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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
Or
[ ] Transition Report Pursuant to Section 13 OR 15 (d) Of the Securities
Exchange Act of 1934
Commission File Number 0-20634
INFORMATION RESOURCE ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1287752
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8029 Corporate Drive
BALTIMORE, MARYLAND 21236
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 931-7500
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Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
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<S> <C>
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 par value Nasdaq National Market
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Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Revenues for the most recent fiscal year were $14,317,423.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 1997, based upon the closing price on that date, on
the Nasdaq National Market, was approximately $38,578,455.
The number of shares of the registrant's Common Stock outstanding as of March
21, 1997 was 5,461,527.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrant's proxy
statement for the Annual Meeting of Shareholders, which proxy statement in
definitive form will be filed no later than 120 days after the close of the
registrant's fiscal year ended December 31, 1996.
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PART I
ITEM 1 - BUSINESS
Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, risks
associated with the receipt and timing of future customer orders, price
pressures and other competitive factors leading to a decrease in anticipated
revenues and gross profit margins.
See "Glossary of Technical Terms" on page 11 for explanation of
certain technical terms used herein.
GENERAL
Information Resource Engineering, Inc. (the "Company") designs,
manufactures and markets enterprise network security systems 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, such as the
Internet. In order to expand its product offerings, the Company acquired
GRETACODER Data Systems, A.G. ("GDS") in October 1995. GDS designs,
manufactures and markets cryptographic equipment primarily in Switzerland and
Europe.
Encryption technologies are utilized by the Company to provide
selective access to computer networks, prevent electronic eavesdropping or
alteration during electronic data transmission; to provide message
authentication confirming that messages are received in unaltered form; and to
enable user authentication and digital signatures verifying the identity of the
message sender and limiting computer access to authorized users. The Company
offers a choice of encryption algorithms to provide the level of network
security appropriate for each client application.
The Company's clients include seven of the largest banks in the U.S.,
Union Bank of Switzerland, the Society for Worldwide Interbank Financial
Telecommunications ("SWIFT") an international financial clearing house, The
Euroclear System ("Euroclear"), MCI Telecommunications Corporation ("MCI"), TRW
Inc., major federal, state and international law enforcement agencies and the
U.S. Department of Treasury. While the network security market has
traditionally been limited to financial institutions and government agencies,
the Company believes that emerging electronic commerce applications,
particularly business-to-bank and business-to-business, provide new market
opportunities.
In the second half of 1996, the Company introduced
"SafeNet/Enterprise(TM)", a comprehensive, centrally managed security system
that enables secure use of public networks, such as the Internet, for private
business transactions. In August 1996, the Company announced the formation of a
joint product development and marketing agreement with CyberGuard Corporation
("CyberGuard") to provide firewall security solutions, including a Virtual
Private Networking (VPN) security solution for Internet business communications
to its SafeNet clients.
The Company was originally incorporated in Maryland on April 7, 1983
under the name "Industrial Resource Engineering, Inc." The Company
reincorporated under its present name in Delaware by merging with its
subsidiary in March 1989. The Company's executive offices are located at 8029
Corporate Drive, Baltimore, Maryland 21236, and its telephone number is (410)
931-7500.
THE MARKET FOR ENTERPRISE NETWORK SECURITY SOLUTIONS
Management believes that the market for security systems and products
providing secure remote access to computer networks has grown over the last
several years due to an increase in the use of computer networks and the
vulnerability of data which is transmitted over these networks. Remote access
to computers has increased substantially due to the use of remote databases,
work-at-home arrangements or telecommuting, electronic mail,
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satellite offices connected to a central computer, electronic funds transfer,
electronic data interchange with clients, suppliers and business partners and
numerous other arrangements. With the increasing use of public and private
communications networks and the ability of different types of computers to
communicate with each other, data integrity and security have gained increased
importance.
Unsecured data transmitted over public networks, such as the Internet,
is subject to interception, electronic vandalism or terrorism, and alteration.
The increased use of networked computers also increases risk, both by
multiplying the number of access points to valuable data and the number of
personal computers which can be utilized to obtain unauthorized information.
The Company believes that the use of computer networks such as the Internet,
will continue to expand and that, as the reliance on these networks grows,
organizations will become more dependent on the integrity and security of the
network. A 1996 report from The Yankee Group expects the network security
market to grow 70% annually. Therefore, management believes that protecting
information on computer networks, such as the Internet, is likely to offer
future business growth opportunities.
BUSINESS STRATEGY
The Company's objective is to be a leading provider of secure network
systems, services and products to the growing market for electronic
communications. The key elements of the Company's strategy are as follows:
Provide Clients with a Broad Range of Enterprise Network Security
Solutions
The Company has historically grown by applying its technological
competence to the development of network security systems and products for use
in the complex computer networks of financial, corporate and government
clients. The Company's focus on technology has led to a family of products
which have reduced the complexity and cost associated with applying encryption
technology to computer networks. The SafeNet/Enterprise(TM) product line
includes firewalls, encryption and user identification tokens in a
comprehensive, centrally managed system. The Company believes that this focus
on technology is vital for its future growth and will continue to invest its
resources accordingly.
Develop an OEM Business
The Company believes that, due to the fact that security is a major
concern among network users, manufacturers of computer and communications
products are seeking to add security capabilities to their products.
Consequently, the Company is developing a family of products which can be
incorporated into computers and communications products manufactured by others.
Such products include smart card readers, a secure communications chip and a
line of products designed around the chip.
Develop a Transaction Services Business
The Company is leveraging its network security expertise to develop a
transaction services business since it believes that the recurring revenue
stream and strategic relationships generated from such business will be
instrumental to its future growth. In the second half of 1996, the Company
established the SafeNet/Trusted Services facility at Company headquarters to
provide security management services such as subscriber enrollment, product
configuration, digital certificates, and key management services to Internet
access providers and directly to end users. The Company expects to receive both
monthly fixed and fee per transaction revenue for providing such services.
Establish Key Strategic Relationships
The Company seeks to establish domestic and international
relationships with organizations that have the ability to expand the use of
encryption technology. Relationships currently exist with the following:
Analog Devices Inc. ("ADI"), a leading manufacturer of
high-performance integrated circuits, is assisting the Company in the design,
manufacture and marketing of the Company's new secure communications chip. The
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new chip, which is expected to become available in 1997, will provide
organizations with a highly secure, inexpensive solution to conducting business
over computer networks;
CybergGuard, a leading provider of network security solutions, has
entered into a joint product development and marketing agreement aimed at
providing a comprehensive security solution for Internet business
communications;
MCI, a leading provider of Internet access services; and the Company
have entered into a sales and marketing agreement. The Company has joined the
MCI Sales Alliance program which allows the MCI sales force and the Company to
co-market the Company's SafeNet products. See "Principal Clients";
Financial Services Technology Consortium is a group of leading
financial institutions whose goal is to utilize emerging technologies to
enhance the competitiveness of the financial services industry. The Company is
a member of a multiple industry team formed to design and implement an
electronic check for use of the Internet by consumers and businesses.
Expand through Acquisition
The network security field is characterized by a large number of small
organizations which focus on various aspects of security. The Company believes
that its major clients and potential clients seek to do business with suppliers
that can offer solutions to multiple network security problems; are able to
provide global support; and are organizationally and financially stable.
Therefore, the Company may seek to augment its internal growth through the
acquisition of companies or technology that provide complementary products,
systems, management and markets. In November 1995, the Company acquired GDS, a
Swiss corporation, which designs manufacturers and markets cryptographic
equipment.
PRODUCT DESIGN STANDARDS
Encryption technologies are utilized by the Company to provide
selective access to computer networks, prevent electronic eavesdropping or
alteration during electronic data transmission; to provide message
authentication confirming that messages are received in unaltered form; and to
enable user authentication and digital signatures verifying the identity of the
message sender and limiting computer access to authorized users. The Company
offers a choice of encryption algorithms to provide the level of network
security appropriate for each client application.
All of the Company's network security systems and products comply with
the following general product design standards:
Standards Compliance
The Company's policy is to offer products based upon encryption
algorithms that have been approved as industry and government standards. This
provides the Company's clients assurance that they are using interoperable
products which meet commercial reasonability tests as applied by both
government regulation and courts of law.
Network Compatibility
The Company's systems and products contain sufficient intelligence to
accommodate the specific communication protocols employed by complex computer
networks. Appropriate models of each product type are provided to support Frame
Relay, Dial Asynchronous, leased line, X.25, Bisync and Internet protocol-based
networks. This network compatibility results in security systems that are
completely independent of the computer hardware systems and software
application programs used by clients. No modifications to hardware or
application software are required to implement the Company's systems and
products.
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Ease of Use
The Company believes that users of its products, while concerned that
their data is secure, do not wish to be required to take specific actions to
achieve secure status. Therefore, the Company's products are designed to
function without user involvement, thus offering an extremely high level of
ease of use.
Ease of Administration
The Company has extended its ease of use concept to the central
management of a secure network with a product known as the SafeNet/Security
Center(TM) ("SSC"). The SSC provides central management and tracking capability
for the entire encrypted network thus reducing the cost of implementing
security for client organizations. For organizations aiming to defer capital
and personnel investment, the Company's SafeNet/Trusted Services subsidiary
provides comprehensive security management as an optional service performed at
the Company's headquarters.
Price Performance Criteria
The Company believes that in order for clients to invest in encryption
technology, its products must be implemented cost effectively. As such, the
Company's development staff follows a design approach similar to that used with
consumer electronics products that are designed for low manufacturing cost.
ENCRYPTION ALGORITHMS
At the present time, the Company's products utilize "DES", the U.S.
government's Data Encryption Standard and "Skipjack" a new algorithm, recently
developed by the U.S. government. DES, as described in American National
Standards Institute ("ANSI") Standard X3.92, has been certified by the National
Institute of Standards and Technology ("NIST") and is the accepted encryption
algorithm for commercial and non-classified government applications in the U.S.
as well as financial applications worldwide. The Company has received export
approval from the U.S. Commerce Department to export its products with the DES
algorithm.
The acquisition of GDS added two new encryption algorithms,
"GRETACODER" and "RSA." GRETACODER is a highly secure encryption algorithm
which has been used by security conscious European organizations including
banks and government agencies. RSA is a proprietary algorithm of RSA Data
Security Inc. which utilizes public key-based encryption in networks including
the Internet.
New encryption algorithms are periodically proposed as industry
standards. The Company's policy is to adopt and offer its clients new
algorithms for various applications as they become certified by standards
organizations such as ANSI, NIST and Internet security groups.
CURRENT NETWORK SECURITY PRODUCTS AND SYSTEMS
The Company's principal network security systems and products, secure
information transmissions on public and private networks.
Public Network/Internet Products
SAFENET/ENTERPRISE(TM). In the second half of 1996, the Company
introduced SafeNet/Enterprise(TM), a comprehensive, centrally managed security
system that enables secure use of public networks, such as the Internet, for
private business transactions. By providing a high level of security,
SafeNet/Enterprise(TM) will allow organizations to reduce their networking
costs by using the Internet instead of costly private networks. The product
line includes:
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- SafeNetDial/(TM), a secure pocket modem operating at 28.8
bps for secure dial access to the Internet by remote users
such as traveling professionals and telecommuters,
- SafeNet/Dial-R provides security identical to the
SafeNet/Dial(TM), without the integral modem,
- SafeNet/LAN(TM) Encrypting Firewall which provides security
for LAN connections to the Internet, as well as packet
filtering,
- SafeNet/Firewall is a highly secure proxy firewall based on
the CyberGuard Firewall,
- SafeNet/Smartcard is a credit card user token that stores
user identification and encryption keys in an advanced
computer chip,
- SafeNet/Soft is a Windows compatible software package that
provides continuous user authentication, one-time password
generation and data encryption,
- SafeNet/Security Center(TM), a high performance workstation
which automatically manages the entire suite of
SafeNet/Enterprise(TM) products,
- SafeNet/Trusted Services provides central management of VPN
security as a service 24 hours a day, 365 days a year.
Private Network Products
SECURE MODEMS. In 1994, the Company introduced its AX400 Secure
Modem. The AX400 is a portable device that fits in the palm of a user's hand,
weighs just a few ounces and uses power from the remote computer. It contains
an internal modem that delivers a 14.4K bps data rate while in secure operation
using standards compliant encryption technology. The AX400 also generates a
random password for each communications session when a user enters the
appropriate personal identification number. Due to its small size, user
authentication and data protection capabilities, the AX400 is convenient for
mobile or remote users.
SECURE DIAL ACCESS SYSTEMS. These products are designed to protect
data communications when remote users access host computers via the voice
telephone network and are most commonly employed when personal computers are
communicating with central computer sites, such as company headquarters. Since
computer communications are taking place over normal, unsecured telephone
lines, some type of security is frequently required in this application.
X.25 SECURITY SYSTEMS. Complex computer networks such as X.25
networks break down the data stream sent from computers into smaller, more
manageable pieces called, "packets" which contain address and routing
information as well as user data. The X.25 Security System selectively applies
encryption technology only to the users data while leaving address and routing
information intact, thus assuring proper delivery of user data in secure form
at minimal expense. The Company markets X.25 Security Systems under both the
IRE and GDS names.
LINK SECURITY SYSTEMS. While dedicated links are inherently more
secure than dial networks, the nature of the data that is frequently
transmitted over dedicated lines (the connections to bank branch offices, for
instance) often requires a high level of security. IRE's products are designed
to protect synchronous or asynchronous communications at speeds up to 64K bps
over dedicated telephone lines. GDS products are designed to protect
synchronous or asynchronous communications at speeds up to 2M bps over
dedicated telephone lines. The Link Security Systems are protocol transparent
and supports asynchronous, bisynchronous, SDLC and HDLC communications
protocols.
GRETACODER FRAME RELAY ENCRYPTORS. The GDS Frame Relay encryptor
combines the advantages of circuit and packet switched services: small delays
over the network and lower transmission cost. The properties of Frame Relay
make it especially suitable for LAN interconnections where bursty traffic has
to be transmitted.
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NEW PRODUCT DEVELOPMENT
The Company conducts product development activities to increase the
size of its available market through broader product offerings and to reduce
the cost of its products resulting in more competitive pricing and/or better
operating margins.
New products, capable of a high level of security on the Internet,
were introduced under the SafeNet/Enterprise(TM) brand name in the second half
of 1996. The Company intends to continue to develop new versions of the
SafeNet/Enterprise(TM) products to support growth of both its product and
service businesses.
New encryption algorithms such as the digital signature standard,
escrowed encryption or Skipjack, and RSA utilize a technology generally known
as public key encryption. The Company believes that this new technology has
potential widespread demand, and is therefore developing products that utilize
this new technology to manage the security of large computer networks.
In January 1997, the Company announced that it is developing a
low-cost secure communications chip with ADI. The new chip can combine
encryption and communications functions, such as modems and LAN adapters, on a
single integrated circuit. The chip supports current and future security
standards and can be software personalized for communications applications such
as LAN, ADSL, ISDN and cable modems. The initial secure communications chip
will be software personalized as a V.34 modem.
The Company is currently devoting significant resources toward the
foregoing product development activities. There can be no assurance that the
Company will successfully complete the development of these products in a
timely fashion or that the Company's current or planned products will satisfy
the needs of the computer and network security market.
PRINCIPAL CLIENTS
The Company focuses its marketing efforts on both commercial and U.S.
government sales.
The Company's largest clients vary from year to year and the Company
has experienced shifts in sales patterns with large clients in the past.
Accordingly, the complete loss of any large client or substantial reduction of
sales to such clients could have a material adverse effect on the Company.
Principal commercial clients of the Company, which accounted for more than 10%
of total revenues, by year and percentage of revenue were MCI with 27% and 13%
of revenues in 1996 and 1995, respectively and The University of California,
Lawrence Livermore National Laboratory (11%) in 1994. For the years ended
December 31, 1995 and 1994, the percentage of revenues from sales to agencies
of the U.S. government was 26% and 20%, respectively. In 1996 revenues from the
U.S. Government were less than 10%.
Commercial Clients
Sales to financial institutions are a central part of the Company's
business. Banks use the Company's network security systems and products to
protect corporate cash management applications. In these systems, treasurers
located at corporations use personal computers to dial into the bank's
computing facility in order to transfer funds electronically. The Company's
network security systems and products are used to secure electronic funds
transfers at Citibank N.A., J.P. Morgan Company, Mellon Bank, Northern Trust
Company, PNC Bank and Wachovia Bank.
In November 1996, the Company entered into a new sales and marketing
agreement with MCI, which transcends the Company's relationship with MCI from a
supplier to a marketing alliance partner. The MCI Sales Alliance Program is a
cooperative plan for the sales and marketing of IRE's SafeNet Secure Internet
products to MCI customers and prospects. The Company believes the Alliance
Program is well structured to enable the Company's products to be marketed
through the MCI channel.
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In the past year the Company received orders from TRW Inc., the prime
contractor for the development and maintenance of the Treasury Communications
System (TCS) of the U.S. Department of Treasury . The Company's AX Family and
SafeNet/Enterprise(TM) products are being used to protect communications
between Treasury departments and offices nationwide. The Company's automated
key management center was also purchased by TRW for user identification and
authentication, real-time security monitoring, audit services and electronic
key delivery.
Euroclear is the world's largest provider of security clearinghouse
services to over 1,400 large international banks and brokerage firms. Euroclear
is owned by a consortium of 120 international financial institutions. The
Company's network security systems and products are used to protect the money
transfer service available to Euroclear participants. When the participant
authorizes a wire transfer for payment, the transfer is protected by the
Company's network security systems and products. Participants who wish to use
the wire transfer service are required to purchase the Company's remote
security devices which provide message authentication, user authentication and
data encryption for the participant's funds transfers communications.
GDS has also recognized the emerging information security needs of
commercial clients, primarily transactions between banks. GDS products are
utilized commercially in several countries to protect financial transactions
from wiretapping and fraudulent data manipulation. Several Swiss banks and
other financial institutions use GDS units to protect their electronically
transmitted transactions, including Union Bank of Switzerland, Swiss Interbank
Clearing, SWIFT, European Payment Systems Services, Societa Interbancaria per
l'Automazione S.p.A., and Swiss Securities Clearing Operation.
Government Clients
The U.S. Department of Treasury uses the Company's network security
systems and products to protect the electronic payment of the government's
bills for civilian agencies, securing approximately 750 million payment
requests each year, with an annual value of more than $700 billion. In the
electronic certification system provided to the U.S. Department of Treasury,
the Company's products verify the integrity of electronic payment orders using
message and user authentication.
The U.S. Department of Energy uses a large installation of the
Company's Link Security System in a communications network that is part of a
premises security system at a highly classified location. The Department of
Energy has deployed the Company's Link Security System at an additional
installation.
Other government agencies deploying the Company's systems and products
include the Federal Bureau of Investigation, National Crime Information
Network, U.S. Drug Enforcement Agency and U.S. Customs Service. The Company's
security systems and products are utilized by these law enforcement agencies to
protect sensitive information traveling across telephone and computer networks.
CLIENT SUPPORT AND PRODUCT WARRANTIES
The Company provides support for clients through a staff of support
engineers knowledgeable in both the Company's network security systems and
products and complex computer networks. In addition to supporting clients, this
group of engineers performs system level quality assurance testing of new
products and product enhancements.
The Company provides client telephone support, including 24 hour a day
"hot line" support. In addition, the Company offers on-site training,
installation and trouble-shooting services, generally on a fee basis.
The Company provides limited warranties on its products for one year
from acceptance of a product. After warranty expiration, clients may purchase
an extended warranty support contract. This contract extends warranty service
for an additional one year period, providing repair or replacement of defective
products, telephone support, software and firmware support, regular maintenance
releases for products and early access to major product enhancements. The
Company also offers support on a time and materials basis.
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SALES AND MARKETING
Sales
In North America, IRE sells its products through a direct sales force
headed by a Vice President of U.S. Sales. In Switzerland, GDS sells its
products through a direct sales force reporting to a sales manager at GDS.
Outside of such territories, the Company and GDS sell their products through
distributors of communication or information security products. Support for
these distributors is provided by a sales force headed by a Vice President of
International Sales.
The Company intends to increase its European presence through the
acquisition of GDS, which, by virtue of its central European location and its
brand name recognition, is suited to distribute and support IRE products as
well as products under the GRETACODER brand name.
Marketing
In 1996, the Company's marketing program emphasized expanded public
relations and continued trade show participation to generate sales leads
resulting in increased coverage of the Company's products in leading trade
publications. In addition, the Company has upgraded the quality of its sales
materials, equipping each sales employee with the capability to make live
demonstrations illustrating the value and efficacy of secure communications to
prospective clients.
INVENTORY, SUPPLIES AND MANUFACTURING
Components for the Company's products are purchased from a limited
number of electronic parts manufacturers and distributors. Electronic assembly
firms are used to mount components onto printed circuit boards according to
designs and instructions provided by the Company's engineers. Since the
components are readily available from other suppliers and since there are
several electronic assembly firms available, a change in suppliers would not
have a material effect on the Company's operations. However, while the Company
has not experienced any significant supply problems in the past, it is possible
that in the future the Company may encounter shortages in parts, components, or
other elements vital to the manufacture, production and sale of its products.
GDS operations are quality certified according to ISO 9001 and EN
29001. This is meant to ensure that quality control procedures satisfying the
requirements of these standards are maintained in all processes performed by
GDS. Actual compliance and control are checked by semi-annual third party
audits. In addition to manufacturing, such certifications also extend to
marketing, sales and administration.
The Company anticipates that it will continue to utilize qualified
suppliers and electronic assembly firms to produce sub-assemblies. The Company
presently performs system integration, final assembly and testing which
consists of assembling the cases containing the product components; attaching
integrated circuits, which contain the specific computer instructions and
algorithms, to printed circuit boards; labeling; adding serial numbers;
testing; packaging and shipping. The Company has and will continue to utilize
contract manufacturers for products requiring high volume production.
COMPETITION
The network security market is relatively new, highly competitive and
subject to rapid technological changes. The Company believes that competition
in this market is likely to intensify as a result of increasing demand for
network security products. There are several companies in this field that have
been established longer than the Company, and have greater financial, research,
service support and marketing resources than those of the Company. There are
also a number of other data encryption methods on the market, both hardware and
software, which compete with the Company's products.
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Management believes that the principal competitive factors affecting
the network security market include standards compliance, quality/reliability,
technical features, network compatibility, ease of use, client service and
support, distribution and price. Although the Company believes its products
currently compete favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against
current and potential competitors.
If the network security market continues to develop, it will likely be
characterized by rapid advances in technology and the continuing introduction
of new products which could render the existing technology upon which the
Company's products are based obsolete or non-competitive. This risk will
increase to the extent that the Company's competitors include manufacturers of
computer equipment and modems to which the Company's products relate, since
such manufacturers may be in a better position than the Company to develop
security products in anticipation of developments in their computer equipment.
INTELLECTUAL PROPERTY
In September 1996, the Company was awarded a United States Patent
covering portable encrypting and authenticating network interface devices such
as modems. The new patent provides the Company with ownership rights to a
technology that the Company believes will be applicable to the growth of
computer networks, such as the Internet. The patent covers various forms of
pocket-sized devices including PCMCIA and Smartcard-based secure tokens and is
adaptable to modems and newer network technologies including ISDN, ADSL and
cable modems. The Company's products covered by the patent include the
SafeNet/Dial(TM) and the AX400.
The computer software source codes, which are essential elements of
the Company's products, are the proprietary trade secrets of and are
copyrighted by the Company. The protection of proprietary technology and
information developed by the Company will be limited to such protection as the
Company may be able to secure pursuant to trade secret or copyright laws or
under any confidentiality agreements which it may enter. The Company has filed
trademarks and trade names for certain of its product names and marks, however,
there is no assurance as to the validity, enforceability or lack of
infringement of such trade names and trademarks.
In March 1996, the Company acquired an option for exclusive worldwide
license rights, subject to the issuance of a United States Patent, to a self
authenticating fingerprint identification card for certain computer security
and financial applications from CardGuard International, Inc. ("CardGuard").
The Company has been informed by CardGuard that it expects a United States
Patent with respect to the technology to be issued in 1997.
At present, the Company is a party to confidentiality agreements with
its officers, directors and employees. There can be no assurance that the scope
of any such protection the Company is able to secure will be adequate to
protect its proprietary information, or that the Company will have the
financial resources to engage in litigation against parties who may infringe
such proprietary technology or copyrights. In addition, there can be no
assurance that others will not develop similar technology independently of the
Company.
The Company believes that its products do not infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not assert infringement claims in the future.
EMPLOYEES
As of March 21, 1997, the Company had approximately 115 full time
employees, of whom 14 are engaged in assembly and quality control, 13 in
administration and financial control, 47 in engineering, development and client
support, and 41 in marketing and sales. The Company employs 85 full time
employees in the U.S. and 30 persons are in Switzerland.
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GLOSSARY OF TECHNICAL TERMS
ALGORITHM A process or procedure, generally expressed as a set of
instructions for carrying out a particular task.
ASYNCHRONOUS Data transmission that takes place one character (of 5 to 8 bits)
at a time, with each character preceded by a start code and followed by a stop
code of set duration.
BISYNCHRONOUS (BISYNC) A type of synchronous communication protocol
characterized by bi-directional transmission of character-oriented data.
DEDICATED LINK A type of network wherein telecommunications lines are
dedicated to particular clients along predetermined routes.
DIAL ASYNCHRONOUS A type of network wherein remote computers access a host
computer through dial telephone lines and the clocks need not be synchronous.
DIGITAL SIGNATURE A mechanism that allows the recipient of information stored
in digital form to prove that the information originated from the claimed
source.
DIGITAL SIGNATURE STANDARD A U.S. Government standard for digital signatures
using the Digital Signature Algorithm, proposed by NIST.
ENCRYPT, ENCRYPTION TECHNOLOGY The protection of data employing cryptographic
procedures to convert it to a form that is unintelligible until it is converted
back to its original form.
FIREWALL Hardware or software devices which screen data traffic at Internet
access points in order to assure that only authorized data and users can reach
computers that are connected to the network.
FRAME RELAY A data communication technology that is used to provide higher
speed for Internet connections. Its usual application is in connecting work
groups rather than individuals.
HDLC High Level Data Link Control. A well-known family of data link layer
protocols defined by the International Standards Organization.
INTERNET A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
INTRANET A network within an organization which provides similar services to
the Internet but is not necessarily connected to it.
ISDN A collection of telecommunications protocols and standards for
high-speed, error-minimized, digital data and voice transmission at speeds up
to 128 Kbps worldwide.
KEY, CRYPTOGRAPHIC KEY A sequence of letters/numbers/bits which is used by a
cryptographic algorithm to transform data from plaintext to ciphertext or vice
versa. DES uses a key which is 56 bits long.
KEY MANAGEMENT SYSTEM OR CENTER The physical place or workstation running
specialized programs that are responsible for generating, disseminating,
distributing, changing, replacing, storing, checking, and destroying
cryptographic keys.
11
<PAGE> 12
LAN Local-Area Network. An interconnected set of systems and devices--such as
PCs, mainframes, workstations, minicomputers, file servers, terminals,
printers, and other communications and computing devices--within a localized
environment.
LINK ENCRYPTION The use of encryption at the beginning, and decryption at the
end, of each link in a communications chain.
MESSAGE AUTHENTICATION A system in which a cryptographic
checksum/checkfunction is created for a message, and the result added to the
message. The recipient performs the same procedure on the message and compares
the computed result to that appended to the original message to verify that it
is complete and has not been modified in any way.
PACKET A collection of data and control characters in a specified format that
are transferred as a whole.
PRIVATE KEY One of the two keys in a public-key cryptographic system--normally
the key used for decryption--which is kept secret.
PROTOCOL A set of rules and conventions for communications, especially those
in a network, that include specifications of syntax, semantics, and timing.
PUBLIC KEY One of the two keys in a public-key cryptographic system, normally
made public or distributed to others for their use in encrypting messages to a
particular recipient.
PUBLIC-KEY CRYPTOGRAPHY A cryptographic system employing separate keys for
encryption and decryption. One of the keys can be made public, thus enabling a
message to be encrypted for transmission to a particular recipient, preserving
its confidentiality because no one without the private key can decipher the
message.
SDLC Synchronous Data Link Control. A bit-oriented IBM version of HDLC
protocol, as used in IBM's Systems Network Architecture.
SMARTCARD A plastic card resembling a credit card containing one or more
computer chips and logic for identification, special-purpose processing, and
data storage and distribution.
SYNCHRONOUS DATA Transmission that takes place with predictable, exact
departure or arrival times regulated by clocking data.
TCP/IP Transmission Control Protocol/Internet Protocol. A suite of network
protocols that allow computers with different architectures and operating
system software to communicate with other computers on the Internet.
USER AUTHENTICATION Generally, a means of verifying the claimed identity of an
individual computer user or terminal so as to properly determine what access
rights are to be given.
VPN Virtual Private Network. Same as Intranet. A network within an
organization which provides similar services to the Internet but is not
necessarily connected to it.
X.25 A widely used protocol standard for telecommunications between a computer
and a packet-switched data network; it encompasses layers 2 and 3 of the OSI
model.
12
<PAGE> 13
ITEM 2 - PROPERTIES
The Company maintains its corporate and administrative facilities at
8029 Corporate Drive, Baltimore, Maryland. The building, constructed in 1988,
has approximately 25,000 square feet and is also used for the Company's
executive headquarters, United States production facilities and for SafeNet
Trusted Services. The lease, which expires in June 2003, requires the Company
to pay real estate taxes, insurance and maintenance. The lease, which provides
for annual increases in rentals during each year of the lease, requires the
Company to pay approximately $155,000 in 1997.
GDS leases approximately 20,000 square feet for its administrative and
production facilities in Regensdorf, Switzerland. The lease, which expires on
December 31, 1997, calls for an annual rental of approximately $347,000.
The Company also leases office space in Danvers, MA for its consulting
staff and in Bethesda, MD for its international sales staff.
ITEM 3 - LEGAL PROCEEDINGS
The Company knows of no litigation or proceeding, pending or
threatened, to which the Company is or may become a party.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of Security Holders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this report.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED MATTERS
The following table sets forth the range of high and low sales prices
for the Company's Common Stock, as reported by the Nasdaq National Market under
the symbol IREG.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997:
First Quarter (through March 21, 1997) $10.75 $8.125
1996:
Fourth Quarter 20.25 8.75
Third Quarter 24.75 10.50
Second Quarter 29.50 17.75
First Quarter 25.50 16.00
1995:
Fourth Quarter 29.00 15.88
Third Quarter 21.00 12.00
Second Quarter 14.13 6.75
First Quarter 9.22 5.88
</TABLE>
On March 21, 1997, the last reported sale price of the Company's
Common Stock was $9.00, as reported by the Nasdaq National Market. As of that
date, there were approximately 259 holders of record of the Common Stock and
3100 beneficial holders of the Common Stock. The Company has not paid dividends
on its Common Stock and intends for the foreseeable future to retain earnings,
if any, to finance the expansion and development of its business.
13
<PAGE> 14
ITEM 6 - SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for each of the
five-years ended December 31, 1996 are derived from the Consolidated Financial
Statements of the Company, which financial statements have been audited by KPMG
Peat Marwick LLP. The Consolidated Financial Statements as of December 31,
1995 and 1996 for the years then ended are included elsewhere herein. The
selected financial data is qualified by and should be read in conjunction with
the Financial Statements, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $3,110 $2,631 $3,424 $8,149 $14,317
Cost of revenues 768 871 1,233 3,318 7,672
----------- ----------- ---------- ---------- -----------
Gross profit 2,342 1,760 2,191 4,831 6,645
Selling, general and administrative expenses 1,426 1,833 2,694 4,609 11,509
Amortization of acquired intangible assets -- -- 410 631 732
Write-off of unamortized acquired intangible
assets from the Connective Strategies,
Inc. acquisition -- -- -- -- 2,216
----------- ----------- ---------- ---------- -----------
Operating earnings (loss) 916 (73) (913) (409) (7,812)
Interest income (expense), net 19 117 24 (96) 728
----------- ----------- ---------- ---------- -----------
Earnings (loss) before income taxes 935 44 (889) (505) (7,084)
Income tax expense (benefit) 222 (15) (173) 190 --
----------- ----------- ---------- ---------- -----------
Net earnings (loss) 713 59 (716) (695) (7,084)
Preferred stock dividends 31 128 85 82 --
----------- ----------- ---------- ---------- -----------
Net earnings (loss) attributable to
common stock $ 682 $ (69) $ (801) $ (777) $(7,084)
=========== =========== ========== ========== ===========
Earnings (loss) per common share $ .27 $ (.02) $ (.25) $ (.20) $ (1.34)
=========== =========== ========== ========== ===========
Weighted average number of common
shares outstanding 2,485 3,000 3,229 3,826 5,305
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 3,914 $ 3,536 $ 671 $ 2,186 $16,664
Intangible assets 298 384 3,974 4,927 3,223
Total assets 4,852 4,812 7,724 15,472 24,653
Long-term debt -- -- 116 47 17
Stockholders' equity 4,335 4,236 5,405 8,216 21,861
</TABLE>
14
<PAGE> 15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, risks
associated with the receipt and timing of future customer orders, price
pressures and other competitive factors leading to a decrease in anticipated
revenues and gross profit margins.
OVERVIEW
The Company designs, manufactures and markets enterprise network
security solutions 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, such as the Internet. In order to expand its product
offerings, the Company acquired GDS in October 1995. GDS designs, manufactures
and markets cryptographic equipment primarily in Switzerland and Europe.
During 1994, the Company acquired CSI which designs, manufactures and
markets communication equipment enabling data/voice connectivity via the ISDN.
In the past year, the Company has invested in the development of a new
secure communications chip. Due to this new superseding technology, which does
not utilize CSI's ISDN product, the Company no longer markets its CSI products
to new customers. Consequently, the Company has taken a one-time charge of
$2,216,200 related to the write-off of the unamortized acquired intangible
assets from this acquisition. Future CSI ISDN product sales are not expected to
be significant since the products will only be sold pursuant to commitments to
existing customers.
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 GDS acquisition and new product offerings such as its
SafeNet/Enterprise(TM) products for the Internet and the SafeNet/Security
Center(TM), a high performance workstation which automatically manages
SafeNet/Enterprise(TM) 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, sales and marketing
activities to allow the Company to take advantage of this market opportunity
and to achieve long-term profitability thereby maximizing shareholder value.
Accordingly, the Company incurred additional personnel costs associated with
expansion of its sales, marketing and engineering staff in 1995 and 1996.
However, there can be no assurance that these strategies will be successful.
RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth certain Consolidated Statement of
Operations data of the Company as a percentage of revenues for the years ended
December 31:
15
<PAGE> 16
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 % 100 % 100 %
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 41 54
---- --- ---
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 59 46
Selling, general and administrative expenses . . . . . . . . . . . . . . 79 57 80
Amortization of acquired intangible assets . . . . . . . . . . . . . . . 12 7 5
Write-off of unamortized acquired intangible assets from the CSI
acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 15
---- --- ---
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (5) (54)
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . 1 (1) 5
---- --- ---
Earnings (loss) before income tax expense (benefit) . . . . . . (26) (6) (49)
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . (5) 2 -
---- --- ---
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . (21) % (8) % (49) %
==== === ===
</TABLE>
Year ended December 31, 1996, Compared to Year ended December 31, 1995
Revenues increased 76%, or $6,168,199, to $14,317,423 for the year
ended December 31, 1996, from $8,149,224 in 1995. Of the increase, $2,228,055
is attributable to network security systems and products, mainly the Company's
SafeNet/Enterprise(TM) dial access products for the Internet. The remainder of
the increase, $3,940,144, is attributable to the revenues of GDS. Since GDS was
acquired in October 1995, the year ended December 31, 1995 includes only two
months revenue from GDS. On a pro forma basis, which includes GDS, revenues for
1995 were $13,175,000.
The Company concluded discussions with MCI in the fourth quarter of
1996 to terminate a previous product agreement under which MCI was obligated to
purchase approximately $7.0 million of SafeNet/Enterprise(TM) products during
the twelve month period ending in September 1997. Pursuant to a new Alliance
and Joint Marketing Agreement between the Company and MCI, the Company has
become a member of the MCI Strategic Alliance Program (the "Program") and has
received an option to purchase the existing MCI inventory of the Company's
SafeNet/LAN(TM) and dial access products at a substantial discount. The Company
believes that the Program will provide a significant marketing opportunity for
its SafeNet/Enterprise(TM) products as the Program has for its other current
participants. There can be no assurance, however, that the Program will be
successful for the Company or that the Program will generate sufficient
SafeNet/Enterprise(TM) product sales volume to enable the Company to benefit
from the discounts offered by MCI. On a pro forma basis, revenues from sales
of network security products during the last six months of 1996 increased by
$138,000 over similar revenues during the same time period in 1995 when sales
to MCI are removed from both periods.
Cost of revenues increased to 54% for the year ended December 31,
1996, from 41% for 1995. Cost of revenues includes $236,000 in 1996 and
$238,000 in 1995 for amortization of a purchase accounting adjustment to the
carrying value of GDS inventory. Without this charge cost of revenues was 52%
in 1996 and 38% in 1995. On a pro forma basis, which includes GDS, the cost of
revenues was 39% in 1995. The 1996 increase reflects higher costs associated
with the production of the SafeNet/Enterprise(TM) dial access products for the
Internet, changes in GDS product mix, and a favorable profit margin on a large
purchase order in the first quarter of 1995. The recent growth in Internet
security products has made market share very important. Accordingly, the
Company realized a lower gross profit on the SafeNet dial access products sold
to MCI in the first half of 1996. It is anticipated that the gross margin will
be improved in subsequent periods by developing new products, by changing the
product sales mix, by improved sales and marketing activities and by the net
service revenues to be generated by the SafeNet/Security Center(TM) which is
projected to begin operations in 1997.
Selling, general and administrative expenses ("SG&A") totaled
$11,509,304 in the year ended December 31, 1996, compared to $4,609,358 for
1995. On a pro forma basis, which includes GDS, SG&A totaled $8,180,000 in
1995. The increase in SG&A is primarily related to increased personnel related
costs associated with the expansion of the sales, marketing and engineering
staffs ($1,446,000), to increased sales and marketing activities ($635,000),
16
<PAGE> 17
to expansion of client support functions ($341,000), and to start-up costs
associated with SafeNet Trusted Services ($672,000).
The Company had a net operating loss of $7,812,682 for the year ended
December 31, 1996, compared to $409,397 in 1995. The 1996 operating loss
includes charges for amortization of acquired intangible assets from the recent
acquisitions of CSI and GDS of $732,644, compared to $630,658 in 1995. The 1996
loss also includes a one-time charge of $2,216,200 for the write-off of
unamortized acquired intangible assets from the CSI acquisition.
Net interest income totaled $728,132 in 1996, which is attributable to
the temporary investment of surplus cash that resulted mainly from the
Company's public offering of 1,172,500 shares of common stock in February 1996,
compared to net interest expense of $95,854 in 1995.
The Company had no income tax expense for the year ended December 31,
1996, compared with $190,000 for the year ended December 31, 1995. The Company
has established a valuation allowance since its ability to fully use the net
operating loss is dependent upon future taxable income.
The Company had a net loss of $7,084,550 for the year ended December
31, 1996, compared to $695,251 in 1995. The loss per common share was $1.34 for
the year ended December 31, 1996, of which $.42 is associated with the one-time
charge, compared to a loss of $.20 per share in 1995. On a pro forma basis, the
net loss was $.30 in 1995.
Year ended December 31, 1995, Compared to Year ended December 31, 1994
Revenues increased 138%, or $4,725,463, to $8,149,224 for the year
ended December 31, 1995, from $3,423,761 in 1994. Network security system and
product sales increased $1,482,920. In addition, $946,700 of the increase is
attributable to revenues from ISDN products added as a result of the CSI
acquisition and $2,295,843 is attributable to GDS revenues after its
acquisition. Since CSI was acquired in October 1994, the year ended December
31, 1994 includes only two months revenue from ISDN products. Since GDS was
acquired in October 1995, the year ended December 31, 1994 does not includes
any revenue from GDS products. On a pro forma basis, which includes CSI and
GDS, revenues were $13,175,000 for 1995 and $13,407,000 for 1994.
Cost of revenues increased to 41% for the year ended December 31,
1995, from 36% for 1994. Cost of revenues in 1995 includes $238,000 for
amortization of a purchase accounting adjustment to the carrying value of GDS
inventory. Without this charge the cost of revenues was 38% in 1995. On a pro
forma basis, the cost of revenues was 39% in 1995, compared to 40% in 1994.
Selling, general and administrative expenses were $4,609,358 for the
year ended December 31, 1995, compared to $2,694,019 for 1994. On a pro forma
basis, SG&A totaled $8,180,000 in 1995 and $7,318,000 in 1994. The increase in
SG&A was primarily related to GDS expenses for which there were no
corresponding amounts in 1994 ($655,000), increased personnel related costs
($1,069,000), increased marketing costs ($231,000), and increased consultants
costs related to product development and general corporate purposes ($196,000).
The Company had a net operating loss of $409,397 for the year ended
December 31, 1995, compared to $912,585 in 1994. The 1995 loss includes the
charge for amortization of acquired intangible assets of $630,658, compared
with $409,813 in 1994.
Net interest expense totaled $95,854 in 1995, which is primarily
attributable to promissory notes issued in the GDS acquisition, compared to net
interest income of $24,082 in 1994.
The Company had income tax expense of $190,000 for the year ended
December 31, 1995, compared with an income tax benefit of $173,000 in 1994. The
tax expense in 1995, despite the pre-tax loss, is due principally to a $203,000
foreign tax provision on GDS earnings which offset an acquired deferred tax
asset, and the establishment of a valuation allowance of $169,500. In addition,
the amortization of acquired intangible assets and the amortization of the GDS
purchase accounting adjustment are not deductible for income tax purposes.
17
<PAGE> 18
The Company's net loss decreased to $695,251 for the year ended
December 31, 1995, from a net loss of $715,503 in 1994. The loss per common
share was $.20 in the year ended December 31, 1995, compared to $.25 in 1994.
On a pro forma basis, the net loss was $.30 in 1995, compared to $.06 in 1994.
LIQUIDITY AND FINANCIAL POSITION 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 its
1997 fiscal year. As of December 31, 1996, the Company had cash, short-term
investments and accounts receivable totaling $15,793,000 and a backlog of
$1,987,000.
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 $21,035,000 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.
In August 1996, the Company signed a Joint Development and Marketing
Agreement with CyberGuard. The companies have developed and intend to market a
product that combines the Company's SafeNet/Enterprise(TM) products and
CyberGuard's Firewall product. In connection therewith, the Company has prepaid
a refundable $1.0 million license fee to CyberGuard which it believes will be
recovered through purchases of Firewall products.
The Company increased its inventory by $1,203,827 during the year. A
$1,489,569 increase in finished goods which was partially offset by $285,742
decline in raw materials. The finished goods increase was mainly caused by the
cancellation of the MCI contract. Internet security products had been produced
in anticipation of being shipped to MCI. While the Company believes that it
will sell these products during 1997, there can be no assurance that they will
be sold during the period.
Significant uses of the Company's financial resources in 1996 include
$1,274,770 spent on the purchase of fixed assets related primarily to the
establishment of its SafeNet/Trusted Services build-out of previously unused
office space, and equipment associated with the expansion of its sales,
marketing and engineering efforts. Other uses include $280,979 paid to retire
certain debt.
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.
18
<PAGE> 19
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets as of December 31, 1995 and 1996 21
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 23
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 24
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 25
Notes to Consolidated Financial Statements 27
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Information Resource Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of Information
Resource Engineering, Inc. and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Information
Resource Engineering, Inc. and subsidiaries as of December 31, 1995 and 1996,
and results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 21, 1997
20
<PAGE> 21
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
===================================================================================================================
1995 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,656,494 11,916,991
Short-term investments -- 2,311,980
Accounts receivable (note 4) 4,328,211 1,564,381
Inventories (note 5) 2,340,168 3,543,995
Recoverable income taxes 32,369 --
Prepaid expenses 36,815 101,843
- -------------------------------------------------------------------------------------------------------------------
Total current assets 9,394,057 19,439,190
Equipment and leasehold improvements, net (notes 6 and 9) 1,069,792 1,842,725
Computer software development costs, net of accumulated amortization of
$833,222 and $336,525 2,863,351 1,142,352
Goodwill, net of accumulated amortization of $133,998 and $142,662 2,063,188 1,080,568
Prepaid license fee (note 16) -- 1,000,000
Other assets 81,806 148,406
- -------------------------------------------------------------------------------------------------------------------
$ 15,472,194 24,653,241
===================================================================================================================
</TABLE>
(Continued)
21
<PAGE> 22
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 1995 and 1996
<TABLE>
<CAPTION>
====================================================================================================================
1995 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 8) $ 4,053,416 --
Current maturities of long-term debt (note 9) 68,787 18,480
Accounts payable 1,376,846 1,288,929
Accrued expenses (note 7) 1,517,513 1,317,389
Deferred revenue on maintenance contracts 191,788 150,498
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,208,350 2,775,296
Long-term debt, less current maturities (note 9) 47,382 16,710
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 7,255,732 2,792,006
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 10 and 14):
Preferred stock, $.01 par value per share. Authorized 500,000 shares -- --
Common stock, $.01 par value per share. Authorized 15,000,000 shares,
issued and outstanding 4,244,827 shares in 1995 and 5,458,127 shares
in 1996 42,448 54,581
Additional paid-in capital 9,712,777 30,917,584
Deficit (1,512,453) (8,597,003)
Cumulative foreign currency translation adjustment (26,310) (513,927)
- --------------------------------------------------------------------------------------------------------------------
Net stockholders' equity 8,216,462 21,861,235
Commitments (notes 12 and 16)
- --------------------------------------------------------------------------------------------------------------------
$ 15,472,194 24,653,241
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
=====================================================================================================================
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (note 4) $ 3,423,761 8,149,224 14,317,423
Cost of revenues (note 4) 1,232,514 3,318,605 7,671,957
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 2,191,247 4,830,619 6,645,466
Selling, general and administrative expenses 2,694,019 4,609,358 11,509,304
Amortization of acquired intangible assets (note 3) 409,813 630,658 732,644
Write-off of unamortized acquired intangible assets from
the Connective Strategies, Inc. acquisition -- -- 2,216,200
- ---------------------------------------------------------------------------------------------------------------------
Operating loss (912,585) (409,397) (7,812,682)
Interest income (expense), net 24,082 (95,854) 728,132
- ---------------------------------------------------------------------------------------------------------------------
Loss before income tax expense (benefit) (888,503) (505,251) (7,084,550)
Income tax expense (benefit) (note 11) (173,000) 190,000 --
- ---------------------------------------------------------------------------------------------------------------------
Net loss (715,503) (695,251) (7,084,550)
Preferred stock dividends (85,870) (82,270) --
- ---------------------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders $ (801,373) (777,521) (7,084,550)
=====================================================================================================================
Loss per common share $ (.25) (.20) (1.34)
=====================================================================================================================
Weighted average number of common shares outstanding 3,228,806 3,826,831 5,304,984
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
====================================================================================================================================
9% Convertible Series A convertible
redeemable cumulative redeemable cumulative
preferred stock preferred stock Common stock
--------------------- --------------------- -----------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 83,847 $ 838 -- $ -- 3,136,851 $ 31,368
Stock options exercised -- -- -- -- 600 6
Conversion of preferred stock (8,761) (87) -- -- 20,612 206
Issuance of common stock and Series A convertible
redeemable cumulative preferred stock in connection
with acquisition of Connection Strategies, Inc. (note 3) -- -- 65 1 480,000 4,800
Preferred stock dividends declared -- -- -- -- -- --
Net loss for 1994 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 75,086 751 65 1 3,638,063 36,380
Sale of common stock, net of offering expenses -- -- -- -- 300,000 3,000
Stock options exercised -- -- -- 300 3
Conversion of preferred stock (74,586) (746) (65) (1) 240,464 2,405
Redemption of preferred stock (500) (5) -- -- -- --
Issuance of common stock upon exercise of warrants, net of
registration expense -- -- -- -- 66,000 660
Preferred stock dividends declared -- -- -- -- -- --
Net loss for 1995 -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- -- 4,244,827 42,448
Sale of common stock, net of offering expenses -- -- -- -- 1,172,500 11,725
Stock options exercised -- -- -- -- 40,800 408
Net loss for 1996 -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- $ -- -- $ -- 5,458,127 $ 54,581
====================================================================================================================================
<CAPTION>
=================================================================================================================================
Cumulative
foreign
Additional Retained currency Net
paid-in earnings translation stockholders'
capital (deficit) adjustment equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 4,137,245 66,441 -- 4,235,892
Stock options exercised 774 -- -- 780
Conversion of preferred stock (119) -- -- --
Issuance of common stock and Series A convertible
redeemable cumulative preferred stock in connection
with acquisition of Connection Strategies, Inc. (note 3) 1,965,199 -- -- 1,970,000
Preferred stock dividends declared -- (85,870) -- (85,870)
Net loss for 1994 -- (715,503) -- (715,503)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 6,103,099 (734,932) -- 5,405,299
Sale of common stock, net of offering expenses 3,331,036 -- -- 3,334,036
Stock options exercised 1,478 -- -- 1,481
Conversion of preferred stock (1,924) -- -- (266)
Redemption of preferred stock (5,495) -- -- (5,500)
Issuance of common stock upon exercise of warrants, net of
registration expense 284,583 -- -- 285,243
Preferred stock dividends declared -- (82,270) -- (82,270)
Net loss for 1995 -- (695,251) -- (695,251)
Foreign currency translation adjustment -- -- (26,310) (26,310)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 9,712,777 (1,512,453) (26,310) 8,216,462
Sale of common stock, net of offering expenses 21,023,046 -- -- 21,034,771
Stock options exercised 181,761 -- -- 182,169
Net loss for 1996 -- (7,084,550) -- (7,084,550)
Foreign currency translation adjustment -- -- (487,617) (487,617)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 30,917,584 (8,597,003) (513,927) 21,861,235
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
===============================================================================================================================
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (715,503) (695,251) (7,084,550)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation of equipment 142,581 336,826 458,199
Amortization 127,407 178,821 201,593
Amortization of acquired intangible assets 409,813 630,658 732,644
Write-off of unamortized acquired intangible assets
from the Connective Strategies, Inc. acquisition -- -- 2,216,200
Deferred income taxes 27,700 215,300 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 77,006 (2,040,764) 2,608,430
(Increase) decrease in costs and estimated
earnings in excess of billing on
uncompleted contracts (248,700) 248,700 --
(Increase) decrease in inventories (82,139) 677,587 (1,425,750)
(Increase) decrease in recoverable income taxes (217,241) 184,872 32,369
Increase (decrease) in accounts payable 132,206 136,106 (53,635)
Increase (decrease) in accrued expenses 38,779 384,301 (112,880)
Decrease in billings in excess of costs and
estimated earnings on uncompleted contracts (104,946) (199,225) --
Increase (decrease) in deferred revenue on
maintenance contracts (6,790) 64,759 (41,290)
Other 14,806 45,152 (137,878)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (405,021) 167,842 (2,606,548)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of Connective Strategies, Inc., net of
cash acquired of $143,965 (32,421) -- --
Payment of liabilities assumed in connection with
the acquisition of Connective Strategies, Inc. (968,405) -- --
Acquisition of GRETACODER Data Systems AG,
net of cash acquired of $131,798 -- (439,602) --
Sale of short-term investments 2,254,569 399,409 --
Purchase of short-term investments (67,964) (902) (2,311,980)
Equipment expenditures (483,959) (154,862) (1,274,770)
Additions to computer software development costs (281,418) (538,200) (440,568)
Prepaid license fee -- -- (1,000,000)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 420,402 (734,157) (5,027,318)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
25
<PAGE> 26
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
================================================================================================================
1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ -- 589,000 --
Payments of notes payable -- (1,081,351) (4,053,416)
Proceeds from issuance of common stock, net of
offering expense 780 3,620,760 21,216,940
Redemption of preferred stock -- (5,766) --
Payment of preferred stock dividends (78,753) (127,118) --
Proceeds from long-term debt 155,650 -- --
Payments of long-term debt (42,136) (67,345) (80,979)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,541 2,928,180 17,082,545
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- 3,266 (188,182)
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 50,922 2,365,131 9,260,497
Cash and cash equivalents at beginning of year 240,441 291,363 2,656,494
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 291,363 2,656,494 11,916,991
================================================================================================================
Cash paid for:
Interest expense $ 16,210 66,481 159,509
================================================================================================================
Income taxes $ 42,300 800 --
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1995 and 1996
===============================================================================
(1) BUSINESS
Information Resource Engineering, Inc. ("the Company") is engaged in the
business of designing, manufacturing and marketing a line of products
which secure data transmissions on computer networks through the use of
encryption technology.
During 1994, the Company acquired Connective Strategies, Inc. ("CSI"),
which designs, manufactures and markets communications equipment
enabling data and voice connectivity via the Integrated Services Digital
Network ("ISDN"). In the past year, the Company has invested in the
development of a new secure communications chip. Due to this new
superseding technology, which does not utilize CSI's ISDN product, the
Company no longer markets its CSI products to new customers.
Consequently, the Company has taken a one-time charge of $2,216,200
related to the write-off of the unamortized acquired intangible assets
from this acquisition. Future CSI ISDN product sales are not expected to
be significant since the products will only be sold pursuant to
commitments to existing customers. Results of operations for CSI are
included in the accompanying consolidated statements of operations for
the period after October 24, 1994.
On October 31, 1995, the Company acquired all of the issued and
outstanding stock of GRETACODER Data Systems AG (formerly Gretag Data
Systems AG) ("GDS"), a company which designs, manufactures and markets
cryptographic equipment. Results of operations for GDS are included in
the accompanying consolidated statement of operations for the period
after October 31, 1995.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers investments purchased with maturities, at date of
purchase, of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, which consist of commercial paper and corporate
bonds which mature within one year, are stated at the lower of cost or
market.
(Continued)
27
<PAGE> 28
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(2) CONTINUED
REVENUES
Revenue is recognized from sales when the product is shipped. Unearned
income on maintenance contracts is amortized by the straight-line method
over the terms of the contracts. Revenues from engineering services are
recognized on the percentage of completion method. Contract costs
include all direct labor, material costs and the indirect costs related
to contract performance. Costs and estimated earnings in excess of
billings on uncompleted contracts are recognized as assets. Billings in
excess of costs and estimated earnings are recognized as liabilities.
Revenues from consulting services are recognized as the services are
provided. There was no material accounts receivable related to unbilled
consulting services at December 31, 1996.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost less accumulated
depreciation. Depreciation of equipment is determined using the
straight-line method over the estimated useful life of five years.
Leasehold improvements are amortized over the life of the lease.
COMPUTER SOFTWARE DEVELOPMENT COSTS
Computer software development costs are capitalized subsequent to the
establishment of technological feasibility for each software product
which is evidenced by a detailed program design. Capitalization of costs
ceases when the product is available for general release to customers.
Such costs are amortized using the straight-line method over five years
beginning on product release dates. The Company assesses the
recoverability of this intangible asset by comparing the unamortized
balance to the net realizable value.
GOODWILL
The excess of acquisition costs over the fair value of net assets
acquired is amortized on a straight-line basis over ten years. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment,
if any, is measured based on projected discounted future operating cash
flows.
(Continued)
28
<PAGE> 29
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(2) CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
PRODUCT WARRANTIES
The Company warrants to the original purchaser that each of its products
will be free from defects in materials and workmanship generally for a
period of one year from the date of purchase. Expected future product
warranty expense is recorded when the product is sold.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of the foreign subsidiary are translated at the
exchange rates as of the balance sheet dates; equity accounts are
translated at historical exchange rates. Revenues and expenses are
translated at the average exchange rates for the periods presented.
Translation gains and losses are included in stockholders' equity.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
29
<PAGE> 30
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(2) CONTINUED
STOCK OPTIONS
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, and has elected to continue to apply the intrinsic value
method under Accounting Principles Board (APB) No. 25, Accounting for
Stock Issued to Employees to account for stock-based employee
compensation. Under this method, compensation cost is recognized for
awards of shares of common stock to employees under compensatory plans
only if the quoted market price of the stock at the grant date (or other
measurement date, if later) is greater than the amount the employee must
pay to acquire the stock. SFAS No. 123 permits companies to adopt a new
fair value based method to account for stock-based employee compensation
plans or to continue using the intrinsic value method. If the intrinsic
value method is used, information concerning the pro forma effects on
net earnings and earnings per share of adopting the fair value based
method for stock-based employee compensation grants made in 1995 and
subsequent years is required to be presented in the notes to the
financial statements. The pro forma disclosures are presented in note 14
to the consolidated financial statements.
LOSS PER COMMON SHARE
The loss per common share is computed by dividing the net loss
applicable to common stock, which reflects the preferred stock dividend
requirement for 1994 and 1995, by the weighted average number of shares
of common stock outstanding during the year and common stock
equivalents, to the extent they result in additional per share dilution,
arising from the assumed exercise of outstanding stock options and
warrants under the treasury stock method.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ significantly from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
The carrying value of cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximates fair value due to
the short maturity of these instruments.
(Continued)
30
<PAGE> 31
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(2) CONTINUED
The book value on variable-rate debt approximates fair value due to the
variable interest rate. The Company evaluates the fair value of
fixed-rate debt based upon rates currently available for similar types
of borrowing arrangements. The book value approximates fair value of
these instruments.
SUPPLEMENTARY STATEMENT OF CASH FLOWS INFORMATION
As described in note 3, during 1994 the Company acquired CSI through the
issuance of common stock and Series A Convertible Redeemable Cumulative
Preferred Stock with an aggregate estimated fair value of $1,970,000.
During 1994, as part of the purchase of an automobile, the Company
issued a note payable in the amount of $70,000.
As described in note 3, during 1995 the Company purchased GDS for cash
and the issuance of two promissory notes aggregating $3,853,416.
(3) ACQUISITIONS
Connective Strategies, Inc.
On October 24, 1994, the Company through its wholly-owned subsidiary IRE
Acquisition Corp., ("IREAC") acquired all of the issued and outstanding
capital stock of CSI. The Agreement and Plan of Merger provided for a
share for share stock exchange with all existing CSI shareholders,
resulting in the aggregate issuance of 480,000 shares of the common
stock of the Company. This transaction effectively transferred all
ownership of CSI to the Company and was accounted for under the purchase
accounting method. In addition, the Company issued 65 shares, valued at
$10,000 per share, of its Series A Convertible Redeemable Cumulative
Preferred Stock, which has a dividend rate of 8.75%, in exchange for the
cancellation of a promissory note issued by CSI in the principal amount
of $650,000. As a result of the plan of merger, CSI was merged into
IREAC and IREAC changed its name to Connective Strategies, Inc.
The aggregate net purchase price for CSI was determined as follows:
<TABLE>
<S> <C>
480,000 shares of the Company's common stock (at $2.75 per share) $ 1,320,000
65 shares of Series A Convertible Redeemable Cumulative Preferred Stock 650,000
Signing bonuses paid to two key employees 100,000
Liabilities assumed in excess of assets acquired 2,460,836
Transaction costs 76,386
--------------------------------------------------------------------------------------------------------------------
Net purchase price $ 4,607,222
====================================================================================================================
</TABLE>
(Continued)
31
<PAGE> 32
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(3) CONTINUED
The net purchase price was allocated to the acquired tangible and
intangible assets based upon the relative fair values as follows:
<TABLE>
<S> <C>
Cash $ 143,965
Other current assets 466,026
Equipment 150,578
Computer software development costs 2,564,645
In-process research and development costs 208,052
Signing bonuses to two key employees 100,000
Goodwill 973,956
--------------------------------------------------------------------------
Net purchase price $ 4,607,222
==========================================================================
</TABLE>
The in-process research and development costs and the signing bonuses
were written off immediately following the acquisition and are included
in amortization of acquired intangible assets in the consolidated
statement of operations for the year ended December 31, 1994.
In the past year, the Company has invested in the development of a new
secure communications chip. Due to this new superseding technology,
which does not utilize CSI's ISDN product, the Company no longer markets
its CSI products to new customers. Consequently, the Company has taken a
one-time charge of $2,216,200 related to the write-off of the
unamortized acquired intangible assets from this acquisition. Future CSI
ISDN product sales are not expected to be significant since the products
will only be sold pursuant to commitments to existing customers.
GRETACODER DATA SYSTEMS AG
On October 31, 1995, the Company acquired all of the issued and
outstanding stock of GDS. The Stock Purchase Agreement provided for an
initial cash payment of $431,850 and two promissory notes aggregating
$3,853,416. Such amount is net of a $400,000 payment discount that the
Company received upon payment of the notes in February 1996. This
transaction effectively transferred all ownership of GDS to the Company
and was accounted for under the purchase accounting method.
The aggregate net purchase price for GDS was determined as follows:
<TABLE>
<S> <C>
Cash purchase price $ 431,850
Notes payable 3,853,416
Transaction costs 139,550
-------------------------------------------------------------------
Net purchase price $ 4,424,816
===================================================================
</TABLE>
(Continued)
32
<PAGE> 33
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(3) CONTINUED
The net purchase price was allocated to the acquired tangible and
intangible net assets based upon the relative fair values as follows:
<TABLE>
<S> <C>
Cash $ 131,798
Inventory 2,346,416
Other current assets 1,484,883
Equipment and leasehold improvements 412,986
Deferred tax assets 194,000
Current liabilities (1,368,497)
Goodwill 1,223,230
--------------------------------------------------------------------
Net purchase price $ 4,424,816
====================================================================
</TABLE>
The Company allocated $474,000 of the purchase price to inventory in
excess of the carrying cost of GDS. Of this amount, $238,000 and
$236,000 was charged to cost of revenues in 1995 and 1996, respectively.
Unaudited pro forma results of operations of the Company for the years
ended December 31, 1994 and 1995 presented as if the acquisitions of CSI
and GDS had occurred on January 1 of the respective years are as
follows:
<TABLE>
<CAPTION>
1994 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 13,407,000 13,175,000
------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense $ 50,000 (932,000)
------------------------------------------------------------------------------------------------------
Net loss $ (113,000) (1,122,000)
------------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders $ (243,000) (1,205,000)
------------------------------------------------------------------------------------------------------
Loss per common share $ (.06) (.30)
======================================================================================================
</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 these periods. The amounts primarily
reflect adjustments for the amortization of intangible assets acquired
and for interest expense. The write-off of in-process research and
development costs and signing bonuses has been excluded in the
determination of the 1994 pro forma amounts since such charges are
non-recurring. The pro forma net losses for 1994 and 1995 included
non-cash charges related to depreciation and amortization of acquired
intangible assets of $1,387,000 and $1,442,000, respectively.
(Continued)
33
<PAGE> 34
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(4) REVENUES AND ACCOUNTS RECEIVABLE
During the three years ended December 31, 1996, revenues from two
commercial clients accounted for greater than 10% of annual revenues as
follows: one client accounted for 11% of 1994 revenues and one client
accounted for 13% of 1995 revenues and 27% of 1996 revenues. In addition
revenues from the United States Government were 26%, 20% and 3% of
revenues in the years ended December 31, 1994, 1995 and 1996,
respectively. During the three years ended December 31, 1996, revenues
from non-U.S. clients were 14%, 34% and 47%, respectively. The majority
of these revenues were derived from European distributors and financial
institutions.
Revenues include contract engineering revenues of $379,255 and $721,105
in the years ended December 31, 1994 and 1995, respectively. Costs of
revenues includes costs applicable to such revenues of $146,212 and
$362,109, respectively. There were no revenues from contract engineering
in 1996.
The Company grants credit to clients. Sales terms with clients,
including distributors, generally do not provide for right of return
privileges for credit, refund or other products. The Company's clients,
which include both commercial companies and governmental agencies, are
in various industries, including banking, security, communications and
distributors of electronic products. Management believes all receivables
are collectible and, accordingly, no reserve for uncollectible
receivables is recorded at December 31, 1996.
(5) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,736,884 1,451,142
Finished goods 603,284 2,092,853
-------------------------------------------------------------------------------
$ 2,340,168 3,543,995
==============================================================================
</TABLE>
(Continued)
34
<PAGE> 35
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(6) EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 1,106,395 1,873,815
Automobiles 88,519 87,636
Leasehold improvements 333,800 629,252
-------------------------------------------------------------------------------------------------------------------------
1,528,714 2,590,703
Less accumulated depreciation and amortization 458,922 847,076
-------------------------------------------------------------------------------------------------------------------------
1,069,792 1,743,627
Purchased software, net -- 99,098
-------------------------------------------------------------------------------------------------------------------------
$ 1,069,792 1,842,725
=========================================================================================================================
</TABLE>
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued salaries and commissions $ 859,043 694,412
Other 658,470 622,977
------------------------------------------------------------------------------------------------
$ 1,517,513 1,317,389
================================================================================================
</TABLE>
(8) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrowings outstanding under a $300,000 line of credit agreement with a
bank bearing interest at the prime rate plus 1% (9.5% at
December 31, 1995) secured by trade accounts receivable of
$1,791,299 at December 31, 1995 $ 200,000 --
Notes payable in connection with GDS acquisition bearing interest at
the prime rate plus 1% (9.5% at December 31, 1995), net of
$400,000 discount 3,853,416 --
-------------------------------------------------------------------------------------------------------------------------
$ 4,053,416 --
=========================================================================================================================
</TABLE>
(Continued)
35
<PAGE> 36
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(9) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to bank bearing interest at the prime rate plus 1.25%
(9.75% at December 31, 1995) and requiring monthly
principal payments plus interest through February 1, 1997 $ 64,076 --
Note payable to finance company bearing interest at 8.95% and
requiring monthly payments of principal and interest of $1,740
through October 1998 52,093 35,190
-------------------------------------------------------------------------------------------------------------------------
116,169 35,190
Less current maturities 68,787 18,480
-------------------------------------------------------------------------------------------------------------------------
$ 47,382 16,710
=========================================================================================================================
</TABLE>
The notes payable are secured by office equipment and an automobile
having a net carrying value of $500,111 at December 31, 1995 and an
automobile having a net carrying value of $59,558 at December 31, 1996.
Aggregate annual maturities on long-term debt as of December 31, 1996
are $18,480 for 1997 and $16,710 for 1998.
(10) STOCKHOLDERS' EQUITY
The 9% convertible redeemable cumulative preferred stock (the "9%
preferred stock") required cumulative dividends of $.90 per share
payable semiannually. Holders of the 9% preferred stock converted 8,761
and 74,586 shares of such stock into common stock of the Company during
the years ended December 31, 1994 and 1995, respectively. The remaining
500 shares of 9% preferred stock were redeemed for cash on June 30,
1995.
In connection with the offering of the 9% preferred stock, the Company
issued the underwriter warrants to purchase 66,000 shares of common
stock at $4.675 per share. The warrants were exercised in June 1995. The
Company received proceeds from the exercise of $285,243, net of offering
expenses.
In connection with the acquisition of CSI (note 3), the Company issued
65 shares of Series A Convertible Redeemable Cumulative Preferred Stock
(the "Series A preferred stock") valued at $10,000 per share. The Series
A preferred stock required cumulative dividends payable semiannually at
an annual rate of 8.75%. On December 5, 1995, the 65 shares of the
Series A preferred stock were converted for 65,000 shares of common
stock.
(Continued)
36
<PAGE> 37
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(10) CONTINUED
On July 7, 1995, the Company effected a two-for-one stock split in the
form of a dividend to stockholders. Numbers of shares disclosed herein
and per share data have been retroactively adjusted to reflect the stock
split for all periods presented.
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
of the Company from the offering were approximately $21,035,000 after
deducting offering expenses.
(11) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (172,700) (29,000) --
State (28,000) (5,300) --
Foreign -- 9,000 --
-----------------------------------------------------------------------------------------------------
(200,700) (25,300) --
-----------------------------------------------------------------------------------------------------
Deferred:
Federal 22,700 19,700 --
State 5,000 1,600 --
Foreign -- 194,000 --
-----------------------------------------------------------------------------------------------------
27,700 215,300 --
-----------------------------------------------------------------------------------------------------
$ (173,000) 190,000 --
=====================================================================================================
</TABLE>
(Continued)
37
<PAGE> 38
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(11) CONTINUED
The income tax expense (benefit) differed from the amount computed by
applying the Federal income tax rate of 34 percent to loss before income
tax expense (benefit) as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (302,091) (171,785) (2,408,747)
Increase (reduction) in income taxes resulting from:
State and local income taxes,
net of Federal income tax benefit (15,180) (2,442) (190,026)
Amortization of acquired intangible assets,
not deductible for tax purposes 119,650 214,423 249,099
Write-off of unamortized acquired intangible assets
from the Connective Strategies, Inc. acquisition
not deductible for tax purposes -- -- 753,508
Income tax benefit of tax free interest (22,874) -- --
Foreign income taxes at rates less than 34% -- (72,950) --
Change in valuation allowance -- 169,500 1,774,500
Other, net 47,495 53,254 (178,334)
---------------------------------------------------------------------------------------------------------------------------
$ (173,000) 190,000 --
============================================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below at December 31:
<TABLE>
<CAPTION>
1995 1996
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Inventories, due to additional costs inventoried for tax
purposes pursuant to the Tax Reform Act of 1986 $ 33,900 67,000
Net operating loss carryforward 157,000 1,906,000
Other 17,700 18,000
----------------------------------------------------------------------------------------------------------------------------
208,600 1,991,000
----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Equipment, due to differences in depreciation (28,600) (22,000)
Other (10,500) (25,000)
----------------------------------------------------------------------------------------------------------------------------
(39,100) (47,000)
----------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset 169,500 1,944,000
Less valuation allowance (169,500) (1,944,000)
----------------------------------------------------------------------------------------------------------------------------
$ -- --
=============================================================================================================================
</TABLE>
(Continued)
38
<PAGE> 39
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(11) CONTINUED
The Company has net operating loss carryforwards for United States
income tax purposes of $4,935,000 which are available to reduce future
taxable income through 2011. In addition, the Company has a net
operating loss of $1,754,000 which is attributable to CSI's
preacquisition period and is available to reduce future taxable income
of CSI at the rate of approximately $124,000 per year and expires in
various amounts through 2008.
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 on the generation of future
taxable income during the periods in which temporary differences are
deductible and net operating losses are allowable. Based on
consideration of the above factors management established a valuation
allowance for which the balance was $169,500 and $1,944,000 at December
31, 1995 and 1996, respectively.
The Company has not provided any additional U.S. income taxes on the GDS
taxable income since management does not expect to repatriate such
earnings.
(12) LEASES
The Company leases office facilities and equipment leases expiring at
various dates through 2003. The leases require the Company to pay real
estate taxes, insurance and maintenance. The Company recognizes rent
expense on a straight-line basis. The annual minimum rentals under the
leases as of December 31, 1996 are as follows:
1997 $ 542,236
1998 206,506
1999 216,573
2000 194,545
2001 194,545
Thereafter 328,480
===================================================================
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$120,897, $184,224 and $518,177, respectively.
(13) PENSION PLAN
The Company has a defined contribution pension plan for employees who
have completed three months of service with the Company. The Plan
permits pre-tax contributions to the Plan by participants pursuant to
Section 401(k) of the Internal
(Continued)
39
<PAGE> 40
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(13) CONTINUED
Revenue Code (the Code) of 3% to 10% of base compensation up to the
maximum allowable contributions as determined by the Code. The Company
matches participants' contributions on a discretionary basis. The
Company may also make additional discretionary contributions. The
Company made no contributions to the plan during the three years ended
December 31, 1996.
(14) STOCK OPTIONS AND WARRANTS
The Company has an incentive stock option plan which provides for the
granting of stock options to officers, directors, consultants and key
employees of the Company. Options issued pursuant to the plan are
exercisable at the fair market value of the common stock on the date of
the issuance of the option. Either incentive stock options or qualified
stock options may be granted under the plan. The vesting and exercise
periods are determined by the Board of Directors not to exceed ten
years. Options issued to date generally vest 20% per year commencing
with dates of employment or dates of grant and expire seven years from
date of grant.
Option transactions during 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Number Range of Weighted average
of shares exercise prices exercise price
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 76,100 $ 1.30 to $5.25 $ 3.54
Granted 65,000 $ 0.10 to $4.75 3.82
Canceled (27,900) $ 1.30 to $4.94 5.20
Exercised (600) $ 1.30 1.30
------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 112,600 $ 0.10 to $5.25 3.22
Granted 151,000 $ 7.25 to $17.00 4.06
Canceled (9,700) $ 4.50 to $13.50 7.48
Exercised (300) $ 4.94 4.94
------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 253,600 $ 0.10 to $17.00 9.54
Granted 393,000 $ 9.88 to $28.63 18.45
Canceled (37,200) $ 1.30 to $17.00 12.85
Exercised (40,800) $ 0.10 to $13.50 4.46
------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 568,600 $ 1.30 to $28.63 $ 15.92
========================================================================================================================
Exercisable at December 31, 1996 78,800 $ 1.30 to $17.00 $ 9.42
========================================================================================================================
</TABLE>
(Continued)
40
<PAGE> 41
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(14) CONTINUED
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- ------------------------------
Weighted average
Range of Number remaining Weighted average Number Weighted average
exercise prices of shares contractual life exercise price of shares exercise price
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.30 to $9.88 105,300 4.97 years $ 5.90 35,100 $ 3.54
$10.00 to $20.00 285,300 5.88 years 14.55 43,700 14.14
$20.38 to $28.63 178,000 6.32 years 24.02 -- --
---------------------------------------------------------------------------------------------------------------------------
568,600 5.85 years $ 15.92 78,800 $ 9.42
===========================================================================================================================
</TABLE>
The Company applies the intrinsic value method in accounting for its
Plan and, accordingly, no compensation cost has been recognized for its
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss and per share
amounts would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss As reported $ (695,251) (7,084,550)
Pro forma (760,000) (7,578,000)
Loss per common share As reported (.20) (1.34)
Pro forma (.22) (1.43)
=============================================================================================================================
</TABLE>
Pursuant to SFAS No. 123, pro forma net loss reflects only options
granted in 1995 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected
in the pro forma net loss amounts presented above because compensation
cost if reflected over the option's vesting periods and compensation
cost for options granted prior to January 1, 1995 is not considered.
The weighted average fair values of options granted during 1995 and 1996
were $806,000 and $2,453,000, respectively, on the dates of grant. The
fair values of options granted were calculated using the Black-Scholes
option-pricing model with the following weighted average assumptions
used for grants in 1995 and 1996, respectively: risk-free interest rates
of 5.83% to 6.76% for 1995 and 5.25% to 6.78% for 1996; expected
votality of 32% in both years; dividend yield and expected dividend
growth rate of 0% in both years; and expected lives of 5 years and
expected forfeitures of 0% for both years.
In addition, in November 1995, in connection with the private placement
of 300,000 shares of the Company's common stock, the Company issued the
placement agent warrants to purchase 30,000 shares of common stock at
$17.00 per share. The warrants are exercisable at any time during a
four-year period commencing on January 29, 1997.
(Continued)
41
<PAGE> 42
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(14) CONTINUED
The price and number of shares is subject to adjustment in certain
circumstances to protect against dilution. Holders of the warrants are
not entitled to vote, receive dividends or exercise any of the rights of
holders of shares of common stock for any purpose until such warrants
are exercised.
At December 31, 1996, the Company had reserved 983,900 shares of common
stock for the stock option plan and conversion of outstanding warrants.
(15) LITIGATION
In June 1994, a former employee of Industrial Resource Engineering,
Inc., a predecessor firm to the Company, commenced an action against the
Company in the Circuit Court for Baltimore County by filing a complaint
for a declaratory judgment and other relief with respect to the
ownership of 72,000 shares of the Company's common stock (as presently
constituted), which she claims was issued to her in consideration of
services performed in 1986.
In August 1995 the Company settled the litigation. Pursuant to the terms
of the settlement, the Company released 63,625 shares of the Company's
common stock owned by the plaintiff and retired the balance of the
plaintiff's shares retroactive to date of issue. Since the 72,000 shares
have, at all times prior to the settlement, been reflected on the
consolidated balance sheet as being issued and outstanding, the effect
on earnings per shares is minimal.
(16) OTHER COMMITMENTS AND CONTINGENCIES
In August 1996, the Company signed a joint development and marketing
agreement ("agreement") with CyberGuard Corporation ("CyberGuard"). The
companies have developed and intend to market a product that combines
the Company's SafeNet products and CyberGuard's Firewall product. In
connection therewith, the Company has prepaid a refundable $1.0 million
license fee to CyberGuard which will be recovered through purchases of
Firewall products. In the event that this agreement is terminated prior
to such credit aggregating $1.0 million, then CyberGuard shall repay to
the Company the balance of the $1.0 million prepaid license fee within
one year of the date of such termination with interest at the prime rate
of interest.
(Continued)
42
<PAGE> 43
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
===============================================================================
(17) OPERATIONS OUTSIDE THE UNITED STATES
Net income (loss) of the Company's non-U.S. subsidiary was $403,769 and
$(298,872) for 1995 and 1996, respectively. Net sales to unaffiliated
customers of the Company's non-U.S. subsidiary were $2,295,843 and
$6,235,987 for 1995 and 1996, respectively.
The Company's investment in identifiable assets and liabilities located
outside the United States was as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 4,405,063 4,002,221
Property, plant and equipment, net 414,968 190,187
------------------------------------------------------------------------------
Total assets 4,820,031 4,192,408
Current liabilities 1,220,648 1,257,190
------------------------------------------------------------------------------
Net assets $ 3,599,383 2,935,218
==============================================================================
</TABLE>
===============================================================================
43
<PAGE> 44
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------ --- -----------------------------------------------
<S> <C> <C>
Anthony A. Caputo 55 Chairman, Chief Executive Officer and President
Charles D. Brown 39 Senior Vice President, Sales
Michael M. Kaplan 52 Senior Vice President, Technology
Jill Leukhardt 40 Senior Vice President, Marketing, Director
David A. Skalitzky 61 Vice President of Finance and Administration,
Secretary and Treasurer
Douglas E. Kozlay 57 Principal Engineer, Director
Ira A. Hunt, Jr 72 Director
Bruce R. Thaw 43 Director
</TABLE>
All directors hold office until the next annual meeting of
shareholders or until their respective successors are elected and qualify.
Executive officers hold office until their successors are chosen and qualify,
subject to earlier removal by the Board of Directors. Set forth below is a
biographical description of each director and executive officer of the Company
based on information supplied by each of them.
Anthony A. Caputo, the Chairman, Chief Executive Officer and President
of the Company, invested in the Company in 1986, and became a director in
November 1986. In 1982, Mr. Caputo founded another computer security firm, TACT
Technology, as a division of a public company, and after securing outside
funding through a $3.0 million limited partnership in 1984, managed TACT as a
separate company. Mr. Caputo resigned from TACT Technology in November 1986 to
join the Company. Mr. Caputo has over 20 years' experience in the computer
industry, in marketing and management capacities. In June 1993, Mr. Caputo was
named Maryland's High Tech Entrepreneur of the Year, an annual award sponsored
by organizations including Inc. Magazine, Ernst and Young LLP and Merrill
Lynch. He has served as an officer of several publicly traded companies
including International Mobile Machines Inc., and Comshare, Inc., as well as
Value Software, now part of Computer Associates, Inc. Currently, Mr. Caputo is
also a director of Egan Systems, Inc., a publicly traded computer software
firm.
Charles D. Brown joined the Company in September 1995 in connection
with the Company's acquisition of CSI and became a Senior Vice President, Sales
of the Company in June 1995. From 1983 to 1995 he was the President and CEO of
CSI where he developed product concepts for CSI's range of ISDN products. With
19 years' experience in data networking, Mr. Brown is a recognized expert in
network technology. He has lectured on LANs for INTEROP, Inc., TCP/IP for
COMNET, has taught privately at IBM and AT&T Bell Laboratories and has served
as a Local Area Network Program Director for Data-Tech Institute. Prior to
forming CSI, Mr. Brown was the Manager of Network Development for the MCI Mail
national network. Previously he was the liaison for the University of Southern
California -- Information Sciences Institute to organizations in Washington,
D.C. and the Strategic Air Command.
44
<PAGE> 45
Michael M. Kaplan joined the Company in February 1996 as Senior Vice President,
Technology. Formerly the Director of Secure Technologies at AT&T Bell
Laboratories, Mr. Kaplan led the design, development and support of AT&T's
security products for voice, data, fax and video applications. Mr. Kaplan was
employed at AT&T Bell Labs for twenty-seven years and holds a Master of Science
in Mathematics from Adelphi University and a Bachelor of Arts in Mathematics
from Queens College. Mr. Kaplan holds four patents for various aspects of
telephone security devices and associated services and there are two additional
patents pending.
Jill Leukhardt has been a Senior Vice President, Marketing of the
Company since June 1995. She served as the Vice President of Sales and
Marketing of the Company from 1989 to 1995. She was appointed a director of the
Company in December, 1990. Ms. Leukhardt possesses a graduate level degree in
Electrical Engineering. From 1980 to 1986, Ms. Leukhardt was a Marketing
Manager at Intel Corporation where she managed several projects including the
planning, specification and initial marketing of the 80386 microprocessor.
Prior to joining the Company, from 1986 to 1989, she served as Vice
President-Marketing for Micro Wholesalers, Inc., a microcomputer distributor.
She has also served as a Trustee of Johns Hopkins University since July 1992.
David A. Skalitzky has been the Vice President of Finance and
Administration of the Company since 1989. Mr. Skalitzky was appointed Secretary
and Treasurer of the Company in March 1993 and December 1990, respectively.
From 1983 to 1989, he was an independent financial consultant. From 1968 to
1983, he was employed by PHH Group, a public company engaged in executive
relocation and leasing where he served as a financial officer. Previously, from
1959 to 1968 Mr. Skalitzky, a Certified Public Accountant, was employed by
Deloitte, Haskins and Sells.
Douglas E. Kozlay is the co-founder, and was President, of the Company
from 1983 until March 1993. Mr. Kozlay's principal responsibilities include
serving as the Company's chief technical officer providing guidance and advice
on product architecture to the Chief Executive Officer and performing
engineering functions as required. Mr. Kozlay has been a director of the
Company since its inception. From 1979 to 1982 Mr. Kozlay served as President
of EMAX, Inc., a company which designed and marketed data acquisition and
control systems. Previously, Mr. Kozlay has served as a manager of a research
and development laboratory for the U.S. National Security Agency and design
engineer for IBM Corporation. In 1982 Mr. Kozlay was Director of Industrial
Automation for EMC Controls. He currently teaches graduate level courses in
robotics at Loyola College of Baltimore.
Ira A. Hunt, Jr. has been a director of the Company since December
1990. He is currently President of BIOSAT, a small technology firm which
utilizes satellite data to monitor the status of agricultural crops worldwide.
Mr. Hunt is a graduate of the U.S. Military Academy, West Point, New York. He
served 33 years in various command and staff positions in the U.S. Army,
retiring from active military service as a Major General in 1978. Subsequently
he was President of Pacific Architects and Engineers in Los Angeles, California
and a Vice President of Frank E. Basil, Inc. in Washington, D.C. Mr. Hunt has a
Masters of Science degree in civil engineering from the Massachusetts Institute
of Technology; an MBA from the University of Detroit; a Doctor of the
University degree from the University of Grenoble, France; and a Doctor of
Business Administration degree from George Washington University.
Bruce R. Thaw has been a director of the Company since December 1990.
From 1987 to the present, Mr. Thaw has served as general counsel to the
Company. Mr. Thaw was admitted to the bar of the State of New York in 1978 and
the California State Bar in 1983. Mr. Thaw is also a director of Amtech
Systems, Inc., a publicly traded company engaged in the semiconductor industry.
The Company's By-Laws provide for the election of directors at the
annual meeting of shareholders, such directors to hold office until the next
annual meeting and until their successors are duly elected and qualified. The
By-Laws also provide that the annual meeting of shareholders be held each year
at such time, date and place as the Board of Directors shall determine by
resolution. Directors may be removed at any time for cause by the Board of
Directors and with or without cause by a majority of the votes cast by the
shareholders entitled to vote for the election of directors.
45
<PAGE> 46
Officers will normally be elected at the annual meeting of the Board
of Directors held immediately following the annual meeting of shareholders, to
hold office for the term for which elected and until their successors are duly
elected and qualified. Officers may be removed by the Board of Directors at
any time with or without cause.
In January 1997, the Company announced the formation of an advisory
board chaired by former United States Treasury Secretary William E. Simon.
Developed to assist in building shareholder value by managing and maintaining
Company expansion, the Company expects to add additional high-caliber
executives to its board. Subsequently, the Company announced the addition of
Dr. Vinton G. Cerf, MCI's Senior Vice President of Internet Architecture and
Daniel L. Mosley, a partner in the law firm of Cravath, Swaine & Moore, to the
board.
The Company's Certificate of Incorporation contains provisions
indemnifying its officers, directors, employees and agents against certain
liabilities.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the definitive Proxy Statement the Company will be filed with the
Securities and Exchange Commission, no later than 120 days after the close of
the Company's fiscal year ended December 31, 1996.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the definitive Proxy Statement the Company will be filed with the
Securities and Exchange Commission, no later than 120 days after the close of
the Company's fiscal year ended December 31, 1996.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the definitive Proxy Statement the Company will be filed with the
Securities and Exchange Commission, no later than 120 days after the close of
the Company's fiscal year ended December 31, 1996.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 1. The financial statements filed as part of this report are listed separately on the Index To
Financial Statements on page 19 of this Form.
2. Financial Statement Schedules: None
(b) Reports on Form 8-K: None
(c) Exhibits required by Item 601 of Regulation S-K:
3A Articles of Incorporation of Registrant, as filed with the Secretary of State of
Delaware on November 1, 1988, as amended on March 6, 1989, May 19, 1989, September 22,
1992, June 30, 1995 and October 4, 1995 1/B/R(1)
3B By-laws of Registrant 1/B/R(2)
4 Specimen of Common Stock Certificate of Registrant 1/B/R(2)
10A Sublease dated November 2, 1993 for facility at 8029 Corporate Drive, Baltimore, Md. 1/B/R(3)
10B Stock Option Plan 1/B/R(4)
10C Employment Agreement with Douglas Kozlay 1/B/R(2)
10D Form Employee Non-Disclosure Agreement 1/B/R(2)
10E Award Contract with United States Department of the Treasury 1/B/R(4)
10F Agreement with GTE Government Systems Corporation 1/B/R(5)
10G Agreement and Plan of Merger dated September 30, 1995 with Connective Strategies, Inc. 1/B/R(6)
10H Employment Agreement with Charles D. Brown 1/B/R(7)
10I Agreement between the Registrant and AT&T International, Inc. for the acquisition of
Gretag Data Systems AG 1/B/R(8)
10J Agreement between the Registrant and MCI Telecommunications Corporation 1/B/R(9)
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C>
10K Employment Agreement between GDS and Dr. Kurt H. Mueller 1/B/R(1)
10L Placement Agent Warrant 1/B/R(1)
10M Alliance and Joint Marketing Agreement between the Registrant and MCI Telecommunications
Corporation
10N Joint Development and Marketing Agreement between the Registrant and CyberGuard
Corporation
10O Employment Agreement with Anthony Caputo
11 Statement re computation of per share loss
21 Subsidiaries of Registrant
27 Financial Data Schedule
- --------------
</TABLE>
(1) Filed as an exhibit to the Registration Statement on Form SB-2 (File
No. 33-80161) of the Registrant and incorporated herein by reference.
(2) Filed as an exhibit to the Registration Statement on Form S-18 (File
No. 33-28673) of the Registrant and incorporated herein by reference.
(3) Filed as an exhibit to Form 10-KSB for the fiscal year ended December
31, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to the Registration Statement on Form S-1 (File
No. 33-52066) of the Registrant and incorporated herein by reference.
(5) Filed as an exhibit to Form 10-KSB for the fiscal year ended December
31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to Form 8-K, dated October 24, 1995 and
incorporated herein by reference.
(7) Filed as an exhibit to Form 10-QSB for the quarterly period ended June
30, 1995 and incorporated herein by reference.
(8) Filed as an exhibit to Form 8-K dated October 31, 1995 and
incorporated herein by reference.
(9) Filed as an exhibit to Form 10-QSB for the quarterly period ended
September 30, 1995 and incorporated herein by reference.
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized.
INFORMATION RESOURCE ENGINEERING, INC.
By: /s/ ANTHONY A. CAPUTO
-----------------------------------------------
Anthony A. Caputo
Chairman, Chief Executive Officer and President
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANTHONY A. CAPUTO Chairman, Chief Executive Officer March 28, 1997
- ------------------------------------- and President
Anthony A. Caputo
Senior Vice President, Marketing, Director March 28, 1997
- -------------------------------------
Jill L. Leukhardt
/s/ DAVID A. SKALITZKY Vice President of Finance and March 28, 1997
- ------------------------------------- Administration, Secretary and Treasurer
David A. Skalitzky (Principal Financial and Accounting
Officer)
/s/ DOUGLAS E. KOZLAY Director March 28, 1997
- -------------------------------------
Douglas E. Kozlay
/s/ IRA A. HUNT, JR. Director March 28, 1997
- -------------------------------------
Ira A. Hunt, Jr.
/s/ BRUCE R. THAW Director March 28, 1997
- -------------------------------------
Bruce R. Thaw
</TABLE>
48
<PAGE> 1
EXHIBIT 10M
ALLIANCE AND JOINT MARKETING AGREEMENT
This Alliance and Joint Marketing Agreement ("Agreement"), between MCI
Telecommunications Corporation ("MCI"), a Delaware Corporation, with offices at
2100 Reston Parkway, Reston VA 22091, and Information Resource Engineering
Incorporated ("IRE"), a Delaware Corporation with offices at 8029 Corporate
Drive, Baltimore, MD 21236, is made and effective on the date of the second
signature affixed hereto.
WITNESSETH:
WHEREAS, MCI and IRE desire to establish terms to govern a cooperative
program ("Program") under which MCI and IRE may jointly market certain MCI and
IRE products and services to third parties ("Customer(s)").
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and commitments set forth below the parties agree as follows:
1. Programs, Products and Services
(a) Attachment A will govern sales activity under the Program. Attachment
A identifies the IRE products or services that are included initially
in the Program. MCI and IRE may by joint agreement modify the pricing
discounts or the list of its products or services included in the
Program. For IRE products sold under the Program, IRE will provide its
products and services to all qualified Customers (as defined in
Attachment A) at the pricing discounts identified therein.
(b) Attachment B identifies the MCI services that are included initially
in the Program. For MCI services sold under the Program MCI will offer
the price discounts identified in Attachment B.
(c) Attachment C establishes terms and conditions applicable to the IRE
products previously purchased by MCI, but which IRE may repurchase
pursuant to this Agreement.
(d) The parties agree to promote, market, and advertise the existence and
use of this IRE/MCI joint selling alliance to their respective sales
forces. The parties also agree to promptly enter into good faith
negotiations for completion of a contract governing IRE's provision of
key management services through its SafeNet Security Center. For the
term of this Agreement, MCI agrees to use its reasonable efforts to
maintain an impartial position when prospects for services offered by
MCI through the Alliance Program express no preference for services
offered by a particular alliance partner.
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2. Customer Relationships
Post-sale Customers, unless otherwise agreed on an individual case basis,
will have a direct relationship with MCI and IRE, for their respective
services and goods.
3. Order Entry
Unless otherwise agreed by the parties:
(a) MCI will provide order entry capability for MCI services offered in the
Program; and
(b) IRE will provide order entry capability for the IRE products and
services offered in the Program.
4. MCI Products and Services Standards
MCI will provide MCI services, and act as the Agent for foreign PTT
services under the Program in accordance with its then-effective
international agreements, unless otherwise agreed with a Customer.
5. IRE Products and Service Standards
IRE will make its products available to Customers under the Program in
accordance with Attachment A unless otherwise agreed with the Customer or
MCI. IRE shall be exclusively responsible for establishing all terms and
conditions, consistent with this Agreement, applicable to the sale of its
products or services to Customers, including but not limited to all
applicable warranty, maintenance, support, service and return policy
requirements associated therewith. MCI shall not be considered a party to
this vendor/vendee relationship, and all obligations arising out of the
sale of IRE's products and services to Customers shall be satisfied solely
and exclusively by IRE. IRE agrees and warrants that all products and
services under this Program will comply with any and all applicable laws
and regulations of all applicable jurisdictions.
6. Program Management
The parties will each appoint a Program Manager. The Program Managers will
meet regularly during initial implementation of the Program. After initial
implementation, the Program Managers will meet quarterly to update
forecasts, improve Program management, and review strategy and Program
performance in accordance with Attachment A.
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7. Training
The parties will provide sales training at no charge for their respective
management, support, sales, and engineering personnel. This training will
be developed and reviewed jointly and may be modified from time to time by
mutual agreement.
8. Term and Termination
This Agreement shall commence on the effective date and shall terminate on
its third anniversary, unless earlier terminated as provided below or
extended by mutual agreement. Either party may terminate this Agreement on
thirty (30) day's written notice to the other party. Termination shall have
the effect of terminating the parties' obligations to continue any joint
marketing activity hereunder. Customer contracts for provision of products
and services that are in effect prior to the date of this Agreement's
termination will be unaffected by a termination. Prior to the effective
date of this Agreement's expiration and pursuant to notice, the parties
will in good faith attempt to negotiate an appropriate transition for any
joint sales activities underway prior the termination. Neither party shall
have any obligation or liability to the other or to any third party by
reason of the rightful termination or expiration of this Agreement.
Notwithstanding anything to the contrary in this Agreement, Section 1 of
Attachment A, including but not limited to IRE's right to purchase product
from MCI inventory, shall survive termination of this Agreement.
9. Confidentiality
The parties use and disclosure of proprietary information shall be subject
to the terms of the Nondisclosure Agreement, executed by the parties and
attached hereto as Attachment D. Information which is disclosed orally in a
manner which makes it apparent that it is proprietary or confidential,
shall be deemed to have been delivered in writing and labeled as
proprietary or confidential. The terms of this provision shall survive
termination of this Agreement.
10. Trademarks
Nothing in this Agreement shall be construed to grant either party any
rights or license in or to the other party's trademarks, service marks,
logos and other proprietary marks ("Trademarks") other than as set forth
herein. Neither party shall use the name, trademarks, trade names or
service marks of the other party in any advertisement, promotional
statement, sales literature or any other form of publicity or marketing
without the prior written approval of the other party. The terms of this
provision shall survive termination of this Agreement. MCI hereby
acknowledges that it retains no right in or to the SafeNet trademark.
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11. Indemnification
Subject to the limitations contained in Article 14, MCI shall indemnify,
protect and save harmless IRE, its affiliates and subsidiaries from and
against any and all loss, liability, damage and expense, including
reasonable attorneys' fees arising out of and to the extent any third party
demand, claim, or suit for personal injury, including death, or damage to
tangible property arising or related to the MCI's negligent acts or
omissions in performing its obligations under this agreement. IRE shall
give MCI prompt notice of any such claim and MCI shall have the sole
authority to defend or settle any and all claims arising under this
section. MCI shall not be liable for any settlements or compromises unless
MCI has approved such settlements or compromises in advance or the defense
of the claims has been tendered to MCI and it failed to promptly undertake
the defense.
Subject to the limitations contained in Article 14, IRE shall indemnify,
protect and save harmless MCI, its affiliates and subsidiaries from and
against any and all loss, liability, damage and expense, including
reasonable attorney's fees arising out of and to the extent any third party
demand, claim, or suit for personal injury, including death, or damage to
tangible property arising or related solely to IRE's negligent acts or
omissions in performing its obligations under this agreement. MCI shall
give IRE prompt notice of any such claim and IRE shall have the sole
authority to defend or settle any and all claims arising under this
section. IRE shall not be liable for any settlements or compromises unless
IRE has approved such settlements or compromises in advance or the defense
of the claims has been tendered to IRE and it failed to promptly undertake
the defense.
12. Relationship of the Parties
This Agreement is not intended to be, nor shall it be construed as, a joint
venture, association, partnership, franchise or other form of business
relationship. Neither party shall have nor hold itself out as having any
right or power or authority to assume, create, or incur any expense,
liability or obligation, expressed or implied, on behalf of the other
party, except as expressly provided herein. Nothing in this Agreement shall
prevent either MCI or IRE from entering into another agreement with a third
party or any other joint marketing programs with a third party. Except as
expressly agreed, each party shall bear its own costs and expenses incurred
under or in conjunction with its performance of obligation contained in
this Agreement.
13. Notices
All notices, demands or consents required or permitted hereunder shall be
in writing and shall be delivered, sent by facsimile (with confirmation
copy by mail) or telex, or mailed to the respective party's at the
addresses first set forth in the first paragraph of this Agreement or at
such other address as shall have been given to the other
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party in writing for the purposes of this clause. Such notices and other
communications shall be deemed effective upon the earliest to occur of (i)
actual delivery, (ii) five (5) days after mailing, addressed and postage
prepaid, returned receipt requested, as aforesaid, or (iii) one (1)
business day after transmission by telex, telegram or facsimile where
receipt has been confirmed by the same type of transmission or in writing
received by the sender.
If to MCI: ATTN: Howard Hempenius
CC: MCI General Counsel
1133 19th Street NW
Washington, DC 20036
If to IRE: ATTN: Jill Leukhardt
CC: Bruce Thaw
IRE General Counsel
45 Banfi Plaza
Farmingdale, N.Y. 11735
14. Limitation on Liability
Neither party shall be liable to the other for indirect, incidental,
consequential, reliance, exemplary or special damages, including without
limitation lost profits, regardless of the form of action. Terms of this
provision shall survive termination of this Agreement.
15. Arbitration
Any dispute or disagreement arising between the parties in connection with
this Agreement, which is not settled to the mutual satisfaction of the
parties within thirty (30) days (or such longer period as may be mutually
agreed upon) from the date that either party informs the other in writing
that such dispute or disagreement exists, shall be settled by arbitration
in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures,
as amended by this Agreement. The cost of the arbitration, including the
fees and expenses of the arbitrator(s), will be shared equally by the
parties unless the award otherwise provides. Each party shall bear the cost
of preparing and presenting its case. The parties agree that this
provision and the arbitrator's authority to grant relief shall be subject
to the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the
provisions of this Agreement, and the ABA-AAA Code of Ethics for
Arbitrators in Commercial Disputes. The parties agree that the
arbitrator(s) shall have no power or authority to make awards or issue
orders of any kind except as expressly permitted by this Agreement, and in
no event shall the
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arbitrator(s) have the authority to make any award that provides for
punitive or exemplary damages. The decision of the arbitrator(s) shall
follow the plain meaning of the relevant documents, and shall be final
and binding upon the parties. The award may be confirmed and enforced in
any court of competent jurisdiction. All post-award proceedings shall be
governed by the USAA.
16. Assignment
Neither this Agreement nor any of the rights or obligations hereunder may
be assigned, delegated, sublicensed or otherwise transferred by either
party without the written consent of the other party except either party
may at its sole discretion assign, delegate or subcontract performance of
its obligations under this agreement to any other division, subsidiary,
affiliate or successor entity of said party; notwithstanding any such
assignment, the assigning party shall continue to be responsible for
performance of this Agreement in accordance with the terms of this
Agreement unless its responsibility is expressly excused by the other
party.
17. Applicable Laws
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without reference to its choice of law
principles.
18. Publicity
The parties agree to release the press announcement attached hereto as
Attachment E upon execution by both parties of this Agreement. The parties
agree that no other news releases, media statements, or other public
announcements concerning the existence of this Agreement or any of its
terms and conditions or performance obligations of the parties shall be
made without the prior written approval of the other party. Such written
approval, whenever granted, shall expire six months after the date on which
approval was granted, and shall be extended beyond six months only by
express agreement between the Parties.
19. Effect on Prior Agreement
The Parties hereby immediately terminate the Purchase and Maintenance
Agreement ("PM Agreement") between MCI and IRE dated September 22, 1995,
including its Minimum Initial Order provisions (Section VI and Schedule C).
The Parties further agree to release each other from and against all
actions, causes of action, claims, suits, debts, damages judgments, and
demands whatsoever, whether matured or unmatured, whether at law or in
equity, whether before a local, state or federal court or state or federal
administrative agency or commission, whether now known or unknown, that
each party now has or may have had, on behalf of it or any other person or
entity, at any time prior to and including the date of this Agreement or
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hereafter can, shall, or may have or claim to have, arising out of or
relating to termination of the PM Agreement and its Minimum Initial Order
provisions. Attachment C of this Agreement establishes terms and conditions
applicable to the IRE products purchased by MCI pursuant to the PM
Agreement.
20. Miscellaneous
(a) No modification, amendment, supplement to, or waiver of the Agreement
or any of its provisions shall be binding upon the parties hereto
unless made in writing and duly signed by an authorized representative
of the party against whom enforcement thereof is sought. A failure or
delay of either party to this Agreement to enforce any of the
provisions thereof, to exercise any option which is herein provided,
or to require performance of any provision hereof shall in no way be
construed to be a waiver of such provisions.
(b) If any provision of this Agreement shall be declared invalid, illegal,
or unenforceable as a matter of law, then that provision shall be deemed
void and of no effect and the remainder of the Agreement shall survive such
event.
(c) The terms and conditions of any and all attachments thereto as amended
from time to time by mutual written agreement of the parties or in
accordance with the terms of this Agreement, are incorporated herein by
reference and shall constitute part of this agreement as if fully set forth
herein. This Agreement shall be construed or interpreted whenever possible
to avoid conflict between the articles hereof and the Attachments hereto,
provided that if such conflict shall arise, the Articles of this Agreement
shall control.
(d) The headings in this Agreement are for the purpose of reference only
and shall not in any way limit or otherwise affect the meaning or
interpretation of any of the terms hereof.
(e) This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the
same instrument.
(f) IRE agrees to indemnify and to save MCI, its officers, agents,
employees, customers, suppliers, and vendors harmless from any and all
losses, expense, damage, liability, claims or demands either at law or
equity of actual or alleged infringement of any patent, invention, design,
trade secret, trademark or copyright arising from the purchase, use or
offering for sale of products and services provided by IRE under this
Program, except where such infringement or alleged infringement arises by
reason of designs for such materials or articles originally furnished to
IRE by MCI.
(g) IRE shall adhere to U.S. government regulations and requirements for
any exports of cryptographic hardware, software, or services made pursuant
to this
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Agreement. All international or export shipments of IRE's products and
services shall be the responsibility of and controlled by IRE.
21. Entirety of Agreement
This Agreement, together with its Attachments, constitutes the entire
Agreement and supersedes all previous agreements, promises,
representations, understandings, and negotiations between the parties,
whether written or oral, with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
IRE CORPORATION MCI TELECOMMUNICATIONS CORPORATION
/s/ AA CAPUTO /s/ JOHN C. SCARBOROUGH
--------------------- -----------------------
Signature Signature
A A Caputo John C. Scarborough
--------------------- -----------------------
Printed or Typed Name Printed or Typed Name
Chairman Director
--------------------- -----------------------
Title Title
12/16/96 11-13-96
--------------------- -----------------------
Date Date
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<PAGE> 9
IRE-MCI SERVICES AGREEMENT
This Services Agreement ("Agreement"), between MCI Telecommunications
Corporation ("MCI"), a Delaware Corporation, with offices at 2100 Reston
Parkway, Reston VA 22091, and Information Resource Engineering Incorporated
("IRE"), a Delaware Corporation with offices at 8029 Corporate Drive, Baltimore,
MD 21236, is made for the purpose of MCI and its affiliates reselling IRE
services to MCI's Customers and shall be effective on the date of the second
signature affixed.
In consideration of the mutual promises and commitments set forth below the
parties agree as follows:
1. IRE Services
1.1 IRE will provide services in accordance with Attachment A at the prices
listed in Attachment B. IRE represents and warrants that services provided
hereunder will meet generally accepted industry standards for information
security and key management services and will be performed in a prompt and
professional manner. There are no warranties, expressed or implied, of
merchantability, fitness or otherwise, which extend beyond the face of this
Agreement.
IRE will notify MCI if an upgrade is necessary to maintain or improve the
security and/or functionality of the services provided by IRE hereunder.
1.2 System availability for session key generation, recording and tracking as
well as availability for trouble shooting shall be no less than 97%, as
calculated according to Section 2.1.1 of Attachment A.
1.3 Questions and support requests relating to the IRE Services may be made by
either MCI or MCI's Customers. IRE shall be solely responsible for
responding to, and will use its best efforts to resolve, MCI Customer
technical problems and complaints related to or arising from the IRE
services provided hereunder, and in doing so shall comply with the
Trouble-Handling Procedures and Response Times listed in Section 6
Attachment A.
1.4 IRE shall provide a minimum of two back up security centers to the primary
Security Center. One security center will be collocated with the primary
security center at IRE headquarters in Baltimore, Maryland and the other
shall be located in Boston, Massachusetts or some other location more than
500 miles from Baltimore. To respond to emergencies, IRE shall maintain
replacement hardware stored in the same building as the Security Center.
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2. Order Entry and Billing
Orders for IRE services offered hereunder may be placed by either MCI or by
MCI Customers.
The prices listed in Attachment B shall only apply to services provided to
Mellon/Dreyfus, and shall apply for the first year of this Agreement. In
the second year, and each subsequent year, IRE may increase these prices by
no more than 15%. IRE shall notify MCI of any price increase 60 days before
the price increase becomes effective.
No later than the tenth day of each month, IRE shall provide MCI in a
mutually agreed format the number of session keys used by MCI Customers in
the previous month, the number of MCI Customer users during the previous
month, and other services received by MCI Customers. MCI shall pay IRE
invoices for services within 45 days, provided that if an MCI Customer
disputes a bill based on information provided by IRE to MCI, MCI shall have
the right to audit IRE's records for the purpose of resolving such dispute
and may withhold payment to IRE of the disputed amount until the dispute is
resolved between the customer and MCI. Upon MCI's request, IRE shall
provide backup documentation for any billing information provided to MCI
and shall cooperate at IRE's own expense in the resolution of any dispute
between MCI and a Customer in which billing information provided by IRE is
at issue.
3. Notices
All notices, demands or consents required or permitted hereunder shall be
in writing and shall be delivered, sent by facsimile (with confirmation
copy by mail) or telex, or mailed to the respective party's at the
addresses first set forth in the first paragraph of this Agreement or at
such other address as shall have been given to the other party in writing
for the purposes of this clause. Such notices and other communications
shall be deemed effective upon the earliest to occur of (i) actual
delivery, (ii) five (5) days after mailing, addressed and postage prepaid,
returned receipt requested, as aforesaid, or (iii) one (1) business day
after transmission by telex, telegram or facsimile where receipt has been
confirmed by the same type of transmission or in writing received by the
sender.
If to MCI: ATTN: Howard Hempenius
MCI Telecommunications Corporation
2100 Reston Parkway, 6th Floor
Reston, VA 20191
CC: MCI General Counsel
1133 19th Street NW
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Washington, DC 20036
If to IRE: ATTN: Jill Leukhardt
Information Resources Engineering, Inc
8029 Corporate Drive
Baltimore, MD 21236
CC: Bruce Thaw
IRE General Counsel
45 Banfi Plaza
Farmingdale, N.Y. 11735
4. Relationship of the Parties
This Agreement is not intended to be, nor shall it be construed as, a joint
venture, association, partnership, franchise or other form of business
relationship. Neither party shall have nor hold itself out as having any
right or power or authority to assume, create, or incur any expense,
liability or obligation, expressed or implied, on behalf of the other
party, except as expressly provided herein. Nothing in this Agreement shall
prevent either MCI or IRE from entering into another agreement with a third
party.
5. Confidentiality
Each party's use and disclosure of the other party's proprietary
information shall be subject to the terms of the Nondisclosure Agreement,
executed by the parties and attached hereto as Attachment C. Information
which is disclosed orally in a manner which makes it apparent that it is
proprietary or confidential, shall be deemed to have been delivered in
writing and labeled as proprietary or confidential. The terms of this
provision shall survive termination of this Agreement.
6. Trademarks
Nothing in this Agreement shall be construed to grant either party any
rights or license in or to the other party's trademarks, service marks,
logos and other proprietary marks ("Trademarks"). Neither party shall use
the name, trademarks, trade names or service marks of the other party in
any advertisement, promotional statement, sales literature or any other
form of publicity or marketing without the prior written approval of the
other party. The terms of this provision shall survive termination of this
Agreement.
7. Publicity
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The parties agree that no news releases, media statements, or other public
announcements concerning the existence of this Agreement or any of its
terms, conditions, or performance obligations shall be made without the
prior written approval of the other party. Such written approval, whenever
granted, shall expire six months after the date on which approval was
granted, and shall be extended beyond six months only by express agreement
between the Parties.
8. Limitation on Liability
Neither party shall be liable to the other for indirect, incidental,
consequential, reliance, exemplary or special damages, including without
limitation lost profits, regardless of the form of action. Terms of this
provision shall survive termination of this Agreement.
9. Applicable Law
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without reference to its choice of law
principles.
10. Arbitration
Any dispute or disagreement arising between the parties in connection with
this Agreement, which is not settled to the mutual satisfaction of the
parties within thirty (30) days (or such longer period as may be mutually
agreed upon) from the date that either party informs the other in writing
that such dispute or disagreement exists, shall be settled by arbitration
in accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures,
as amended by this Agreement. The cost of the arbitration, including the
fees and expenses of the arbitrator(s), will be shared equally by the
parties unless the award otherwise provides. Each party shall bear the cost
of preparing and presenting its case. The parties agree that this
provisions and the arbitrator's authority to grant relief shall be subject
to the United States Arbitration Act, 9 U.S.C. 1-16 et seq. ("USAA"), the
provisions of this Agreement, and the ABA-AAA Code of Ethics for
Arbitrators in Commercial Disputes. The parties agree that the
arbitrator(s) shall have no power or authority to make awards or issue
orders of any kind except as expressly permitted by this Agreement, and in
no event shall the arbitrator(s) have the authority to make any award that
provides for punitive or exemplary damages. The decision of the
arbitrator(s) shall follow the plain meaning of the relevant documents, and
shall be final and binding upon the parties. The award may be confirmed and
enforced in any court of competent jurisdiction. All post-award proceedings
shall be governed by the USAA.
11. Assignment
Neither this Agreement nor any of the rights or obligations hereunder may
be assigned, delegated, sublicensed or otherwise transferred by either
party without
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the written consent of the other party except either party may at its sole
discretion assign, delegate or subcontract performance of its obligations
under this agreement to any other division, subsidiary, affiliate or
successor entity of said party; notwithstanding any such assignment, the
assigning party shall continue to be responsible for performance of this
Agreement in accordance with the terms of this Agreement unless its
responsibility is expressly excused by the other party. For purposes of
this Agreement, the term "affiliate" means any person or entity directly or
indirectly controlling, controlled by, or under common control with a
Party.
12. Term and Termination
This Agreement shall commence on the effective date and shall terminate on
its third anniversary, provided that either party may terminate this
Agreement if the other party commits a material breach of its obligations
hereunder and does not cure the material breach within thirty days of being
notified thereof.
13. Miscellaneous
13.1 No modification, amendment, supplement to, or waiver of the Agreement or
any of its provisions shall be binding upon the parties hereto unless made
in writing and duly signed by an authorized representative of the party
against whom enforcement thereof is sought. A failure or delay of either
party to this Agreement to enforce any of the provisions thereof, to
exercise any option which is herein provided, or to require performance of
any provision hereof shall in no way be construed to be a waiver of such
provisions.
13.2 If any provision of this Agreement shall be declared invalid, illegal, or
unenforceable as a matter of law, then that provision shall be deemed void
and of no effect and the remainder of the Agreement shall survive such
event.
13.3 The terms and conditions of any and all attachments thereto as amended from
time to time by mutual written agreement of the parties or in accordance
with the terms of this Agreement, are incorporated herein by reference and
shall constitute part of this agreement as if fully set forth herein. This
Agreement shall be construed or interpreted whenever possible to avoid
conflict between the articles hereof and the Attachments hereto, provided
that if such conflict shall arise, the Articles of this Agreement shall
control.
13.4 The headings in this Agreement are for the purpose of reference only and
shall not in any way limit or otherwise affect the meaning or
interpretation of any of the terms hereof.
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13.5 This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the
same instrument.
13.6 IRE agrees to indemnify and to save MCI, its affiliates, officers, agents,
employees, customers, suppliers, and vendors harmless from any and all
losses, expense, damage, liability, claims or demands either at law or
equity of actual or alleged infringement of any patent, invention, design,
trade secret, trademark, copyright or other third party right arising from
the purchase, use or offering for sale of products or services provided by
IRE under this Agreement. IRE shall indemnify and hold harmless MCI, its
affiliates, directors, officers, employees, and customers from and against
any loss, liability, damage, or expense (including reasonable attorney's
fees) incurred as a result of any third party demand, claim, suit or
allegation arising out of or relating to IRE's breach of its obligations
under this Agreement, misrepresentations, negligence, gross negligence, or
willful misconduct. MCI shall give IRE prompt notice of any such claim, and
IRE shall have sole authority to defend or settle any claims or actions
hereunder.
13.7 MCI shall indemnify and hold harmless IRE, its affiliates, directors,
officers, employees, and customers from and against any loss, liability,
damage, or expense (including reasonable attorney's fees) incurred as a
result of any third party demand, claim, suit or allegation arising out of
or relating to MCI's breach of its obligations under this Agreement or
misrepresentations. IRE shall give MCI prompt notice of any such claim, and
MCI shall have sole authority to defend or settle any claims or actions
hereunder.
13.8 IRE shall adhere to U.S. government regulations and requirements for any
exports of cryptographic hardware, software, or services made pursuant to
this Agreement.
13.9 Force Majeure.
Neither Party shall be liable for any delay in or failure to carry out this
Agreement if such delay or failure is due to any cause beyond the
reasonable control of the party affected, including but not limited to
governmental orders, regulations or restrictions, strikes, riots, wars,
military action, or civil disorders; provided that under no circumstances
will this provision relieve or excuse IRE from its system availability
commitment in Section 2.1.1 of Attachment A.
14. Entirety of Agreement
This Agreement, together with its Attachments, constitutes the entire
Agreement between the parties and supersedes all previous agreements,
promises, representations, understandings, and negotiations between the
parties, whether written or oral, with respect to the subject matter
hereof.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
IRE CORPORATION MCI TELECOMMUNICATIONS
CORPORATION
/s/ JILL L. LEUKHARDT /s/ VINTON G. CERF
- ---------------------- ---------------------
Signature Signature
Jill L. Leukhardt Vinton G. Cerf
- ---------------------- ---------------------
Printed or Typed Name Printed or Typed Name
Senior Vice President Sr VP
- ---------------------- ---------------------
Title Title
12/19/96 12/17/96
- ---------------------- ---------------------
Date Date
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EXHIBIT 10N
JOINT DEVELOPMENT AND MARKETING AGREEMENT
This Agreement, made and entered into as of the 6th day of August, 1996, by
and between CyberGuard Corporation, a Florida corporation ("CyberGuard"), whose
address is 2101 West Cypress Creek Road, Fort Lauderdale, Florida 33309; and
Information Resource Engineering, Inc., a Delaware corporation ("IRE"), whose
address is 8029 Corporate Drive, Baltimore, Maryland 21236:
WHEREAS, CyberGuard designs, manufactures and markets network security
products, including the CyberGuard(TM) Firewall, for Internet, intranet and
commercial networking environments;
WHEREAS, IRE has developed, manufactures and markets an encrypting
modem-related hardware, software and documentation, and key management services
through its SafeNet Security Center ("S/SC")(TM);
WHEREAS, CyberGuard and IRE desire to jointly develop and market a proposed
product offering consisting of a combination of the CyberGuard Firewall and IRE
SafeNet(TM) products in an interoperable centrally managed system configured for
use with a virtual private network ("VPN") and in applications that combine VPNs
with public Internet access and/or legacy network use;
NOW THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable considerations, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, CyberGuard and IRE
enter into this Agreement in order to provide for the initial phase of joint
development and marketing activities for the proposed joint product offering.
I. DEFINITIONS
As used herein, the following words or phrases have the following meanings:
1.1 "CyberGuard Products" shall mean the software and manuals to be incorporated
with an Intel-based personal computer to be supplied by a third party vendor.
1.2 "CyberGuard Property" means any and all Intellectual Property owned by
CyberGuard as of the Effective Date or developed thereafter solely by or on
behalf of CyberGuard, and expressly excludes any IRE Property.
1.3 "CyberGuard Firewall" shall mean a product comprised of an Intel-based
personal computer to be supplied by a third party vendor and software and
manuals supplied by CyberGuard.
1.4 "Effective Date" means August 6th, 1996.
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1.5 "Hereof," "herein, and "hereunder" when used in this Agreement shall refer
to the Agreement as a whole, unless the context otherwise requires.
1.6 "Intellectual Property" means any and all inventions, improvements,
enhancements, methods, designs, know-how, trade secrets, software, hardware,
circuits, products, documentation, mask works, layouts, ornamental designs,
trademarks, service marks, trade dress, company names, brand names, logos, and
fictitious names, together with any and all worldwide vested and/or inchoate
rights in and to any or all of the foregoing under any issued, pending and/or
later filed applications for patent or copyright registration, trademark and/or
service mark registration, utility models and/or any other form of protection of
various forms of intellectual and/or industrial property recognized anywhere in
the world including any and all rights of domestic and/or foreign priority, the
right to sue and recover damages for infringements including, without
limitation, any past infringements.
1.7 "IRE Property" means any and all Intellectual Property owned by IRE as of
the Effective Date or developed thereafter solely by or on behalf of IRE, and
expressly excludes any CyberGuard Property.
1.8 "IRE/SafeNet Products" shall consist of the SafeNet/Dial, SafeNet/LAN,
SafeNet/Security Center and SafeNet/Security Services.
1.9 "Joint Developments" means any and all Intellectual Property written,
invented, developed or otherwise created jointly by CyberGuard and IRE in the
course of the Project during the Term of this Agreement. Joint Developments
shall not include any CyberGuard Property or any IRE Property.
1.10 "Prepaid License Fee" shall have the meaning as set forth in Section 2.3
of this Agreement.
1.11 "Product" or "Products" shall mean any combination of the CyberGuard
Firewall and IRE SafeNet Products, developed in accordance with this Agreement,
having an interoperable centrally managed system configured for use with a VPN
and for use in applications that combine VPNs with public Internet access and/or
legacy network use and having the characteristics set forth in the
Specifications.
1.12 "Project" means all activity relating to the design, development,
implementation, testing, modification and/or improvement of any Product and/or
components thereof, whether hardware, software, electronic, mechanical or
otherwise.
1.13 "Proprietary Information" means proprietary rights in, and to, all computer
programs, source code, algorithms, software routines, microcode and other
similar data pertaining to
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CyberGuard Products, the IRE/SafeNet Products, or the Product, as the case may
be.
1.14 "Specifications" means the criteria for and description of the Product set
forth on Exhibit A hereto.
1.15 "Term" means the period from the Effective Date through the Termination
Date.
1.16 "Termination Date" means any date upon which this Agreement shall terminate
in accordance with the terms hereof, or two years from the Effective Date,
whichever is earlier.
II. JOINT DEVELOPMENT; PREPAID LICENSE
2.1 Development of the Product. Subject to the terms and conditions of this
Agreement, CyberGuard and IRE agree to cooperate with and assist each other in
the joint design and development of the Product. The Product is intended to
address the markets and include the functionalities in accordance with Exhibits
A and B attached hereto.
2.2 Enhancements to the Product. IRE and CyberGuard each acknowledge
that from time to time it may be advantageous to develop enhancements to their
respective product offerings that are components of the Product. Each of the
parties hereto agrees that, at the request of the other party, it will work with
the other party to jointly develop enhancements or revisions to the CyberGuard
Firewall and/or the IRE SafeNet products. In the event that the parties hereto
fail to agree on the timing, extent or nature of such enhancements and/or
revisions, or on the sharing of expense with respect to such enhancements and/or
revisions, the party that does not wish to proceed with such enhancements and/or
revisions shall provide to the other party a price quotation (on an actual time
and materials basis) and schedule for implementing such enhancements
or revision. Such enhancements and/or revisions shall be effectuated upon
acceptance of such proposal by the party requesting the enhancements and/or
revisions. In the event that such enhancements and/or revisions result in any
new Intellectual Property, such Intellectual Property shall become the property
of the party or parties which fund(s) the enhancements and/or revisions.
2.3 Prepaid License. CyberGuard acknowledges that IRE, on the Effective
Date, has paid to CyberGuard a prepaid license fee in the amount of $1 million
("Prepaid License Feel"). The Prepaid License Fee shall represent a prepayment
of the amounts that will become due under Section 3.1.2 hereof, and shall be
credited to the account of IRE on a dollar-for-dollar basis against such amounts
that otherwise would become due to CyberGuard under Section 3.1.2 hereof. In the
event that this Agreement is terminated prior to such credit aggregating the $1
million, then CyberGuard shall repay to IRE the balance of the $1 million
prepaid license fee within one year of the date of such
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termination, with interest at the prime rate of interest as is in effect as of
the date of such termination and announced by Chase Bank of New York.
III. MANUFACTURE AND ASSEMBLY
3.1 Delivery of CyberGuard Products to IRE.
3.1.1 Subject to the terms and conditions hereof, CyberGuard shall use
commercially reasonable efforts to supply to IRE such number of CyberGuard
Products as may be required during the term of this Agreement to fill orders for
the Product.
3.1.2 CyberGuard shall sell CyberGuard Products, F.O.B. CyberGuard's place
of business in Fort Lauderdale, Florida, at the prices set forth on Exhibit C.
Payment terms are net 30 days from the date of IRE shipment to its customers for
CyberGuard Products sold.
3.1.3 All prices quoted by CyberGuard are exclusive of all excise, sales
and similar taxes of whatever jurisdiction and of any other taxes, customs,
duties, fees or charges that may be imposed on the sale of CyberGuard Products
to IRE.
3.2 Manufacture of the Product. IRE shall assemble and configure the
Product by integrating the CyberGuard Firewall and IRE/SafeNet Products in
accordance with the Specifications, as such Specifications may be modified or
supplemented in a writing agreed to by the parties hereto from time to time. The
parties agree that the PC platform and the vendor that will supply the platform
will be selected by IRE, from time to time, so long as such selection meets the
technical requirements of CyberGuard. The parties agree that for this purpose
the Intel-based PC platform manufactured by Advanced Logic Research, Inc. is
acceptable to both IRE and CyberGuard.
3.3 Costs of Manufacture. All costs and expenses, including taxes,
related to the assembly and configuration as described in Section 3.2 of the
Product shall be borne solely by IRE.
3.4. No License Fee. Except for the Prepaid License Fee, the fees
payable in accordance with Section 3.1.2 hereof and a fee payable under the
license described in Exhibit D hereto, no license fee under this Agreement shall
be payable by either IRE or CyberGuard with respect to CyberGuard Products or
IRE/SafeNet Products incorporated into the Product for sale in accordance with
this Agreement.
IV. MARKETING AND SALES
4.1 Terms and Conditions of Sales. The parties agree to negotiate in
good faith and to reach agreement on the following matters within 15 days after
the Effective Date: the initial List Prices for the Product, the discounts that
will be available to the various sales channels, the other terms and conditions
of the
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sales of the Product to third parties, and the terms, conditions and pricing
under which CyberGuard will act as reseller of the Product. IRE and CyberGuard
agree to cooperate in the future to establish different List Prices and
discounts as needed to address cost changes or market conditions. All other
terms and conditions of sales of the Product that are not addressed in the
mutually agreed-to terms shall be set by IRE.
4.2 Marketing Assistance/Assignment of Sales Personnel. IRE and
CyberGuard shall cooperate in marketing and selling the Product. For each sales
lead generated by or becoming known to a party hereto, the parties agree that
for a preliminary time period to be agreed upon by IRE and CyberGuard, each of
them will use reasonable best efforts to jointly assign a sales team consisting
of a representative from each corporation (consisting of a sales representative
from one corporation and a customer support representative from the other) to
pursue such leads with a view toward generating a sale.
4.3 Marketing Fees. In consideration of the sales support to be provided
by CyberGuard under Section 4.2 hereof, for each Product sold, in addition to
the payment for CyberGuard Products as set forth in Section 3.1 hereof, IRE
shall pay CyberGuard a marketing fee as set forth in Exhibit C hereto. The
marketing fee shall be paid monthly based upon payments received by IRE from the
purchasers of the Product during the previous month.
4.4 Order Flow and Fulfillment. Orders for the Product, whether
generated by CyberGuard or IRE, shall be submitted to IRE for fulfillment. IRE
shall have the sole discretion to determine whether to extend credit to any
potential purchaser of a Product. IRE shall process orders for shipment in
accordance with commercially reasonable standards. IRE shall submit invoices to
purchasers for products shipped and shall be responsible for collection of such
invoices. IRE shall provide to CyberGuard written monthly reports that describe
the identity of the purchasers, the Products sold, quantities, discounts and
prices for all sales of Products. Revenue from sales of Product shall be
considered solely the revenue of IRE for all accounting and other purposes.
4.5 Compliance With Laws and Business Practices. It is expressly
understood and agreed that this Agreement, and any exports, sales, transfers, or
any other disposition of CyberGuard Products or IRE/SafeNet Products, to the
extent incorporated in the Product, are subject to the laws and regulations of
the United States. Specifically, contracts and orders placed for the Product may
require advance U.S. Government Export approval or licensing, and, therefore all
such contracts and orders are subject to the receipt of any necessary approvals
and licenses. The parties hereto agree to solicit orders, and IRE agrees to
process and ship orders, in accordance with all applicable laws and regulations.
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V. CUSTOMER SUPPORT
5.1 Initial Contact. IRE shall be the initial point of contact for
customer support of the Product and shall establish and maintain support
facilities sufficient to provide primary support for the Product. Primary
support requires that IRE provide all necessary resources to provide initial
diagnosis of both hardware and software problems and providing reasonable
assistance to purchasers to resolve problems with the Product.
5.2 Maintenance. Following receipt of support requests from a customer
and an assessment by IRE of the customer's additional support requirements, if
it is determined that the customer requires maintenance services, CyberGuard
shall provide such maintenance for CyberGuard Products and IRE shall provide
such maintenance in all other instances. Each party hereto agrees to maintain
support services sufficient to discharge the duty set forth in the preceding
sentence, and shall provide such services in its usual and customary manner, and
at customary rates, as provided to other customers (which, in all cases, shall
be a commercially reasonable manner and rate). Each party agrees to maintain the
availability of support services for a period of at least two years after the
termination of this Agreement. The term "support," for purposes of this section
5.2, means verifying, diagnosing and resolving hardware and software problems
and delivery of software patches and applicable release notes.
VI. INTELLECTUAL PROPERTY RIGHTS
6.1 Ownership of Intellectual Property; Property Tradename.
6.1.1 CyberGuard Property. Subject to the provisions of Section 6.2, the
parties acknowledge and agree that all CyberGuard Property is and shall remain
at all times the exclusive property of CyberGuard, its successors and assigns.
6.1.2 IRE Property. Subject to the provisions of Section 6.2, the parties
acknowledge and agree that all IRE Property is and shall remain at all times the
exclusive property of IRE, its successors and assigns.
6.1.3 Joint Developments. Joint Developments shall be owned jointly by
CyberGuard and IRE, their successors and assigns, as tenants in common.
6.1.4 Property Tradename. CyberGuard and IRE agree that the Product shall
be branded with a name or names and marks that are acceptable to both IRE and
CyberGuard (the "Product Tradename"). The Product Tradename shall be used only
for purposes of marketing and selling the Product. Notwithstanding the
foregoing, there shall be no restriction with respect to IRE's use of the
"SafeNet" mark for any and all purposes. The parties agree that the Product
Tradename shall be solely and exclusively IRE Property; provided, however, that
CyberGuard
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shall have the right to use the Product Tradename to the limited extent
necessary to act as a seller of the Product.
6.2 Cross License. Subject to the terms and conditions contained herein,
CyberGuard hereby grants to IRE a nontransferable, non-exclusive license to use
the CyberGuard Property solely to the extent as is required to develop,
manufacture and market the Product. Subject to the terms and conditions
contained herein, IRE hereby grants to CyberGuard a nontransferable,
non-exclusive license to use the IRE/SafeNet Property solely to the extent as is
required to develop, manufacture and market the Product. Each party hereto
acknowledges and agrees that the other has expended considerable time, effort
and funds in developing and generating the Intellectual Property owned by it,
and has and will continue to have a substantial proprietary interest and
valuable trade secret therein. The license granted by each party to the other
herein is granted as part of the consideration of entering into this Agreement.
6.3 Limitation. CyberGuard shall have no interest in any of the
trademarks, service marks, trade dress, company names, or logos of IRE or the
Product; without limiting the generality of the foregoing clause of this
sentence, CyberGuard shall have no rights with respect to the tradename
"SafeNet" and related tradenames, except to the limited extent necessary to act
as a seller of the Product. IRE shall have no interest in any of the trademarks,
service marks, trade dress, company names, or logos of CyberGuard; without
limiting the generality of the foregoing clause of this sentence, IRE shall have
no rights with respect to the tradename "CyberGuard" and related tradenames,
except to the limited extent necessary to act as a seller of the Product.
6.4 Protection of Intellectual Property.
6.4.1 Each of the parties hereto agrees to make full and complete
disclosure to the other of all Joint Developments it believes may be
copyrightable, patentable or of commercial value.
6.4.2 With respect to all Joint Developments believed by either party to be
copyrightable, patentable or of commercial value, the parties agree to decide
jointly whether and where to apply for copyright, patent or other appropriate
forms of protection. To the extent the parties agree to protect a Joint
Development, the parties shall do so at their joint expense using counsel as
mutually agreed.
6.4.3 In the event the parties elect not to jointly pursue protection of
any Joint Development, either party (the "Electing Party") may seek such
protection in its own name and at its sole expense using counsel of its choice.
As to Joint Developments with respect to which the Electing Party elects to seek
protection, the non-electing party shall assign its intellectual property rights
in and to such Joint Development to the Electing Party and the Electing Party
shall grant to the non-
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electing party a fully paid-up, worldwide, extendible, nonexclusive perpetual
license to use the Joint Development and any and all Intellectual Property
therein for any and all purposes.
6.4.4 All expenses of renewing and or maintaining intellectual property
protection of any Joint Development shall be borne by the party seeking
protection, or, in the case of protection sought jointly by the parties hereto,
by both parties sharing equally in such expenses.
6.5 Enforcement of Intellectual Property Rights.
6.5.1 CyberGuard shall be solely responsible for enforcing any and all
CyberGuard Property, and IRE shall be, solely responsible for enforcing any and
all IRE Property, whether or not such CyberGuard Property or IRE Property is
incorporated into the Product. In the event that it is unclear whether
CyberGuard Property or IRE Property is being infringed upon, the parties shall
treat such infringement as if the infringement were on a Joint Development in
accordance with the provisions below.
6.5.2 Each party agrees promptly to advise the other of suspected or known
infringements on any Joint Development.
6.5.3 The parties agree to consult as to the appropriate action to be taken
with respect to any infringement of any Joint Development. If the parties agree
to settle or jointly prosecute any claim for misappropriation and/or
infringement, the parties shall share equally in the costs and expenses,
including attorney's fees, incurred in connection with such prosecution and
shall share equally in any settlements or other recoveries thereon.
6.5.4 If one of the parties hereto does not agree to be responsible for its
full share of the costs and expenses of prosecuting an infringement claim
jointly, then either party may sue it its own name and at its sole expense and,
in such case, the other party agrees to be joined as a plaintiff for standing
purposes and to cooperate as reasonably requested in prosecuting such action
(subject to reimbursement for reasonable costs, expenses, and attorneys' fees).
In such event, any recovery shall inure to the party prosecuting the
infringement and not to the other, whether or not such other party joins as a
plaintiff as provided herein.
6.6 Defense of Intellectual Property.
6.6.1 CyberGuard shall be solely responsible for defending any and all
claims of third parties against CyberGuard Products for infringement, and IRE
shall be solely responsible for defending any and all claims of third parties
against IRE/SafeNet Products for infringement, whether or not the CyberGuard
Product or IRE/SafeNet Product at issue in any claim is incorporated into the
Product.
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6.6.2 Each party agrees promptly to advise the other of claims of
infringement brought or threatened against any Joint Development.
6.6.3 The parties agree to consult as to the appropriate action to be taken
with respect to any claims of infringement by any Joint Development. If the
parties agree to jointly defend any claim for misappropriation and/or
infringement, the parties shall share equally in the costs and expenses,
including attorney's fees, incurred in connection with such defense. Each party
shall bear only such damages as are awarded against it.
6.6.4 If one of the parties hereto does not agree to be responsible for its
full share of the costs and expenses of defending an infringement claim jointly,
then the other party may defend at its sole expense and the defending party
shall have a lien upon the Intellectual Property of the other in the full amount
of damages and costs and expenses of defense.
VII. WARRANTIES OF THE PARTIES TO THE OTHER
7.1 Ownership of CyberGuard Products. CyberGuard warrants to IRE that it
owns or otherwise holds all rights necessary to make, use, sell, offer for sale,
advertise and distribute the CyberGuard Products free and clear from all claims,
liens and encumbrances of third parties, except for the obligations under those
agreements and licenses listed on Exhibit D hereto.
7.2 Ownership of IRE Products. IRE warrants to CyberGuard that it owns
or otherwise holds all rights necessary to make, use, sell, offer for sale,
advertise and distribute the IRE/SafeNet Products free and clear from all
claims, liens and encumbrances of third parties.
7.3 Warranty. CyberGuard hereby warrants to IRE that under normal use
and service, CyberGuard Products are free from defects in design and
workmanship. IRE hereby warrants to CyberGuard that under normal use and
service, IRE/SafeNet Products are free from defects in design and workmanship.
Each party warrants to the other that the products delivered by such party for
use in connection with the Product will be complete and in conformity with the
products regularly supplied by each to purchasers and lessees of its products.
CyberGuard's warranty under this Section 7.3 shall not include a warranty for
the Intel-based PC that is a component of the CyberGuard Firewall and is
supplied by a third party vendor.
7.4 Product Warranty. The Product shall be sold with a warranty to be
agreed upon between the parties hereto, essentially to the effect that the
Product will be free from defects in design, workmanship and material, with a
time period (not to exceed one year) and on such other terms and conditions as
are to be agreed upon between the parties. Subject to the limitations on
warranty contained in this Agreement, CyberGuard agrees to assume all liability
for breach of such warranty to the extent that a breach
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of warranty relates solely to CyberGuard Products incorporated into the Product.
Subject to the limitations on warranty contained in this Agreement, IRE agrees
to assume all liability for breach of such warranty to the extent that such
breach relates to the assembly or configuration of the Product or solely to
IRE/SafeNet Products. CyberGuard and IRE agree to jointly assume all liability
for breach of such warranty to the extent that a breach of warranty relates to
the design of the Product or other matters that are not covered by either of the
two preceding sentences.
7.5 Limitation on Warranty. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
HEREIN AND EXCEPT FOR WARRANTY OF TITLE, NEITHER PARTY MAKES ANY OTHER
WARRANTIES, EXPRESS OR IMPLIED TO THE OTHER WITH RESPECT TO ITS PRODUCTS. EXCEPT
AS OTHERWISE EXPRESSLY SET FORTH HEREIN, THERE ARE NO WARRANTIES OR ANY
AFFIRMATIONS OF FACT OR PROMISES BY EITHER PARTY HERETO AS TO MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, INFRINGEMENT OR OTHERWISE. USE OF SUCH
PRODUCTS CONSTITUTES THE CONSENT OF THE OTHER PARTY HERETO TO ASSUME ALL RISKS
OF SUCH USE AND TO HOLD THE OTHER HARMLESS FOR ANY DAMAGES OR CLAIM OF DAMAGES
ARISING IN ANY MANNER FROM SUCH USE. THE EMPLOYEES OR AGENTS OF NEITHER PARTY
HAVE ANY AUTHORITY TO MAKE ANY WARRANTY OR REPRESENTATION REGARDING THE MANNER
OR BENEFITS OF USE OF ANY PRODUCT OTHER THAN THOSE EXPRESSLY SET FORTH IN THE
SPECIFICATION FOR SUCH PRODUCT.
VIII. TERMINATION
8.1 Conditions for Termination. This Agreement shall terminate upon any of the
conditions contained in this Section 8.1.
8.1.1 This Agreement shall terminate upon the occurrence of a material
breach of this Agreement by either party hereto, provided:
8.1.1.1 The breaching party is given notice by the other party hereto
containing a claim of breach and setting forth the nature of the breach and
circumstances giving rise to such a claim; and
8.1.1.2 The party to whom notice is given fails to remedy such
circumstances within sixty days after receipt of the notice.
8.1.2 This Agreement shall terminate upon the written notice of either
party to the other that such party is unable to perform as provided hereunder
due to labor disputes, fire, casualties and accidents, acts of the elements,
acts of a public enemy, sovereign acts or regulations and any other causes
beyond the control of such party, its agents, employees or officers.
8.1.3 This Agreement shall terminate if any of the following events occur
as to one party hereto and the other party does not provide written notice
within thirty days after it becomes aware of such event that it intends to waive
termination
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of this Agreement: a party makes an assignment for the benefit of its creditors,
requests or permits a proposal, arrangement or reorganization under or, as an
insolvent debtor, takes the benefit of any legislation now or hereafter in force
for bankrupt or insolvent debtors; a receiver or other officer with like powers
is appointed for a party for a substantial part of its assets; a lienholder
takes possession of a substantial part of a party's property; or an order is
made for the winding up, liquidation, revocation, or cancellation of
incorporation of a party; or a party ceases carrying on its business as a going
concern.
8.1.4 This Agreement shall terminate at the expiration of two years
from its Effective Date.
8.2 Effects of Termination/Liability.
8.2.1 If this Agreement is terminated for reasons set forth in Section 8.1,
then a breaching party shall indemnify the non-breaching party from and against
all actual costs and expenses incurred or resulting from the breach, including
reasonable attorneys' fees and costs of dispute resolution (collectively
"Damages"); provided, however, that neither party hereto shall be liable under
any circumstances, for indirect, special, incidental or consequential damages;
and provided further that the amount of Damages payable by either party hereto
to the other shall be limited to the amount that the party entitled to such
Damages has incurred in connection with the performance of its obligations under
this Agreement or to enforce the obligations of the other party hereunder.
8.2.2 Except as set forth herein, neither party shall be liable to the
other for any claims, damages, costs, expenses or other charges incurred in
connection with the entering into, performance, breach, or termination of this
Agreement unless specifically provided for herein.
8.2.3 Notwithstanding the Termination Date of this Agreement, the
provisions of Sections 5.2, 6.1, and 9.2 shall survive the Termination Date
indefinitely, and the provisions of Article III and Section 6.2 shall survive
until the second anniversary of the Termination Date. Without limiting the
generality of the foregoing sentence, for two years after the Termination Date,
CyberGuard shall continue to use commercially reasonable efforts to supply to
IRE such number of CyberGuard Products as may be required for IRE to fulfill its
orders for the Product and IRE shall continue to use commercially reasonable
efforts to assemble and configure the number of Products as may be required for
CyberGuard to fulfill its orders for the Product. The prices to be charged by
IRE and CyberGuard to the other in fulfillment of the obligations stated in the
foregoing sentence are described in Exhibit C and Section 4.1 hereto.
8.2.4 The parties hereto agree to deposit with mutually agreeable
escrow agents in the case of (i) CyberGuard, a
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current version of its software source code which incorporates all necessary and
appropriate improvements, revisions, enhancements, or updates for the source
code for the CyberGuard Products so that at all times, such source code will
correspond with the software actually in use by CyberGuard (subject to the
rights of Santa Cruz Operation, Inc. as set forth in the licenses and agreements
described in Exhibit D hereto); (ii) IRE, all necessary schematics, diagrams and
source code for the IRE/SafeNet Products (excluding SafeNet/Services) and all
documentation reasonably necessary to manufacture the Product so that at all
times, the source code, schematics and diagrams will correspond with the
products and software actually in use by IRE. The parties hereto agree to
negotiate and enter into escrow agreements to effectuate the purposes of the
foregoing and to place the source codes and, as the case may be, schematics and
diagrams for the CyberGuard Products and IRE/SafeNet Products in escrow so as to
provide each party with access to such information in the event that the other
party does not perform its obligations under this Agreement.
IX. MISCELLANEOUS PROVISIONS
9.1 Assignment. Neither party shall assign this Agreement or any
interest therein without the prior written consent of the other party.
9.2 Confidentiality. Neither party hereto shall, without the express
written consent of the other, provide, disclose, transfer or otherwise make
available any Proprietary Information, or parts or copies thereof, to any third
party. Each party shall ensure that it, its employees and third party agents
having access to any Proprietary Information, or to the CyberGuard Products or
IRE/SafeNet Products of the other, will restrict and control the use, copying,
modification, disclosure, transfer, protection and security of such items, in
accordance with these provisions. Each party hereto agrees to protect all
Proprietary Information with the same standard of care that it uses to protect
its own like information.
9.3 Nonsolicitation. The parties hereto agree that they will not, at any
time during the term this Agreement and for a period of one year thereafter,
directly or indirectly, for itself or for any other person, firm, corporation,
partnership, association or other entity, attempt to employ, employ or enter
into any contractual arrangement with any employee or former employee of the
other party, its subsidiaries or predecessors in interest, unless such employee
or former employee has not been employed by the other party, its subsidiaries or
its predecessors in interest, for a period in excess of six months.
9.4 Publicity. The parties hereto agree to cooperate in the drafting of
any press releases or other public disclosure that relates to the Project.
Neither shall make any public disclosure relating to the Project or the other
party without the consent of such other party. Notwithstanding the foregoing, in
the event
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that a party hereto (the "Disclosing Party") is advised by counsel that public
disclosure relating to the Project or the other party is required, the
Disclosing Party shall provide to the other party a copy of the proposed
disclosure in advance of its public release and shall use all reasonable efforts
to seek the comments of the other party prior to its publication.
9.5 Notices. All notices permitted or required hereunder shall be
effective: upon receipt if delivered personally; on the third business after
sending if sent via registered or certified U.S. mail, return receipt requested;
on the second business day after sending, charges prepaid for next day delivery,
via a nationally recognized overnight delivery service (Federal Express,
Purolator Courier, DHL and UPS are acceptable for these purposes); and upon
acknowledgment of receipt by the party to be charged with notice if sent via any
other means. Notice shall be given to the following address or to such other
address as to which a party shall give notice:
If to CyberGuard:
CyberGuard Corporation
2101 W. Cypress Creek Road
Ft. Lauderdale, FL 33309
Attention: President
If to IRE:
Information Resource Engineering, Inc.
8029 Corporate Drive
Baltimore, MD 21236
Attention: Chairman
9.6 Disputes.
9.6.1 Any controversy or claim related to or arising out of this Agreement
shall be settled by binding arbitration conducted under the Commercial
Arbitration Rules of the American Arbitration Association. Judgment on the
arbitrator's award may be entered and enforced in any court of competent
jurisdiction. Neither party will be precluded from seeking provisional remedies
in the courts including, but not limited to, temporary restraining orders and
preliminary injunctions, to protect its rights and interests, but such relief
will not be sought as a means to avoid or stay arbitration.
9.6.2 This Section 9.6 provides the sole recourse for the settlement of any
dispute arising under or in connection with this Agreement. In any arbitration
between the parties, the prevailing party shall be entitled to reasonable
attorneys' fees and all costs of proceedings incurred in enforcing this
Agreement in addition to any other amount of recovery ordered in such
arbitration.
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9.6.3 IRE and CyberGuard each agree that if either of them determine to
begin an arbitration action, then such action may be brought only in the city or
county in which the corporate headquarters of the defendant to such action is
located, and each agree that venue is proper in such location.
9.7 Relationship of the Parties. The parties hereto agree that no
agency, employment, partnership, joint venture or franchise relationship is
created or shall be deemed to be created hereunder. Neither party shall have,
and neither shall represent to have, any power, right or authority to bind the
other or to assume or create any obligation or responsibility, express or
implied, on behalf of the other party or in the other party's name, except as
herein expressly permitted.
9.8 Entire Agreement. This Agreement constitutes the entire agreement
and supersedes any prior agreements or understandings between the parties hereto
regarding the subject matter hereof, and no amendment, alteration or waiver of
this Agreement shall be valid or binding unless made in writing and signed by
both parties.
9.9 Governing Law. This Agreement shall be governed by, and interpreted
and construed in accordance with the laws of the State of New York.
9.10 Further Agreements. The parties hereto agree to enter into good
faith negotiations for the purposes of executing and delivering an appropriate
agreement or agreements providing for CyberGuard's ability to resell the IRE
SafeNet family of products and for IRE's ability to resell the CyberGuard
Firewall family of products, now or hereafter developed during the term of this
Agreement.
9.11 Severability. Any provision in this Agreement found to be void,
voidable or unenforceable shall not affect the validity or enforceability of any
other provision in this Agreement. In the event that any provision of this
Agreement shall be declared void, voidable or unenforceable by a court of
competent jurisdiction, said provision shall be deemed to be amended to provide
the party seeking to enforce this Agreement the greatest protection available
under law.
14
<PAGE> 15
IN WITNESS WHEREOF the undersigned have executed and delivered this
Agreement as of the date and year first above written.
INFORMATION RESOURCE CYBERGUARD CORPORATION
ENGINEERING, INC.
By: /s/ ANTHONY A. CAPUTO By: /s/ ROBERT L. CARBERRY
------------------------- ----------------------------
Anthony A. Caputo Robert L. Carberry
Its: Chairman, Chief Executive Its: Chairman,President
Officer and President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10O
EMPLOYMENT AGREEMENT
AGREEMENT, dated this 27th day of March, 1997 between Information
Resource Engineering, Inc., a Delaware corporation (the "Company") with offices
at 8029 Corporate Drive, Baltimore, MD and Anthony A. Caputo (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company and the Executive wish to enter into an employment
and compensation arrangement on the following terms and conditions;
1. Employment. Subject to the terms and conditions of this Agreement,
the Company agrees to employ the Executive as its Chief Executive Officer
during the Employment Period (as defined in Section 7) and to perform such acts
and duties and furnish such services to the Company and its affiliates and
related parties as the Company's Board of Directors shall from time to time
direct. The Executive shall have general and active charge of the business and
affairs of the Company as its Chief Executive Officer and, in such capacity,
shall have responsibility for the day-to-day operations of the Company, subject
to the authority and control of the Board of Directors of the Company. During
the Employment Period, the Company shall continue to take such actions as
necessary to cause the Executive's nomination as a member of the Board of
Directors of the Company. The Executive hereby accepts such employment and
agrees to devote his full time and best efforts to the duties provided herein,
provided, that the Executive may engage in other business activities which (i)
involve no conflict of interest with the interests of the Company (subject to
approval by the Board of Directors, which approval shall not be unreasonably
withheld) and (ii) do not materially interfere with the performance by the
Executive of his duties under this Agreement.
2. Compensation. For services rendered to the Company during the term
of this Agreement, the Company shall compensate the Executive with an initial
salary, payable in bi-weekly installments, of $250,000 per annum. Such base
salary shall be reviewed on an annual basis by the Compensation Committee of
the Company's Board of Directors (the "Compensation Committee") and shall be
increased by at least ten (10%) percent per annum.
(1)
<PAGE> 2
3. Incentive Compensation. The Executive shall also be entitled to
annual incentive compensation of up to fifty (50)% of the applicable base
salary if the Company's business objectives as set forth in the Company's
annual business plan are achieved. The nature and extent of such incentive
compensation shall be determined by the Compensation Committee no later than
ninety (90) days following the end of the Company's fiscal year.
4. Stock Options. As further compensation, Employee shall be issued
50,000 incentive stock options (subject to allowable limitations set forth in
the Internal Revenue Code of 1986, as amended, hereinafter "stock options")
upon the effective date of this Agreement. The stock options shall be issued at
the fair market value of the Employer's common stock as of the date of this
Agreement and shall then be vested at 20% per full year of service (and shall
not be vested for interim periods on a pro-rata basis, except as otherwise
provided in the applicable Stock Option Agreement) from the date of this
Agreement, over a five year period, all of the foregoing to be in accordance
with the provisions of Employer's Stock Option Plan, as may be amended from
time to time, which is incorporated by reference herein.
If the Executive's employment is terminated (i) because of his death or
disability pursuant to Section 8 of this Agreement, (ii) by the Company for any
reason other than for Cause or (iii) by the Executive for Good Reason:
(x) the portion of the stock option which was exercisable
at termination shall remain exercisable for a period of 3 years after such
date; and
(y) with respect to that portion, if any, of the stock
option which was not yet exercisable at termination, such portion shall
immediately become exercisable and shall remain exercisable until the end of
such 3-year period. The stock option shall be memorialized in a separate
written stock option agreement reasonably satisfactory to the Company and the
Executive.
In the event that the Common Stock to be issued upon the exercise of
said options has not been registered under the Securities Act of 1933 (the
"Act"), it must be held by the Executive indefinitely, and may not be sold or
disposed of unless (i) a registration statement covering those shares becomes
effective under the Act, or (ii) if an exemption from registration becomes
available. The Company is not under any obligation to register the shares under
the Act. The Company shall use its best efforts to timely file all reports,
statements and other documents as may be required under
(2)
<PAGE> 3
the Securities and Exchange Act of 1934 to keep available the exemption under
Rule 144 of the Act or other comparable rules or regulations of the Securities
and Exchange Commission.
5. Benefits. During the Employment Period, the Company shall provide
or cause to be provided to the Executive such employee benefits as are provided
to other executive officers of the Company, including family medical and
dental, disability and life insurance, and participation in pension and
retirement plans, incentive compensation plans, stock option plans and other
benefit plans. During the Employment Period, the Company may provide or cause
to be provided to the Executive such additional benefits as the Company may
deem appropriate from time to time. The Company shall also provide the
Executive the use of an automobile of at least equal value to that which is
presently utilized by the Executive as of the date of this Agreement
6. Vacation. The Executive shall be entitled to annual vacations in
accordance with the Company's vacation policies in effect from time to time for
executive officers of the Company.
7. Term; Employment Period. The "Employment Period" shall commence on
the date of this Agreement and shall terminate 5 years thereafter, unless
extended by written agreement between the parties or unless earlier terminated
pursuant to Section 8. If the Executive shall remain in the full-time employ of
the Company beyond the Employment Period without any written agreement between
the parties, this Agreement shall be deemed to continue on a month to month
basis and either party shall have the right to terminate this Agreement at the
end of any ensuing calendar month on written notice of at least 30 days.
8. Termination.
(a) Executive's employment with the Company shall be "at will".
Either the Company or the Executive may terminate this Agreement and
Executive's employment at any time, with or without Cause or Good Reason (as
such terms are defined below), in its or his sole discretion, upon thirty (30)
days' prior written notice of termination.
(b) Without limiting the foregoing Section 8(a), (i) the Executive
may terminate his employment with the Company at any time for Good Reason, or
(ii) the Company may terminate his employment at any time for Cause. "Good
Reason" shall mean death, Disability (as defined below)
(3)
<PAGE> 4
or a termination of employment as a result of a substantial diminution in the
Executive's responsibilities, or base salary below $250,000 or a demotion in
title or status. "Cause" shall mean (i) the Executive's willful, repeated or
neglectful failure to perform his duties hereunder or to comply with any
reasonable or proper direction given by or on behalf of the Company's Board of
Directors following ten (10) days written notice to such effect; (ii) the
Executive being guilty of serious misconduct on the Company's premises or
elsewhere, whether during the performance of his duties or not, which may cause
damage to the reputation of the Company or render it difficult for the
Executive to satisfactorily continue to perform his duties; (iii) the Executive
being found guilty in a criminal court of any offense of a nature likely to
affect the reputation of the Company or to prejudice its interests if the
Executive were to continue to be employed by the Company; (iv) the Executive's
commission of any act of fraud, theft or dishonesty, or any intentional tort
against the Company; or (v) the Executive's violation of any of the material
terms, covenants, representations or warranties contained in this Agreement.
(c) "Disability" shall mean that the Executive, in the good faith
determination of the Board of Directors of the Company, is unable to render
services of the character contemplated hereby and that such inability (i) may
be expected to be permanent, or (ii) may be expected to continue for a period
of at least three (3) consecutive months (or for shorter periods totaling more
than six (6) months during any period of twelve consecutive months).
Termination resulting from Disability may only be effected after at least
thirty (30) days written notice by the Company of its intention to terminate
the Executive's employment.
(d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date established by the Company pursuant to
Section 8(c) hereof; (iii) if this Agreement is terminated by the Company, the
date on which a notice of termination is given to the Executive; (iv) if the
Agreement is terminated by the Executive, the date the Executive ceases work;
or (v) if this Agreement expires by its terms, the last day of the term of this
Agreement.
(4)
<PAGE> 5
9. Severance.
(a) If (i) the Company terminates the employment of the Executive
against his will and without Cause, or (ii) the Executive terminates his
employment for Good Reason (excluding death or Disability), the Executive shall
be entitled to receive salary, target incentive compensation and vacation
accrued through the Termination Date plus the lesser of (i) $600,000 or (ii)
the balance of the Executive's compensation hereunder to the end of the term of
this Agreement computed using the latest applicable salary rate. The Company
shall make such termination payment within 30 days of such termination.
Notwithstanding the foregoing, the Company shall not be required to pay any
severance pay for any period following the Termination Date if the Executive
violates the provisions of Section 15, Section 16 or Section 17 of this
Agreement. In such event, the Company shall provide written notice to the
Executive detailing such violation.
(b) If, after two years of service pursuant to this Agreement, the
Executive voluntarily terminates his employment other than for Good Reason,
then the Executive shall be entitled to receive salary, accrued vacation and
six months' severance pay.
(c) If (i) prior to two years of service pursuant to this Agreement
the Executive voluntarily terminates his employment other than for Good Reason,
(ii) the Executive's employment is terminated due to death or Disability, or
(iii) the Executive is terminated by the Company for Cause, then the Executive
shall be entitled to receive salary and accrued vacation through the
Termination Date only.
(d) In addition to the provisions of Section 9(a), 9(b) and 9(c)
hereof, to the extent COBRA shall be applicable to the Company or as provided
by law, the Executive shall be entitled to continuation of group health plan
benefits for a period of one (1) year following the Termination Date if the
Executive makes the appropriate conversion and payments.
(e) The Executive acknowledges that, upon termination of his
employment, he is entitled to no other compensation, severance or other
benefits other than those specifically set forth in this Agreement or any
applicable Stock Option Agreement.
(5)
<PAGE> 6
10. Expenses. The Company shall pay or reimburse the Executive for all
expenses normally reimbursed by Company, reasonably incurred by him in
furtherance of his duties hereunder and authorized and approved by the Company
in compliance with such rules relating thereto as the Company may, from time to
time, adopt and as may be required in order to permit such payments as proper
deductions to Company under the Internal Revenue Code of 1986, as amended, and
the rule and regulations adopted pursuant thereto now or hereafter in effect.
11. Facilities and Services. The Company shall furnish the Executive
with office space, secretarial, support staff and such other facilities and
services as shall be reasonably necessary for the performance of his duties
under this Agreement.
12. Mitigation Not Required. In the event this Agreement is
terminated, the Executive shall not be required to mitigate amounts payable
pursuant hereto by seeking other employment or otherwise. The Executive's
acceptance of any such other employment shall not diminish or impair the
amounts payable to the Executive pursuant hereto.
13. Place of Performance. The Executive shall perform his duties
primarily in Baltimore, Maryland or locations within a reasonable proximity
thereof, except for reasonable travel as the performance of the Executive's
duties may require.
14. Insurance and Indemnity. During the Employment Period, if available
at reasonable costs, the Company shall maintain, at its expense, officers and
directors fiduciary liability insurance covering the Executive and all other
executive officers and directors in an amount of no less than $1,000,000. The
Company shall also indemnify the Executive, to the fullest extent permitted by
law, from any liability asserted against or incurred by the Executive by reason
of the fact that the Executive is or was an officer or director of the Company
or any affiliate or related party or is or was serving in any capacity at the
request of the Company for any other corporation, partnership, joint venture,
trust, employment benefit plan or other enterprise. This indemnity shall
survive termination of this Agreement.
(6)
<PAGE> 7
15. Noncompetition.
A. The Executive agrees that, except in accordance with his duties
under this Agreement on behalf of the Company, he will not during the term of
this Agreement:
Participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have any interest, directly or
indirectly, in any enterprise which is engaged in the business of distributing,
selling or otherwise trading in products or services which are competitive to
any products or services distributed, sold or otherwise traded in by the
Company or any of its subsidiaries during the term of the Executive's
employment with the Company, or which are competitive to any products or
services being actively developed, with the bona fide intent to market same, by
the Company or any of its subsidiaries during the term of the Executive's
employment with the Company;
In addition, the Executive agrees that for a period of two years after
the end of the term of this Agreement (unless this Agreement is terminated due
to a breach of the terms hereof by the Company in failing to pay to the
Executive all sums due him under the terms hereof, in which event the following
shall be inapplicable), the Executive shall observe the covenants set forth in
this Section 15 and shall not own, either directly or indirectly or through or
in conjunction with one or more members of his or his spouse's family or
through any trust or other contractual arrangement, a greater than five percent
(5%) interest in, or otherwise control either directly or indirectly, any
partnership, corporation, or other entity which distributes, sells, or
otherwise trades in computer network security products or other products which
are competitive to any products or services being developed, distributed, sold,
or otherwise traded in by the Company or any its subsidiaries, during the term
of this Agreement, or being actively developed by the Company or any of its
subsidiaries during the term of this Agreement with the Company with a bona
fide intent to market same. Executive further agrees, for such two year period
following termination, to refrain from directly or indirectly soliciting
Company's vendors, customers or employees.
B. The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 15 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 15 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
(7)
<PAGE> 8
16. Assignment of Patents. Executive shall disclose fully to the
Company any and all discoveries he shall make and any and all ideas, concepts
or inventions which he shall conceive or make during his period of employment,
or during the period of six months after his employment shall terminate, which
are in whole or in part the result of his work with the Company. Such
disclosure is to be made promptly after each discovery or conception, and the
discovery, idea, concept or invention will become and remain the property of
the Company, whether or not patent applications are filed thereon. Upon
request and at the expense of the Company, the Executive shall make application
through the patent solicitors of the Company for letters patent of the United
States and any and all other countries at the discretion of the Company on such
discoveries, ideas and inventions, and to assign all such applications to the
Company, or at its order, forthwith, without additional payment by the Company
during his period of employment and for reasonable compensation for time
actually spent by the Executive at such work at the request of the Company
after the termination of the employment. He is to give the Company, its
attorneys and solicitors, all reasonable assistance in preparing and
prosecuting such applications and, on request of the Company, to execute all
papers and do all things that may be reasonably necessary to protect the right
of the Company and vest in it or its assigns the discoveries, ideas or
inventions, applications and letters patent herein contemplated. Said
cooperation shall also include all actions reasonably necessary to aid the
Company in the defense of its rights in the event of litigation.
17. Trade Secrets.
A. In the course of the term of this Agreement, it is anticipated
that the Executive shall have access to secret or confidential technical and
commercial information, records, data, specifications, systems, methods, plans,
policies, inventions, material and other knowledge ("Confidential Material")
owned by the Company and its subsidiaries. The Executive recognizes and
acknowledges that included within the Confidential Material are the Company's
confidential commercial information, technology, methods of manufacture,
designs, and any computer programs, source codes, object codes, executable
codes and related materials, all as they may exist from time to time, and that
they are valuable special and unique aspects of the Company's business. All
such Confidential material shall be and remain the property of the Company.
Except as required by his duties to the Company, the Executive shall not,
directly or indirectly, either during the term of his employment or at any time
thereafter, disclose or disseminate to anyone or make use of, for any
(8)
<PAGE> 9
purpose whatsoever, any Confidential Material. Upon termination of his
employment, the Executive shall promptly deliver to the Company all
Confidential Material (including all copies thereof, whether prepared by the
Executive or others) which are in the possession or under the control of the
Executive. The Executive shall not be deemed to have breached this Section 17
if the Executive shall be specifically compelled by lawful order of any
judicial, legislative, or administrative authority or body to disclose any
confidential material or else face civil or criminal penalty or sanction.
B. The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 17 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 17 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.
18. Payment and Other Provisions After Change of Control
(a) In the event Executive's employment with the Company is
terminated within one year following the occurance of a Change of Control
(other than as a consequence of death or disability) either (x) by the Company
for any reason other than for Cause, or (y) by Executive for Good Reason, then
Executive shall be entitled to receive from the Company, in lieu of the
severance payment otherwise payable pursuant to Section 9(a), the following:
(i) Base Salary: Executive's annual base salary as in
effect at the date of termination, multiplied by three, shall be paid on the
date of termination;
(ii) Target Incentive Compensation: The amount of the
Executive's target incentive compensation under the applicable Executive Bonus
Plan for the fiscal year in which the date of termination occurs, multiplied by
three, shall be paid on the date of termination; and
(iii) Other Benefits: Notwithstanding the vesting period
provided for in the Company's Stock Option Plan and any related stock option
agreements between the Company and the Executive for stock options ("options")
granted Executive by the Company all of options shall be fully vested and
exercisable upon a Change of Control and termination of employment.
(9)
<PAGE> 10
(b) For purposes of this Agreement, the term "Change of Control" shall
mean:
(i) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Rule 13d-3 promulgated
under the Exchange Act or any successor provision) (any of the foregoing
described in this Paragraph 18.b.i hereafter a "Person") of 50% or more of
either (a) the then outstanding shares of Capital Stock of the Company
(the"Outstanding Capital Stock") or (b) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Voting Securities"),
provided, however, that any acquisition by (x) the Company or any of its
subsidiaries, or any employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its subsidiaries or (y) any Person
that is eligible, pursuant to Rule 13d-1(b) under the Exchange Act, to
file a statement on Schedule 13G with respect to its beneficial ownership
of Voting Securities, whether or not such Person shall have filed a
statement on Schedule 13G, unless such Person shall have filed a statement
on Schedule 13D with respect to beneficial ownership of 50% or more of the
Voting Securities or (z) any corporation with respect to which, following
such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Capital Stock and Voting Securities immediately prior to such acquisition
in substantially the same proportion as their ownership, immediately prior
to such acquisition, of the Outstanding Capital Stock and Voting
Securities, as the case may be, shall not constitute a Change of Control;
or
(ii) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least
a majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company (as such terms
are
(10)
<PAGE> 11
used in Rule 14a-11 of Regulation 14A, or any successor section,
promulgated under the Exchange Act); or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in
each case, with respect to which all or substantially all holders of the
Outstanding Capital Stock and Voting Securities immediately prior to such
Business Combination do not, following such Business Combination,
beneficially own, directly or indirectly, more than 60% of, respectively,
the then outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the corporation
resulting from the Business Combination; or
(iv) (a) a complete liquidation or dissolution of the Company or
(b) a sale or other disposition of all or substantially all of the assets
of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors is then owned beneficially, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Capital Stock and
Voting Securities immediately prior to such sale or disposition in
substantially the same proportion as their ownership of the Outstanding
Capital Stock and Voting Securities, as the case may be, immediately prior
to such sale or disposition.
19. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail, return receipt requested to his residence in the case of the
Executive, or to its principal office in the case of the Company, or to such
other addresses as they may respectively designate in writing.
20. Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties and may not be changed orally but only by an
agreement in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. Waiver of or failure to
exercise any rights provided by this Agreement in any respect shall not be
deemed a waiver of any further or future rights.
(11)
<PAGE> 12
21. Binding Effect; Assignment. The rights and obligations of this
Agreement shall bind and inure to the benefit of any successor of the Company
by reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business or properties. The Executive's
rights hereunder are personal to and shall not be transferable nor assignable
by the Executive.
22. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
23. Governing Law; Arbitration. This Agreement shall be construed in
accordance with and governed for all purposes by the laws and public policy of
the State of Delaware applicable to contracts executed and to be wholly
performed within such state. Any dispute or controversy arising out of or
relating to this Agreement shall be settled by arbitration in accordance with
the rules of the American Arbitration Association and judgment upon the award
may be entered in any court having jurisdiction thereover. The arbitration
shall be held in Wilmington, Delaware or in such other place as the parties
hereto may agree.
24. Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, and cause to be executed, acknowledged,
delivered and performed, at any time and from time to time, all such further
acts, deeds, assignments, transfers, conveyances, powers of attorney and/or
assurances as may be necessary or proper to carry out the provisions or intent
of this Agreement.
25. Severability. The parties agree that if any one or more of the
terms, provisions, covenants or restrictions of this Agreement shall be
determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
26. Counterparts. This Agreement maybe executed in several
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
(12)
<PAGE> 13
IN WITNESS WHEREOF, INFORMATION RESOURCE ENGINEERING, INC. has caused
this instrument to be signed by a duly authorized officer and the Executive has
hereunto set his hand the day and year first above written.
INFORMATION RESOURCE ENGINEERING, INC.
By /s/ DAVID A. SKALITZKY
-------------------------------
Vice President, Finance
/s/ ANTHONY A. CAPUTO
-------------------------------
ANTHONY A. CAPUTO
(13)
<PAGE> 1
INFORMATION RESOURCE ENGINEERING, INC. AND SUBSIDIARIES EXHIBIT 11
Computation of Per Share Loss
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
===========================================================================================================================
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY
Net loss $ (715,503) (695,251) (7,084,550)
Accrued dividends on preferred stock (85,870) (82,270) --
- ---------------------------------------------------------------------------------------------------------------------------
Loss attributable to common stockholders $ (801,373) (777,521) (7,084,550)
===========================================================================================================================
Average number of common shares outstanding 3,228,806 3,826,831 5,304,984
Dilutive effect of stock options and warrants -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 3,228,806 3,826,831 5,304,984
===========================================================================================================================
Loss per common share $ (.25) (.20) (1.34)
===========================================================================================================================
ASSUMING FULL DILUTION
Loss attributable to common stockholders $ (801,373) (777,521) (7,084,550)
===========================================================================================================================
Weighted average number of common shares outstanding 3,228,806 3,826,831 5,304,984
Additional dilutive effect of stock options and warrants -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 3,228,806 3,826,831 5,304,984
===========================================================================================================================
Loss per common share assuming full dilution $ (.25) (.20) (1.34)
===========================================================================================================================
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The registrant owns 100% of the capital stock of the following subsidiaries:
Connective Strategies, Inc. (A Delaware Corporation)
GRETACODER Data Systems AG (A Switzerland Corporation)
SafeNet/Trusted Services Corporation (A Delaware Corporation)
IRE Secure Solutions, Inc. (A Delaware Corporation)
49
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 FOR INFORMATION RESOURCE
ENGINEERING INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,916,991
<SECURITIES> 2,311,980
<RECEIVABLES> 1,564,381
<ALLOWANCES> 0
<INVENTORY> 3,543,995
<CURRENT-ASSETS> 19,439,190
<PP&E> 2,689,801
<DEPRECIATION> 847,076
<TOTAL-ASSETS> 24,653,241
<CURRENT-LIABILITIES> 2,775,296
<BONDS> 16,710
0
0
<COMMON> 54,581
<OTHER-SE> 21,806,654
<TOTAL-LIABILITY-AND-EQUITY> 24,653,241
<SALES> 14,317,423
<TOTAL-REVENUES> 14,317,423
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<INCOME-CONTINUING> (7,084,550)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (7,084,550)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
