1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACTS OF 1934
For the Quarter ended JUNE 30, 2001 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 August
7, 2001, was 26,077,633.
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RAINBOW TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2001
(unaudited) and December 31, 2000............................... 4
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and 2000 (unaudited)......... 5
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the three and six months ended June 30, 2001
and 2000 (unaudited)............................................ 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 (unaudited)............. 7
Notes to Condensed Consolidated Financial Statements (unaudited) 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 8-K................................ 14
SIGNATURES............................................................... 16
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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
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.
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 13,632,000 $ 19,458,000
Marketable securities available-for-sale ...................... 979,000 1,582,000
Marketable securities trading ................................. 121,000 3,669,000
Accounts receivable, net of allowance for doubtful accounts
of $1,417,000 and $1,460,000 in 2001 and 2000, respectively . 27,950,000 40,710,000
Inventories ................................................... 29,169,000 30,395,000
Income tax receivable ......................................... 11,308,000 7,444,000
Deferred income taxes ......................................... 5,927,000 5,862,000
Unbilled costs and fees ....................................... 3,402,000 1,039,000
Prepaid expenses and other current assets ..................... 2,897,000 3,325,000
------------- -------------
Total current assets ........................................ 95,385,000 113,484,000
Property, plant and equipment, at cost:
Buildings ..................................................... 6,364,000 7,005,000
Furniture ..................................................... 2,771,000 1,645,000
Equipment ..................................................... 19,612,000 18,467,000
Leasehold improvements ........................................ 2,850,000 1,837,000
------------- -------------
31,597,000 28,954,000
Less accumulated depreciation and amortization ................ 15,086,000 13,266,000
------------- -------------
Net property, plant and equipment ........................... 16,511,000 15,688,000
Goodwill, net of accumulated amortization of $16,450,000 and
$15,549,000 in 2001 and 2000, respectively .................. 20,493,000 21,524,000
Software development costs, net of accumulated amortization
of $6,356,000 and $4,411,000 in 2001 and 2000, respectively . 14,182,000 12,833,000
Product licenses, net of accumulated amortization of $2,616,000
and $2,267,000 in 2001 and 2000, respectively ............... 4,935,000 4,900,000
Other assets .................................................. 4,144,000 2,780,000
------------- -------------
$ 155,650,000 $ 171,209,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 6,918,000 $ 8,579,000
Accrued payroll and related expenses .......................... 5,618,000 8,671,000
Other accrued liabilities ..................................... 5,461,000 6,713,000
Long-term debt, due within one year ........................... 202,000 223,000
Line of credit ................................................ -- 3,129,000
------------- -------------
Total current liabilities ................................... 18,199,000 27,315,000
Long-term debt, net of current portion ........................ 521,000 726,000
Deferred income taxes ......................................... 2,471,000 2,718,000
Other liabilities ............................................. 432,000 702,000
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value, 55,000,000 shares authorized,
26,058,493 and 25,980,252 shares issued and outstanding
in 2001 and 2000, respectively .............................. 26,000 26,000
Additional paid-in capital .................................... 56,287,000 55,689,000
Accumulated other comprehensive loss .......................... (2,344,000) (851,000)
Retained earnings ............................................. 80,058,000 84,884,000
------------- -------------
Total shareholders' equity .................................. 134,027,000 139,748,000
------------- -------------
$ 155,650,000 $ 171,209,000
============= =============
See accompanying notes.
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Revenues:
Digital Rights Management ........................... $ 12,260,000 $ 14,143,000 $ 24,922,000 $ 29,240,000
Secure Communications ............................... 17,137,000 11,653,000 35,785,000 23,185,000
iVEA ................................................ 4,146,000 7,949,000 8,731,000 12,928,000
Spectria ............................................ 3,802,000 5,149,000 8,107,000 9,984,000
------------ ------------ ------------ ------------
Total revenues .................................... 37,345,000 38,894,000 77,545,000 75,337,000
Operating expenses:
Cost of Digital Rights Management Revenues .......... 5,700,000 4,603,000 11,187,000 9,230,000
Cost of Secure Communications Revenues .............. 12,971,000 9,292,000 28,149,000 18,663,000
Cost of iVEA Revenues ............................... 1,605,000 1,896,000 3,649,000 3,150,000
Cost of Spectria Revenues ........................... 2,053,000 3,273,000 4,688,000 5,779,000
Selling, general and administrative ................. 13,041,000 10,380,000 26,062,000 21,138,000
Research and development ............................ 3,384,000 2,647,000 6,412,000 5,461,000
Goodwill amortization ............................... 763,000 771,000 1,526,000 1,494,000
------------ ------------ ------------ ------------
Total operating expenses .......................... 39,517,000 32,862,000 81,673,000 64,915,000
------------ ------------ ------------ ------------
Operating income (loss) ............................... (2,172,000) 6,032,000 (4,128,000) 10,422,000
Unrealized gain (loss) on marketable trading securities (959,000) 4,218,000 (3,548,000) 4,218,000
Asset impairment charge ............................... -- (2,173,000) -- (2,173,000)
Interest income ....................................... 139,000 229,000 365,000 419,000
Interest expense ...................................... (50,000) (33,000) (81,000) (70,000)
Other income (expense), net ........................... (595,000) (104,000) (392,000) 409,000
------------ ------------ ------------ ------------
Income (loss) before income taxes ..................... (3,637,000) 8,169,000 (7,784,000) 13,225,000
Benefit (provision) for income taxes .................. 1,382,000 (3,141,000) 2,958,000 (5,066,000)
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ (2,255,000) $ 5,028,000 $ (4,826,000) $ 8,159,000
============ ============ ============ ============
Net income (loss) per share:
Basic .............................................. $ (0.09) $ 0.20 $ (0.19) $ 0.33
============ ============ ============ ============
Diluted ............................................ $ (0.09) $ 0.18 $ (0.19) $ 0.30
============ ============ ============ ============
Shares used in computing net income (loss) per share:
Basic .............................................. 26,055,000 24,860,000 26,038,000 24,468,000
============ ============ ============ ============
Diluted ............................................ 26,055,000 27,852,000 26,038,000 27,582,000
============ ============ ============ ============
See accompanying notes.
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Net income (loss) ...................................... $(2,255,000) $ 5,028,000 $(4,826,000) $ 8,159,000
Other comprehensive income (loss):
Foreign currency translation adjustment .............. (535,000) 757,000 (2,237,000) 438,000
Unrealized gain (loss) on securities ................. (121,000) 251,000 (171,000) (44,000)
----------- ----------- ----------- -----------
Other comprehensive income (loss), before income taxes (656,000) 1,008,000 (2,408,000) 394,000
Benefit (provision) for income taxes related to other
comprehensive income (loss) ........................ 249,000 (384,000) 915,000 (151,000)
----------- ----------- ----------- -----------
Other comprehensive income (loss), net of taxes ...... (407,000) 624,000 (1,493,000) 243,000
----------- ----------- ----------- -----------
Comprehensive income (loss) ............................ $(2,662,000) $ 5,652,000 $(6,319,000) $ 8,402,000
=========== =========== =========== ===========
See accompanying notes.
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RAINBOW TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
------------------------------
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) ................................................... $ (4,826,000) $ 8,159,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization ........................................................ 4,181,000 2,535,000
Depreciation ........................................................ 1,909,000 1,720,000
Change in deferred income taxes ..................................... (182,000) (9,424,000)
Gain on sale of property, plant and equipment ....................... (7,000) --
Minority interest in subsidiary's earnings .......................... 22,000 --
Unrealized (gain) loss on marketable trading securities ............. 3,548,000 (4,218,000)
Asset impairment charge ............................................. -- 2,173,000
Tax benefit of exercise of common stock options ..................... 137,000 5,619,000
Provision (reversal) of allowance for doubtful accounts ............. (19,000) 105,000
Changes in operating assets and liabilities:
Accounts receivable ............................................... 11,532,000 (2,722,000)
Inventories ....................................................... 725,000 (7,951,000)
Unbilled costs and fees ........................................... (2,363,000) 308,000
Prepaid expenses and other current assets ......................... 413,000 (1,674,000)
Note receivable ................................................... -- (1,090,000)
Accounts payable .................................................. (1,574,000) (1,305,000)
Accrued liabilities ............................................... (3,640,000) (481,000)
Billings in excess of costs and fees .............................. (350,000) --
Income taxes ...................................................... (3,673,000) 6,258,000
Other ............................................................. (26,000) (863,000)
------------ ------------
Net cash provided by (used in) operating activities ............. 5,807,000 (2,851,000)
Cash flows from investing activities:
Purchases of property, plant and equipment .......................... (3,253,000) (2,107,000)
Net cash paid for acquisition of Systematic Systems
Integration, Inc................................................... -- (1,765,000)
Investment in Datasafe Technologies, China .......................... (231,000) --
Investment in Rainbow Technologies K.K., Japan ...................... (1,357,000) --
Additional investment in Rainbow Goldensoft, China .................. (1,031,000) --
Other non-current assets ............................................ 332,000 (1,327,000)
Capitalized software development costs .............................. (4,001,000) (2,065,000)
------------ ------------
Net cash used in investing activities ........................... (9,541,000) (7,264,000)
Cash flows from financing activities:
Exercise of common stock options .................................... 461,000 6,369,000
Payments on line of credit .......................................... (3,129,000) (4,000,000)
Repayments of long-term debt ........................................ (155,000) (118,000)
------------ ------------
Net cash provided by (used in) financing activities ............. (2,823,000) 2,251,000
Effect of exchange rate changes on cash ............................... 731,000 735,000
------------ ------------
Net decrease in cash and cash equivalents ............................. (5,826,000) (7,129,000)
Cash and cash equivalents at beginning of period ...................... 19,458,000 26,709,000
------------ ------------
Cash and cash equivalents at end of period ............................ $ 13,632,000 $ 19,580,000
============ ============
See accompanying notes.
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RAINBOW TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
1. Basis of presentation
Rainbow Technologies, Inc. (the Company) develops, manufactures, programs and
markets secure software distribution products which prevent the unauthorized use
of intellectual property, including software programs; develops and manufactures
secure communications products for satellite communications; develops and
manufactures internet performance and security products to provide privacy and
security for network communications; and provides customized eBusiness
consulting services. 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 2001 presentation.
Financial information related to the ikey authentication tokens line of business
was reclassified from the iVEA segment to the Digital Rights Management segment
(DRM) effective January 1, 2001. All prior year information has been
reclassified to conform with the new 2001 segment 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, total
estimated contract costs associated with billed and unbilled contract revenue
and the fair value of marketable securities.
At June 30, 2000, the Company performed a review for impairment of the
long-lived assets related to Quantum Manufacturing Technologies (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
$2,173,000.
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 Accumulated Other Comprehensive Loss within Shareholders'
Equity.
During the second and third quarter of fiscal year 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." The
difference between the estimated fair value and the cost of the securities
acquired resulted in a loss of $3,548,000 and a gain of $4,218,000 which were
recognized in earnings for the six months ended June 30, 2001 and 2000,
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 June 30, 2001 and results of operations for the three and six months
ended June 30, 2001 and 2000. 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, 2000 Annual Report on
Form 10-K. Results of operations for the three and six months ended June 30,
2001 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.
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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:
INVENTORIES
(DOLLARS IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
Finished goods............................................. $7,986 $10,699
Raw materials.............................................. 14,014 11,659
Work in process............................................ 3,462 2,538
Inventoried costs relating to long-term contracts, net of
amounts attributed to revenues recognized to date....... 3,707 5,499
------- -------
$29,169 $30,395
======= =======
5. 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.
6. Software development costs
Statement of Financial Accounting Standards ("SFAS") 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. These amounts are written-off if it is determined that
the projects cannot be brought to market.
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7. Industry segments
The Company operates in four industry segments. The first segment includes the
development and sale of devices, which protect data and software from
unauthorized use and products that provide access control to computer networks,
Internet Websites and virtual private networks (Digital Rights Management
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 includes the
development and sale of products which accelerate performance of security
servers and network equipment (iVEA 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 June 30, 2001 were $84,782,000,
$26,329,000, $23,045,000, and $21,494,000, respectively, compared with
$81,167,000, $32,909,000, $32,547,000 and $24,586,000 as of December 31, 2000.
Intercompany revenues for the three and six months ended June 30, 2001 were
$91,000 and $266,000, respectively, and $535,000 and $1,150,000, respectively,
for the corresponding periods in the prior year. Intercompany revenues are
generated by the Secure Communications Segment.
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. All common stock information presented as
of and for the six months ended June 30, 2001 has been adjusted to reflect the
impact of the stock split.
9. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial
accounting and reporting for a business combination and requires all business
combinations to be accounted for using the purchase method. SFAS No. 141 is
effective for any business combinations initiated after June 30, 2001. SFAS No.
142, effective for the Company January 1, 2002, addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. Goodwill and other intangible assets with indefinite
lives will no longer be amortized but instead subject to impairment tests at
least annually. Based upon the Company's current goodwill level, amortization
expense will decrease by approximately $3 million annually beginning January 1,
2002.
10. Restructuring Charge
In the third quarter 2001, the Company is restructuring and consolidating its
Digital Rights Management and iVEA operations, resulting in a net staff
reduction of more than 20 percent in North America. For Q3-2001, the Company
anticipates taking charges of $18 to $20 million related to the Company's
restructuring and consolidation of operations. In addition, the Company has
instituted expense control measures to improve profitability.
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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)
THREE MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- --------
Revenues
Digital Rights Management $ 12,260 $ 14,143
Secure Communications 17,137 11,653
IVEA 4,146 7,949
Spectria 3,802 5,149
-------- --------
Total revenues $ 37,345 $ 38,894
======== ========
Operating Income (Loss)
Digital Rights Management $ (2,281) $ 3,248
Secure Communications 3,333 2,124
iVEA (2,822) 1,471
Spectria (402) (811)
-------- --------
Total operating income (loss) $ (2,172) $ 6,032
======== ========
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- --------
Revenues
Digital Rights Management $ 24,922 $ 29,240
Secure Communications 35,785 23,185
iVEA 8,731 12,928
Spectria 8,107 9,984
-------- --------
Total revenues $ 77,545 $ 75,337
======== ========
Operating Income (Loss)
Digital Rights Management $ (4,951) $ 6,513
Secure Communications 6,526 4,185
iVEA (4,842) 1,201
Spectria (861) (1,477)
-------- --------
Total operating income (loss) $ (4,128) $ 10,422
======== ========
REVENUES
On a consolidated basis, revenues for the three and six months ended June 30,
2001, decreased by 4% to $37,345,000 and increased by 3% to $77,545,000,
respectively, when compared to the same periods in the prior year. These
fluctuations are due to lower revenues in the DRM, iVEA and Spectria segments,
partially offset by higher revenues in the Secure Communications segment.
Revenues from international markets for the three and six months ended June 30,
2001 decreased 12% to $6,563,000 and 5% to $14,090,000, respectively, from the
same periods in the prior year. Domestic sales for the three months ended June
30, 2001 decreased 2% to $30,782,000 and increased 5% to $63,456,000 for the six
months ended June 30,2001, from the prior year. These fluctuations are due to
the aforementioned decreases in revenues in the DRM, iVEA and Spectria segments,
partially offset by the increase in the Secure Communications segment.
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Revenues from DRM for the three and six months ended June 30, 2001 decreased by
13% to $12,260,000 and 15% to $24,922,000, respectively, when compared to the
same periods in 2000. The decrease in revenues was primarily due to decreased
demand in North America and Europe for business software applications. For the
three and six months ended June 30, 2001, DRM international revenues were 50%
and 52%, respectively, of total DRM revenues as compared to 48% for the same
periods in the prior year.
Secure Communications revenues for the three and six months ended June 30, 2001
increased 47% to $17,137,000 and 54% to $35,785,000, respectively, when compared
to the same periods in 2000. The revenue growth was primarily due to higher
demand for network security products.
iVEA revenues for the three and six months ended June 30, 2001 decreased 48% to
$4,146,000 and 33% to $8,731,000, respectively, when compared to the same
periods in 2000. The decrease in revenues was primarily due to less demand for
performance enhancement products in the server and network appliance markets.
For the three and six months ended June 30, 2001, iVEA international revenues
were 10% and 12%, respectively, of total iVEA revenues as compared to 8% and 7%,
respectively, for the same periods in the prior year.
Spectria revenues for the three and six months ended June 30, 2001 decreased 26%
to $3,802,000 and 19% to $8,107,000, respectively, when compared to the same
periods in 2000, due to a general decline in demand for Information Technology
services.
GROSS PROFIT
Gross profit from DRM for the three months ended June 30, 2001 decreased to 54%
of revenues compared to 68% of revenues for the corresponding period in 2000.
Gross profit for the six months ended June 30, 2001 decreased to 55% of revenues
compared to 68% of revenues for the corresponding period in 2000. The decrease
was primarily due to increases in certain component costs and increased overhead
in the Company's manufacturing operations.
Gross profit from Secure Communications for the three months ended June 30, 2001
increased to 24% of revenues compared to 20% of revenues for the corresponding
period in 2000. Gross profit for the six months ended June 30, 2001 increased to
21% of revenues compared to 20% of revenues for the corresponding period in
2000. The increase was due to the change in mix to more profitable product
contracts from less profitable research and development contracts.
Gross profit from iVEA for the three months ended June 30, 2001 decreased to 61%
of revenues compared to 76% of revenues for the corresponding period in 2000.
Gross profit for the six months ended June 30, 2001 decreased to 58% of revenues
compared to 76% of revenues for the corresponding period in 2000. The decrease
was due to higher sales to several large customers at lower prices.
Gross profit from Spectria for the three months ended June 30, 2001 increased to
46% of revenues compared to 36% of revenues for the corresponding period in
2000. The increase in gross profit was primarily due to improvements in
productivity including a reduction in staff. Gross profit for the six months
ended June 30, 2001 was 42% of revenues which were consistent with the same
period in 2000.
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 June 30, 2001 were $13,041,000 or 35% of revenues as compared to
$10,380,000 or 27% of revenues for the corresponding period in 2000. Selling,
general and administrative expenses for the six months ended June 30, 2001 were
$26,062,000 or 34% of revenues as compared to $21,138,000 or 28% of revenues for
the corresponding period in 2000. These increases reflected higher personnel
related expenses 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 June 30, 2001 were $3,384,000 or 9% of revenues, as compared to research
and development expense of $2,647,000 or 7% of revenues for the corresponding
period in 2000. Research and development expenses for the six months ended June
30, 2001 were $6,412,000 or 8% of revenues, as compared to research and
development expense of $5,461,000 or 7% of revenues for the corresponding period
in 2000. The dollar increases in research and development expenses were
primarily due to increased staffing for the development of new products.
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MARKETABLE TRADING SECURITIES
During the second and third quarter of fiscal year 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." The
difference between the estimated fair value and the cost of the securities
acquired resulted in an unrealized loss of $3,548,000 and a gain of $4,218,000,
which were recognized in earnings for the six months ended June 30, 2001 and
2000, respectively.
PROVISION FOR INCOME TAXES
The effective tax rate was 38% for the three and six months ended June 30, 2001
and 2000.
ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2001 decreased by approximately $12,760,000 to
$27,950,000 as compared with $40,710,000 at December 31, 2000. This decrease was
due to increased collection activities.
INVENTORIES
Finished goods decreased approximately $2,713,000 to $7,986,000 at June 30, 2001
as compared with $10,699,000 at December 31, 2000. The decrease was primarily
due to the Company's reduced production activities because of adequate inventory
levels.
Raw materials increased approximately $2,355,000 to $14,014,000 at June 30, 2001
as compared with $11,659,000 at December 31, 2000. The increase was due
primarily to the abrupt decline in demand for the Company's internet
infrastructure products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of operating funds have been from operations.
Net cash provided by operations for the six months ended June 30, 2001 was
$5,807,000 while net cash used in operations for the six months ended June 30,
2000 was $2,851,000. Operating activities in 2001 included decreases in
inventory of $725,000, in accounts receivable of $11,532,000, in accounts
payable of $1,574,000 and in accrued liabilities of $3,640,000.
Net cash used in investing activities for the six months ended June 30, 2001 and
2000 were $9,541,000 and $7,264,000, respectively. Investing activities in 2001
included $3,253,000 in capital expenditures, $4,001,000 in development of new
products and $2,619,000 of new and additional investments in China and Japan.
Investing activities in 2000 included $1,765,000 for the acquisition of
Systematic.
Net cash used in financing activities for the six months ended June 30, 2001 was
$2,823,000 while net cash provided by financing activities for the six months
ended June 30, 2000 was $2,251,000. Financing activities included in 2001 and
2000 were payments to the line of credit of $3,129,000 and $4,000,000,
respectively, and approximately $461,000 and $6,369,000 received from common
stock options exercised.
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 June 30, 2001, the Company's subsidiaries in France, The United Kingdom,
Germany and The Netherlands carried approximately $7,336,000, $629,000, $663,000
and $1,425,000, 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 $77,186,000 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
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 (incorporated by reference to Exhibit
10(b) of the Company's 1998 Annual Report on Form 10-K under
the Securities Exchange Act of 1934 filed in March, 1999 (the
"1998 10-K")).
10(c) Agreement, dated December 1998, between the Company and EM
Microelectronic -- Marin S.A. (incorporated by reference to
Exhibit 10(c) of the 1998 10-K).
10(d) 1990 Incentive Stock Option Plan as amended (incorporated by
reference to Exhibit 10(j) of the 1991 10-K).
10(e) Employment Agreement, dated February 16, 1990, between the
Company and Walter W. Straub (incorporated by reference to
Exhibit 10(j) of the 1989 10-K).
10(f) Change of Control Agreement, dated February 16, 1990, between
the Company and Walter W. Straub (incorporated by reference to
Exhibit 10(k) of the 1989 10-K).
10(g) Employment Agreement, dated January 15, 1992, between the
Company and Peter M. Craig (incorporated by reference to
Exhibit 10(m) of the 1991 10-K).
10(h) Change of Control Agreement, dated January 15, 1992, between
the Company and Peter M. Craig (incorporated by reference to
Exhibit 10(n) of the 1991 10-K).
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")).
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15
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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. (incorporated by
reference to Exhibit 10(u) of the 1998 10-K).
10(v) Development Agreement, dated September 30, 1997, between
AlliedSignal, Inc. and Mykotronx, Inc. (incorporated by
reference to Exhibit 10(v) of the 1998 10-K).
10(w) Agreement for Design and Product Purchase, dated September 4,
1997, between IBM Microelectronics and Rainbow Technologies,
Inc. and Mykotronx, Inc. (incorporated by reference to Exhibit
10(w) of the 1998 10-K).
10(x) Leases for premises at 357, 359, and 371 Van Ness Way,
Torrance, California, dated September 8, 1993, September 25,
1996 and October 2, 1997, respectively, between Surf Management
Associates, a California limited partnership, and Mykotronx,
Inc., a California Corporation (incorporated by reference to
Exhibit 10(x) of the 1999 Form 10-K).
10(y) Lease for premises at 111 West Ocean Boulevard, Long Beach,
California, between Stevens Creek Associates, a California
general partnership, and the Company (incorporated by reference
to Exhibit 10(y) of the 1999 Form 10-K).
10(z) Lease for premises at 8 Hughes, Irvine, California, between
Alton Irvine Partners, LLC, a California limited liability
company, and the Company. (Incorporated by reference to Exhibit
10(z) of the 2000 Form 10-K).
10(aa) 2000 Incentive Stock Option Plan (incorporated by reference to
Rainbow's Registration Statement on Form S-8 filed under the
Securities Act of 1933).
10(bb) Asset Purchase Agreement, dated December 29, 2000 between
Kaster Chase Applied Research Limited and Mykotronx, Inc.
(incorporated by reference to Exhibit 10(bb) of the 2000 Form
10-K).
(b) Reports on Form 8-K
None
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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: August 14, 2001 RAINBOW TECHNOLOGIES, INC.
By: /s/ Patrick Fevery
----------------------------
Chief Financial Officer
16