<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20634
INFORMATION RESOURCE ENGINEERING, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
--------------------
<TABLE>
<S> <C>
DELAWARE 52-1287752
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
8029 Corporate Drive, Baltimore, Md. 21236
------------------------------------------
(Address of principal executive offices)
(410) 931-7500
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's Common Stock as of May 9,
1996 was 5,417,329.
Transitional Small Business Disclosure Format (check one): Yes No X.
-- --
<PAGE> 2
INFORMATION RESOURCE ENGINEERING, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Balance Sheet as of March 31, 1996 3
Consolidated Statements of Operations for the three months ended
March 31, 1995 and 1996 4
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1996 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1995 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Part II. Other information 11
Signatures 11
</TABLE>
2
<PAGE> 3
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Assets
------
Current assets:
Cash and cash equivalents $20,594,105
Accounts receivable 2,903,477
Inventories 2,692,535
Recoverable income taxes 32,369
Prepaid expenses 146,159
-----------
Total current assets 26,368,645
Equipment and leasehold improvements, net of accumulated depreciation of $ 551,830 1,060,003
Computer software development costs, net of accumulated amortization of $ 997,317 2,822,904
Goodwill, net of accumulated amortization of $ 188,927 2,008,259
Other assets 58,306
-----------
$32,318,117
===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 68,390
Accounts payable 2,586,611
Accrued expenses 1,243,083
Deferred revenue on maintenance contracts 144,110
-----------
Total current liabilities 4,042,194
Long-term debt, less current maturities 30,723
-----------
Total liabilities 4,072,917
-----------
Stockholders' equity:
Preferred stock, $01 par value per share.
Authorized 500,000 shares issued and outstanding - none --
Common stock, $.01 par value per share.
Authorized 15,000,000 shares, issued and outstanding 5,417,329 shares 54,173
Additional paid-in capital 30,759,922
Deficit (2,435,899)
Cumulative foreign currency adjustment (132,996)
------------
Net stockholders' equity 28,245,200
------------
$ 32,318,117
============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenues $1,513,731 $3,324,652
Cost of revenues 473,634 1,961,013
---------- ----------
Gross profit 1,040,097 1,363,639
Selling, general and administrative expenses 703,764 2,202,862
Amortization of acquired intangible assets 152,580 183,161
---------- ----------
Operating earnings (loss) 183,753 (1,022,384)
Interest income (expense), net (15,085) 98,938
--------- ----------
Earnings (loss) before income taxes 168,668 (923,446)
Income tax expense 124,000 --
---------- ----------
Net earnings (loss) 44,668 (923,446)
Preferred stock dividends 30,929 --
---------- ----------
Net earnings (loss) attributable to common stock $ 13,739 $ (923,446)
========== ==========
Earnings (loss) per common share $ -- $ (.19)
========== ==========
Weighted average number of shares outstanding 3,733,944 4,911,395
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock Additional Cumulative Net
------------ paid-in foreign currency stockholders'
Shares Amount capital Deficit adjustments equity
------ ------ ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period 4,244,829 $42,448 $ 9,712,777 $(1,512,453) $ (26,310) $ 8,216,462
Sale of common stock,
net of offering
expenses 1,172,500 11,725 21,047,145 -- -- 21,058,870
Net loss -- -- -- (923,446) -- (923,446)
Foreign currency
translation
adjustment -- -- -- -- (106,686) (106,686)
--------- ------- ----------- ----------- --------- -----------
Balance at end of
period 5,417,329 $54,173 $30,759,922 $(2,435,899) $(132,996) $28,245,200
========= ======= =========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 44,668 $ (923,446)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation of equipment 61,745 93,896
Amortization 33,477 35,863
Amortization of acquired intangible assets 152,580 183,159
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (574,713) 1,404,879
Decrease in costs and estimated earnings in excess of
billing on uncompleted contracts 248,700 --
Increase in recoverable income taxes 124,000 --
Increase in inventories (151,573) (399,179)
Increase in accounts payable 257,258 1,176,287
Increase (decrease) in accrued expenses 37,324 (257,583)
Decrease in billings in excess of costs and estimated
earnings on uncompleted contracts (105,345) --
Decrease in deferred revenue on maintenance contracts (17,156) (47,678)
Other 19,139 (85,802)
----------- ------------
Net cash provided by operating activities 130,104 1,180,396
----------- ------------
Cash flows from investing activities:
Sale of short-term investments 399,409 --
Purchase of short-term investments (902) --
Equipment expenditures (20,678) (96,805)
Additions to computer software development costs (262,319) (123,648)
----------- ------------
Net cash provided by (used in) investing activities 115,510 (220,453)
----------- ------------
Cash flows from financing activities:
Proceeds from notes payable 300,000 --
Payments of notes payable (408,177) (4,053,416)
Proceeds from sale of common stock, net of offering expense -- 21,058,870
Payments of preferred stock cash dividends (44,848) --
Payments of long-term debt (16,708) (17,056)
----------- ------------
Net cash provided by (used in) financing activities (169,733) 16,988,398
----------- ------------
Effect of exchange rate changes on cash -- (10,730)
----------- ------------
Net increase in cash and cash equivalents 75,881 17,937,611
Cash and cash equivalents at beginning of period 291,363 2,656,494
----------- ------------
Cash and cash equivalents at end of period $ 367,244 $ 20,594,105
=========== ============
Cash paid for
Interest expense $ 10,198 $ 124,964
=========== ============
Income taxes $ -- $ --
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
reporting and instructions to Form 10-QSB. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation have been included.
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
(2) REVENUES
Revenues from the United States Government were 54% of revenues in the three
month periods ended March 31, 1995. In 1996, revenues from the United States
Government were less than 10% of revenues. Revenues from one commercial client
accounted for 42% of revenues in the three month period ended March 31, 1996.
In 1995, no commercial client accounted for greater than 10% of revenues.
Revenues from foreign clients were 13% and 35% in the three month periods
ended March 31, 1995 and 1996, respectively. The majority of these revenues in
1996 were derived from sales to unaffiliated customers of the Company by the
Company's Swiss subsidiary.
(3) INVENTORIES
Inventories consists of the following at March 31, 1996:
<TABLE>
<S> <C>
Raw materials $2,032,165
Finished goods 660,370
----------
Total $2,692,535
==========
</TABLE>
(4) ACCRUED EXPENSES
Accrued expenses consists of the following at March 31, 1996:
<TABLE>
<S> <C>
Accrued salaries and commissions $ 823,116
Other 419,967
----------
Total $1,243,083
==========
</TABLE>
(5) INCOME TAXES
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which temporary differences become deductible and net operating
losses are allowable. Based on consideration of the above factors, management
determined an increase of $166,000 in the valuation allowance to $335,500 was
required at March 31, 1996.
7
<PAGE> 8
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
(6) STOCK SPLIT
On July 7, 1995, the Company effected a two-for-one stock split in the form of
a dividend to shareholders. Numbers of shares disclosed herein and per share
data have been retroactively adjusted to reflect the stock split for all
periods presented.
(7) GRETACODER DATA SYSTEMS AG ("GDS")
In October 1995, the Company, acquired all the issued and outstanding capital
stock of GDS. The transaction was accounted for under the purchase accounting
method.
Unaudited pro forma results of operations of the Company for the three period
ended March 31, 1995 as if the GDS acquisition had occurred on January 1, 1995
are as follows:
<TABLE>
<S> <C>
Revenues $3,010,000
==========
Earnings before income tax $ 43,000
==========
Net loss $ (81,000)
==========
Net loss attributable to common stock $ (112,000)
==========
Loss per common share $(.06)
=====
</TABLE>
The unaudited pro forma results of operations do not purport to be indicative
of the results that actually would have been obtained had the operations been
consolidated for this period. The amounts primarily reflect adjustment for the
amortization of intangible assets acquired and for interest expense. The pro
forma net loss includes non-cash charges of $337,000 related to depreciation
and the amortization of acquired intangible assets.
(8) EARNINGS (LOSS) PER COMMON SHARE
The earnings (loss) per common share for the three month period ended March 31,
1995 and 1996 was computed by dividing the net earnings (loss) attributable to
common stock, which reflects the preferred stock dividend requirement for 1995,
by the weighted average number of shares of common stock outstanding during
each period and common stock equivalents, to the extent they result in
additional per share dilution. Earnings (loss) per common share assuming full
dilution is substantially the same as earnings (loss) per common share as
stated and, accordingly, is not shown separately.
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
The Company designs, manufactures and markets network security systems and
products using encryption technology. The Company's products are used in
electronic commerce applications by financial institutions, government agencies
and large corporations to secure data transmissions on private and public
computer networks. In order to expand its product offerings, the Company
acquired Connective Strategies, Inc. ("CSI") in October 1994 and GRETACODER
Data Systems AG ("GDS") in October 1995. CSI designs, manufactures and markets
communications equipment that enables data/voice connectivity via the
Integrated Services Digital Networks (ISDN). GDS designs, manufactures and
markets cryptographic equipment primarily in Switzerland and Europe.
The Company's historical operating results have been dependent on a variety
of factors including, but not limited to, the length of the sales cycle, the
timing of orders from and shipments to clients, product development expenses
and the timing of development and introduction of new products. The Company's
expense levels are based, in part, on expectations of future revenues. The size
and timing of the Company's historical revenues have varied substantially from
quarter to quarter and year to year. Accordingly, the results of a particular
period, or period to period comparisons of recorded sales and profits may not
be indicative of future operating results.
While management is committed to the long-term profitability of the Company,
the recent growth of the computer security industry has made it important that
market share be obtained. The Company has undertaken various strategies in
order to increase its revenues and improve its future operating results,
including the two recent acquisitions and new product offerings such as its
Internet security products. Management believes that growth in the market for
products that provide secure remote access to computer networks requires the
Company to increase its investment in development and marketing activities to
allow the Company to take advantage of this market opportunity and to achieve
long-term profitability thereby maximizing shareholder value.
RESULTS OF OPERATIONS OF THE COMPANY
Three Months ended March 31, 1996 Compared to Three Months ended March 31, 1995
The following table sets forth certain Consolidated Statement of Operations
data of the Company as a percentage of revenues for the three months ended
March 31:
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . 100 % 100 %
Cost of revenues . . . . . . . . . . . . . . . . . 31 59
---- ----
Gross profit . . . . . . . . . . . . . . . . . . 69 41
Selling, general and administrative expenses . . . 42 66
Amortization of acquired intangible assets . . . . 10 6
---- ----
Operating loss . . . . . . . . . . . . . . . . . 12 (31)
Interest income (expense), net . . . . . . . . . . (1) 3
---- ----
Earnings (loss) before income tax expense . . . . 11 (28)
Income tax expense . . . . . . . . . . . . . . . . 8 --
---- ----
Net earnings (loss) . . . . . . . . . . . . . . . . 3 % (28) %
==== ====
</TABLE>
Revenues increased 120%, or $1,810,921, to $3,324,652 for the three months
ended March 31, 1996 from $1,513,731 for the same period in 1995. Of the
increase, $716,719 is attributable to network security systems and products,
mainly the Company's secure dial access systems for the Internet. The remainder
of the increase, $1,094,202, is attributable to the revenues of GDS. Since GDS
was acquired in October 1995, the three months ended March 31, 1995 does not
included any revenues from GDS. On a pro forma basis, which includes GDS,
revenues for the three months ended March 31, 1995 were $3,010,000.
9
<PAGE> 10
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(Continued)
Cost of revenues increased to 59% for the three months ended March 31, 1996
from 31% in 1995. Cost of revenues for 1996 include $236,000 for amortization
of a purchase accounting adjustment to the carrying value of GDS inventory.
Without this charge, cost of revenues was 52% in 1996. On a pro forma basis,
the cost of revenues was 36% in 1995. The increase reflects higher costs
associated with the startup of production of the secure dial access systems for
the Internet, changes in product mix and a favorable profit margin on a large
1995 purchase.
Selling, general and administrative expenses ("SG&A") totaled $2,326,510 in
the three months ended March 31, 1996 before reduction of $123,648 for
capitalized computer software development costs, resulting in a net SG&A
expense of $2,202,862. On a pro forma basis, gross and net SG&A expenses in
1995 were $2,093,000 and $1,705,000, respectively. The increase in total SG&A
expense is primarily due to increased personnel related costs associated with
the expansion of the marketing and engineering staffs.
The Company had no income tax expense for the three months ended March 31,
1996, compared with income tax expense of $124,000 in 1995. The 1996 provision
reflects the establishment of a valuation allowance since the Company's ability
to fully use the net operating loss is dependent upon future taxable income.
The 1995 provision is greater than the statutory rate of 34% primarily because
the amortization of acquired intangible assets is not deductible for income tax
purposes.
The Company had a net loss of $923,446 for the three months ended March 31,
1996 compared to net earning of $44,668 in 1995. The 1996 net loss includes the
charge for amortization of acquired intangible assets of $183,161, compared to
$152,580 in 1995. Net interest income totaled $98,938 in 1996, which is
attributable to the temporary investment of the proceeds from the Company's
public offering of 1,172,500 shares of common stock in February 1996, compared
to net interest expense of $15,085 in 1995. The loss per common share was $.19
in the three months ended March 31, 1996 compared to nil earnings per common
share in 1995. On a pro forma basis, the net loss in 1995 was $81,000 and the
loss per common share was $.06.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company believes that its current cash resources, together with the cash
flows from operations, will be sufficient to meet its needs for the immediate
future.
In February 1996, the Company completed a public offering of 1,172,500 shares
of common stock at a per share price of $20.00. The net proceeds to the Company
from the offering were $21,059,000 after deducting offering expenses. The
proceeds were used to pay promissory notes incurred in the GDS acquisition
($3,853,416) and for working capital and general corporate purposes, including
product development and expansion of the Company's sales and marketing efforts.
A portion of the proceeds designated for working capital purposes may also be
used for investment in, or acquisition of, related or complimentary businesses,
products, product development rights or technologies. However, at the present
time no discussions or arrangements have occurred regarding possible investment
or acquisitions, and there can be no assurance that the Company can consummate
any acquisition or investment on acceptable terms.
As of March 31, 1996, the Company had cash and accounts receivable totaling
$23,498,000 and a backlog of $10,823,000 of which 88% was attributable to MCI
Telecommunications Corporation pursuant to an agreement dated September 21,
1995.
INFLATION AND SEASONALITY
The Company does not anticipate that inflation will significantly impact its
business. The Company does not believe its business is seasonal, however,
because the Company recognizes revenues upon shipment of finished products,
such recognition may be irregular and uneven, thereby disparately impacting
quarterly operating results and balance sheet comparisons.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item b. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K: None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INFORMATION RESOURCE ENGINEERING, INC.
May 13, 1996
By:/s/Anthony A. Caputo
--------------------
ANTHONY A. CAPUTO,
Chairman, President
and Chief Executive Officer
May 13, 1996
By:/s/David A. Skalitzky
---------------------
DAVID A. SKALITZKY,
Vice President, Finance
(Principal Financial and Accounting Officer)
11
<PAGE> 1
Exhibit 11
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Primary
-------
Net earnings (loss) $ 44,668 $ (923,446)
Accrued dividend on preferred stock (30,929) --
------------ --------------
Net earnings (loss) attributable to common stock $ 13,739 $ (923,446)
============ ==============
Average common shares outstanding 3,648,382 4,911,395
Dilutive effect of stock options and warrants 85,562 --
------------ --------------
Weighted average common shares outstanding 3,733,944 4,911,395
============ ==============
Earnings (loss) per common share $ -- $ (.19)
============ ==============
Assuming full dilution
----------------------
Net earnings (loss) attributable to common stock $ 13,739 $ (923,446)
============ ==============
Weighted average common shares outstanding 3,733,944 4,911,395
Additional dilutive effect of stock options and warrants 2,300 --
------------ --------------
Weighted average common shares outstanding 3,736,244 4,911,395
============ ==============
Earnings (loss) per common share assuming full dilution $ -- $ (.19)
============ ==============
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at March 31, 1996 and Consolidated Statement of
Operations for the three months ended March 31, 1996 for Information Resource
Engineering, Inc. and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,594,105
<SECURITIES> 0
<RECEIVABLES> 2,903,477
<ALLOWANCES> 0
<INVENTORY> 2,692,532
<CURRENT-ASSETS> 26,368,645
<PP&E> 1,060,003
<DEPRECIATION> (551,830)
<TOTAL-ASSETS> 32,318,117
<CURRENT-LIABILITIES> 4,042,194
<BONDS> 30,723
0
0
<COMMON> 54,173
<OTHER-SE> 28,191,027
<TOTAL-LIABILITY-AND-EQUITY> 32,318,117
<SALES> 3,324,652
<TOTAL-REVENUES> 3,324,652
<CGS> 1,961,013
<TOTAL-COSTS> 1,961,013
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (98,938)
<INCOME-PRETAX> (923,446)
<INCOME-TAX> 0
<INCOME-CONTINUING> (923,446)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (923,446)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
