primarily due to
higher demand for network security products.
Internet Performance and Security revenues for the three and nine months ended
September 30, 2000 increased 381% to $11,181,000 and 450% $25,022,000,
respectively, when compared to the same periods in 1999. The revenue growth was
primarily due to increased demand for performance enhancement products in the
server and network appliance markets. Revenues from Europe and Asia-Pacific were
20% and 5%, respectively, of total Internet Performance and Security revenues
for the three months ended September 30, 2000.
Spectria revenues for the three and nine months ended September 30, 2000
increased 42% to $5,033,000 and 183% to $15,017,000, respectively, when compared
to the same periods in 1999. Revenues in 1999 reflect sales generated from the
date of acquisition, May 12, 1999.
GROSS PROFIT
Gross profit from Secure Software Distribution for the three months ended
September 30, 2000 decreased to 70% of revenues compared to 72% of revenues for
the corresponding period in 1999. Gross profit for the nine months ended
September 30, 2000 and 1999 was 71% of revenues.
Gross profit from Secure Communications for the three months ended September 30,
2000 increased to 24% of revenues compared to 18% of revenues for the three
months ended September 30, 1999. Gross profit for the nine months ended
September 30, 2000 increased to 21% of revenues compared to 12% of revenues for
the nine months ended September 30, 1999. The increase was due to the change in
mix from less profitable research and development contracts to more profitable
product contracts.
Gross profit from Internet Performance and Security for the three months ended
September 30, 2000 decreased to 73% of revenues compared to 79% of revenues for
the corresponding period in 1999. Gross profit for the nine months ended
September 30, 2000 decreased to 71% of revenues compared to 74% of revenues for
the nine months ended September 30, 1999. The decrease was due to higher sales
to several large customers at lower prices, resulting in lower gross profit.
Gross profit from Spectria for the three months ended September 30, 2000
increased to 36% of revenues compared to 32% of revenues for the corresponding
period in 1999. Gross profit for the nine months ended September 30, 2000
increased to 40% of revenues compared to 36% of revenues for the same period in
1999. The increase in gross profit was due to improvements in matching
employees' skills to customer requirements resulting in an increase in
productivity.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses consist primarily of
personnel-related expenses , sales commission, promotional activities, and
professional fees. Selling, general and administrative expenses for the three
months ended September 30, 2000 were $11,484,000 or 26% of revenues as compared
to $8,508,000 or 28% of revenues for the three months ended September 30, 1999.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $32,622,000 or 27% of revenues as compared to $23,013,000 or 27%
of revenues for the nine months ended September 30, 1999. The increase in
absolute dollars reflected higher personnel related costs resulting from the
hiring of sales, marketing, management and administrative personnel, and higher
legal and other professional fees.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and other
personnel-related expenses, costs related to engineering development tools, and
subcontracting costs. Research and development expenses for the three months
ended September 30, 2000 were $3,141,000 or 7% of revenues, as compared with
research and development expense of $3,029,000 or 10% or revenues for the three
months ended September 30, 1999. Research and development expenses for the nine
months ended September 30, 2000 were $8,602,000 or 7% of revenues, as compared
with research and development expenses of $8,488,000 or 10% of revenues for the
nine months ended September 30, 1999. The decrease in research and development
expenses as a percentage of revenues reflected the significant increase in
revenues in the three and nine months ended September 30, 2000 as compared to
the respective prior year period.
OTHER INCOME AND EXPENSE
Other expense for the three months ended September 30, 2000 was $22,000 compared
to other income of $342,000 for the three months ended September 30, 1999. Other
income for the nine months ended September 30, 2000 and 1999 was $383,000 and
$751,000, respectively. The decrease in other income was primarily due to
minority owners' share of QMT's losses which were included in other income for
the three and nine months ended September 30, 1999. As of March 31, 2000, QMT is
no longer consolidated in the Company's financial statements.
At June 30, 2000, the Company performed a review for impairment of the
long-lived assets related to QMT. Based on its evaluation, the Company
determined that all of the long-lived assets related to QMT were fully impaired
and as a result recorded an impairment charge of $2,200,000.
During the second quarter and third quarter of fiscal 2000, the Company acquired
securities and classified them as trading securities, as defined by SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities." At September
30, 2000, the difference between the estimated fair value and the cost of the
securities acquired resulted in a gain of $67,000, which was recognized in
earnings for the three months ended September 30, 2000. At June 30, 2000, the
difference between the estimated fair value and the cost of the securities
acquired resulted in a gain of $4,200,000, which was recognized in earnings for
the three months ended June 30, 2000.
PROVISION FOR INCOME TAXES
The effective tax rate was 38% for the three months ended September 30, 2000
compared to 39% for the three months ended September 30, 1999. The effective tax
rate for the nine months ended September 30, 2000 was 38% compared to 39% for
the nine months ended September 30, 1999.
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ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2000 increased by approximately $12,932,000
to $41,603,000 as compared with $28,671,000 at December 31, 1999. The major
reason for this increase was due to the fact that approximately $27,000,000 of
product was invoiced during the month of September 2000. This was primarily due
to strong demand for Secure Communications and Internet Performance and Security
products in September 2000. Over 67% of receivables were due by October 31,
2000. The days sales outstanding at September 31, 2000 was 80 days compared with
74 days at December 31, 1999. The increase was due to higher sales to the US
government and Other Equipment Manufacturers (OEM), and distributors with longer
payment terms.
INVENTORIES
Finished goods increased approximately $3,018,000 to $7,822,000 at September 30,
2000 as compared with $4,804,000 at December 31, 1999. The increase was largely
due to the Company's need to maintain adequate inventories on hand for a growing
number of OEM customers and other customers for whom the Company offers shorter
lead times.
Raw materials increased approximately $9,216,000 to $10,864,000 at September 30,
2000 as compared with $1,648,000 at December 31, 1999. The increase was due
primarily to the Company's need to meet the growing demand for the Company's
products which has been much stronger than expected. In addition, an acute
component shortage in the market has required the Company to acquire extra raw
materials in order to meet anticipated strong demand for its products.
PREPAID EXPENSES
Prepaid expenses at September 30, 2000 increased by approximately $8,609,000 as
compared with December 31, 1999. The increase was mainly due to approximately
$6,588,000 in tax benefit related to the exercises of stock options under the
Company's stock options plans.
OTHER ASSETS
Other assets represent primarily certain investments in early-stage companies,
capitalized software development costs, acquired software costs, and software
developed for internal use. Other assets, net of amortization, was $11,351,000
at September 30, 2000, compared with $8,060,000 at December 31, 1999, an
increase of $3,291,000. This increase was primarily due to $1,800,000 incurred
in developing an Enterprise Resources Planning (ERP) software package for
internal use and approximately $3,000,000 of software costs capitalized during
the development stage of technologically feasible products as defined by
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed" (FAS No. 86).
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. Net cash used in
operations for the nine months ended September 30, 2000 was $286,000 while net
cash provided by operations for the nine months ended September 30, 1999 was
$8,623,000. Operating activities in 2000 included an increase in inventory
totaling $12,206,000 and an increase in accounts receivable balance of
$12,962,000 partially offset by $3,024,000 increase in accounts payable and
$6,976,000 additional accrued income tax expense.
Net cash used in investing activities for the nine months ended September 30,
2000 and 1999 was $14,384,000 and $10,851,000, respectively. Investing
activities in 2000 included $5,020,000 on development of new products and
$1,765,000 for the acquisition of Systematic. Investing activities in 1999
included $10,861,000 for the acquisition of Systematic.
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Net cash provided by financing activities for the nine months ended September
30, 2000 was $6,507,000 while net cash used in financing activities for the nine
months ended September 30, 1999 was $6,572,000. Financing activities in 2000
included a payment of $2,000,000 on a line of credit and approximately
$8,672,000 received from common stock options exercised. Financing activities in
1999 included the purchase and retirement of $7,794,000 of treasury stock.
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.
At September 30, 2000, the Company's subsidiaries in France, The United Kingdom,
Germany and The Netherlands carried approximately $8,673,000, $2,475,000,
$1,149,000 and $5,049,000, respectively, 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.
The Company believes that its current working capital of $75,312,000 and
anticipated working capital to be generated by future operations will be
sufficient to support the Company's working capital requirements for at least
the next twelve months.
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PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Dated: November 13, 2000
RAINBOW TECHNOLOGIES, INC.
By: /s/ Patrick Fevery
--------------------------------
Chief Financial Officer
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