<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8029 Corporate Drive, Baltimore, Md. 21236
------------------------------------------
(Address of principal executive offices)
(410) 931-7500
--------------
(Registrant's telephone number)
Indicate by a check mark whether the issuer (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 twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the issuer's Common Stock as of May 12,
1997 was 5,462,127.
<PAGE> 2
INFORMATION RESOURCE ENGINEERING, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL INFORMATION
Consolidated Balance Sheet as of December 31, 1996 and March 31, 1997 3
Consolidated Statements of Operations for the three months ended March 31,
1996 and 1997 4
Consolidated Statements of Stockholders' Equity for the three months ended
March 31, 1996 and 1997 5
Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
PART II. OTHER INFORMATION 10
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 10
EXHIBITS 11 and 27 11
</TABLE>
2
<PAGE> 3
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
Assets ------------ ---------
------ (Note) Unaudited
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,916,991 $ 2,751,897
Short-term investments 2,311,980 8,331,081
Accounts receivable 1,564,381 3,152,718
Inventories 3,543,995 3,510,617
Prepaid expenses 101,843 378,947
---------- ----------
Total current assets 19,439,190 18,125,260
Equipment and leasehold improvements, net of accumulated
depreciation of $847,747 and $965,899 1,842,725 1,799,807
Computer software development costs, net of accumulated
amortization of $336,525 and $402,229 1,142,352 1,217,872
Goodwill, net of accumulated amortization of $142,662 and $173,243 1,080,568 1,049,987
Prepaid license fee 1,000,000 997,500
Other assets 148,406 121,710
---------- ----------
$24,653,241 $ 23,312,136
=========== ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 18,480 $ 18,896
Accounts payable 1,288,929 1,388,591
Accrued expenses 1,317,389 1,530,905
Deferred revenue on maintenance contracts 150,498 143,146
---------- ----------
Total current liabilities 2,775,296 3,081,538
Long-term debt, less current maturities 16,710 11,827
---------- ----------
Total liabilities 2,792,006 3,093,365
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value per share.
Authorized 500,000 shares, issued and outstanding, none -- --
Common stock, $.01 par value per share.
Authorized 15,000,000 shares, issued and outstanding 5,458,127
shares in 1996 and 5,461,527 in 1997 54,581 54,615
Additional paid-in capital 30,917,584 30,925,809
Deficit (8,597,003) (10,021,148)
Cumulative foreign currency adjustment (513,927) (740,505)
---------- ----------
Total stockholders' equity 21,861,235 20,218,771
---------- ----------
$24,653,241 $ 23,312,136
=========== ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Revenues $ 3,324,652 $ 3,150,116
Cost of revenues 1,961,013 1,461,191
----------- -----------
Gross profit 1,363,639 1,688,925
Operating expenses
Research and development expenses 915,639 936,555
Sales and marketing expenses 848,971 1,649,212
General and administrative expenses 438,252 635,767
Amortization of acquired intangible assets 183,161 30,581
----------- -----------
2,386,023 3,252,115
----------- -----------
Operating loss (1,022,384) (1,563,190)
Interest income, net 98,938 139,045
----------- -----------
Loss before income taxes (923,446) (1,424,145)
Income taxes -- --
----------- -----------
Net loss $ (923,446) $(1,424,145)
=========== ===========
Loss per common share $ (.19) $ (.26)
=========== ===========
Weighted average number of common shares outstanding 4,911,395 5,459,240
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common stock Additional Cumulative Net
------------ paid-in foreign currency stockholders'
Shares Amount capital Deficit adjustment equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1996
Balance at beginning
of period 4,244,829 $42,448 $ 9,712,777 $(1,512,453) $ (26,310) $ 8,216,462
Sale of common stock,
net of offering
expenses 1,172,500 11,725 21,047,145 -- -- 21,058,870
Net loss -- -- -- (923,446) -- (923,446)
Foreign currency
translation
adjustment -- -- -- -- (106,686) (106,686)
--------- ------- ----------- ----------- --------- -----------
Balance at end of
period 5,417,329 $54,173 $30,759,922 $(2,435,899) $(132,996) $28,245,200
========= ======= =========== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Common stock Additional Cumulative Net
------------ paid-in foreign currency stockholders'
Shares Amount capital Deficit adjustment equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1997
Balance at beginning
of period 5,458,127 $54,581 $30,917,584 $(8,597,003) $(513,927) $21,861,235
Stock options
exercised 3,400 34 8,225 -- -- 8,259
Net loss -- -- -- (1,424,145) -- (1,424,145)
Foreign currency
translation
adjustment -- -- -- -- (226,578) (226,578)
--------- ------- ----------- ------------ --------- -----------
Balance at end of
period 5,461,527 $54,615 $30,925,809 $(10,021,148) $(740,505) $20,218,771
========= ======= =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (923,446) $(1,424,145)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation of equipment 93,896 133,725
Amortization 35,863 69,454
Amortization of acquired intangible assets 183,159 30,581
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 1,404,879 (1,638,454)
Increase in inventories (399,179) (73,427)
Increase in prepaid expenses (109,302) (277,353)
Increase in accounts payable 1,176,287 141,318
Increase (decrease) in accrued expenses (257,583) 257,458
Decrease in deferred revenue on maintenance contracts (47,678) (7,352)
Other 23,500 25,446
----------- -----------
Net cash provided by (used in) operating activities 1,180,396 (2,762,749)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investments -- (6,019,101)
Equipment expenditures (96,805) (104,786)
Additions to computer software development costs (123,648) (141,224)
----------- -----------
Net cash used in investing activities (220,453) (6,265,111)
----------- -----------
Cash flows from financing activities:
Payments of notes payable (4,053,416) --
Proceeds from sale of common stock, net of offering expense 21,058,870 8,259
Payments of long-term debt (17,056) (4,467)
----------- -----------
Net cash provided by financing activities 16,988,398 3,792
----------- -----------
Effect of exchange rate changes on cash (10,730) (141,026)
----------- -----------
Net increase (decrease) in cash and cash equivalents 17,937,611 (9,165,094)
Cash and cash equivalents at beginning of period 2,656,494 11,916,991
----------- -----------
Cash and cash equivalents at end of period $20,594,105 $ 2,751,897
=========== ===========
Cash paid for
Interest expense $ 124,964 $ 944
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
reporting and instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation have been included.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
(2) Revenues
One commercial client accounted for 18% of revenues in the three month period
ended March 31, 1997. A second commercial client accounted for 42% of revenues
in the three month period ended March 31, 1996.
Revenues from foreign clients were 35% and 41% in the three month periods
ended March 31, 1996 and 1997, respectively. The majority of these revenues
were derived from sales to unaffiliated customers of the Company by the
Company's Swiss subsidiary.
(3) Inventories
Inventories consists of the following at March 31, 1997:
<TABLE>
<S> <C>
Raw materials $1,430,975
Finished goods 2,079,642
----------
Total $3,510,617
==========
</TABLE>
(4) Accrued Expenses
Accrued expenses consists of the following at March 31, 1997:
<TABLE>
<S> <C>
Accrued salaries and commissions $ 903,937
Other 626,968
----------
Total $1,530,905
==========
</TABLE>
(5) Income Taxes
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of the deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which temporary differences become deductible and net operating
losses are allowable. Based on consideration of the above factors, management
determined an increase in the valuation allowance of $166,000 and $476,000 was
required at March 31, 1996 and 1997, respectively. The cumulative valuation
allowance at March 31, 1997 was $2,420,000.
(6) Loss per Common Share
The loss per common share for the three month period ended March 31, 1996 and
1997 was computed by dividing the net loss by the weighted average number of
shares of common stock outstanding during each period and common stock
equivalents, to the extent they result in additional per share dilution,
arising from the assumed exercise of outstanding stock options and warrants
under the treasury stock method.
7
<PAGE> 8
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED) (Continued)
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, was issued in February 1997 and, effective for financial statements
issued for periods ending after December 15, 1997, establishes standards for
computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the consolidated
statement of operations and requires reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Earlier application is not permitted, however,
adoption will not have a material effect on EPS.
ITEM 2 - 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 Gretacoder Data Systems AG ("GDS") in October
1995. GDS designs, manufactures and markets cryptographic equipment primarily
in Switzerland and Europe.
The Company's historical operating results have been dependent on a variety
of factors including, but not limited to, the length of the sales cycle, the
timing of orders from and shipments to clients, product development expenses
and the timing of development and introduction of new products. The Company's
expense levels are based, in part, on expectations of future revenues. The size
and timing of the Company's historical revenues have varied substantially from
quarter to quarter and year to year. Accordingly, the results of a particular
period, or period to period comparisons of recorded sales and profits may not
be indicative of future operating results.
While Management is committed to the long-term profitability of the Company,
the recent growth of the computer security industry has made it important that
market share be obtained. The Company has undertaken various strategies in
order to increase its revenues and improve its future operating results,
including the 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 1996 and 1997.
However, there can be no assurance that these strategies will be successful.
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations of the Company
Three Months ended March 31, 1997 Compared to Three Months ended March 31, 1996
The following table sets forth certain Consolidated Statement of Operations
data of the Company as a percentage of revenues for the three months ended
March 31:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Revenues 100% 100%
Cost of revenues 59 46
--- ---
Gross profit 41 54
Operating expenses
Research and development 27 30
Sales and marketing expenses 26 52
General and administrative expenses 13 20
Amortization of acquired intangible assets 6 1
--- ---
72 103
--- ---
Operating loss (31) (49)
Interest income, net 3 4
--- ---
Loss before income taxes (28) (45)
Income taxes -- --
--- ---
Net loss (28)% (45)%
=== ===
</TABLE>
Revenues decreased 5% or $174,536 to $3,150,116 for the three months ended
March 31, 1997, from $3,324,652 for the same period in 1996. While the Swiss
franc revenues of GDS increased slightly, the exchange rate decline resulted in
a quarter to quarter decrease in revenues of $165,000. During the 1997 quarter
the Company was able to generate revenues from new and existing clients that
offset the loss of revenue due to the termination of the product agreement with
MCI Telecommunications Corporation ("MCI"). Revenues from MCI were $1,397,000
in the first quarter of 1996.
Cost of revenues decreased to 46% for the three months ended March 31, 1997
compared to 59% for the same period in 1996. The 1996 cost of revenues included
$236,000 for amortization of a purchase accounting adjustment to the carrying
value of GDS inventory. Without this charge, the cost of revenues was 52% in
1996. During 1996, the Company realized a lower gross profit on the SafeNet
dial access products sold to MCI in order to obtain increased market share.
SafeNet/Trusted Services ("Services"), a provider of virtual private network
security management, started generating revenue in the 1997 quarter. On a pro
forma basis with Services revenues and cost of revenues removed, cost of
revenues was 43% for the quarter. It is anticipated that the gross margin will
continue to improve in subsequent periods due to the development of new
products, changes in product sales mix, improved sales and marketing activities
and by increases in the net service revenues generated by Services.
Sales and marketing expenses increased by 94% or $800,241 to $1,649,212
compared to $848,971 for the same period in 1996. The increase is primarily
related to increased personnel related costs associated with the expansion of
the sales and marketing staffs ($427,000) and with the increased sales and
marketing activities ($344,000). This is consistent with the Company's
strategy to continue to invest in its core business in order to increase its
market share.
General and administrative expenses increased by 45% or $197,515 to
$635,767 compared to $438,252 for the same period in 1996. The increase is
primarily related to increased personnel costs associated with the expansion of
the support functions ($95,000), with the use of outside services for general
corporate purposes ($66,000) and with travel expenses ($35,000).
In the fourth quarter of 1996, the Company took a one-time charge related to
the write-off of the unamortized acquired intangible assets from the
acquisition of Connective Strategies, Inc. As a result, the quarterly
amortization of acquired intangible assets has now been reduced by $152,580.
The Company had no income tax benefit in either period. A valuation
allowance has been established since the Company's ability to use the net
operating loss is dependent upon future taxable income.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company had a net loss of $1,424,145 for the three month ended March
31, 1997 compared to a net loss of $923,446 for the same period in 1996. The
loss per common share was $.26 in 1997 compared to $.19 in 1996.
Liquidity and Financial Position of the Company
The Company believes that its current cash resources, together with cash
flows from operations, will be sufficient to meet its needs for the next year.
As of March 31, 1997, the Company had cash, short-term investments and accounts
receivable totaling $14,236,000 and a backlog of $3,050,000.
Significant uses of the Company's cash balances during the first quarter
of 1997 included the purchase of short-term investments ($6,019,000) and the
funding of operating activities ($2,763,000). Accounts receivable increased by
$1,638,000 during the quarter due to a large volume of shipments in the last
month of the quarter.
In August 1996, the Company signed a Joint Development and Marketing
Agreement with CyberGuard Corporation ("CyberGuard"). The companies have
developed and are marketing a product that combines the Company's
SafeNet/Enterprise 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.
During 1996, the Company experienced a significant increase in its
finished goods inventory as a result of the cancellation of the MCI contract
since 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.
Inflation and Seasonality
The Company does not believe that inflation will significantly impact its
business, The Company does not believe its business is seasonal, however,
because the Company revenues upon shipment of finished products, such
recognition may be irregular and uneven, thereby disparately impacting
quarterly operating results and balance sheet comparisons.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
11 Statement re computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION RESOURCE ENGINEERING, INC.
May 13, 1997
By:/s/Anthony A. Caputo
--------------------
ANTHONY A. CAPUTO,
Chairman, President and Chief Executive Officer
May 13, 1997
By:/s/David A. Skalitzky
---------------------
DAVID A. SKALITZKY,
Vice President, Finance
(Principal Financial and Accounting Officer)
10
<PAGE> 1
EXHIBIT 11
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Primary
-------
Net loss $ (923,446) $(1,424,145)
=========== ===========
Average common shares outstanding 4,911,395 5,459,240
Dilutive effect of stock options and warrants -- --
----------- -----------
Weighted average number of common shares outstanding 4,911,395 5,459,240
=========== ===========
Loss per common share $ (.19) $ (.26)
=========== ===========
Assuming full dilution
----------------------
Net loss $ (923,446) $(1,424,145)
=========== ===========
Weighted average number of common shares outstanding 4,911,395 5,459,240
Additional dilutive effect of stock options and warrants -- --
----------- -----------
Weighted average number of common shares outstanding 4,911,395 5,459,240
=========== ===========
Loss per common share assuming full dilution $ (.19) $ (.26)
=========== ===========
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 FOR INFORMATION RESOURCE
ENGINEERING, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,751,897
<SECURITIES> 8,331,081
<RECEIVABLES> 3,152,718
<ALLOWANCES> 0
<INVENTORY> 3,510,617
<CURRENT-ASSETS> 18,125,260
<PP&E> 2,765,706
<DEPRECIATION> 965,899
<TOTAL-ASSETS> 23,312,136
<CURRENT-LIABILITIES> 3,081,538
<BONDS> 11,827
0
0
<COMMON> 54,615
<OTHER-SE> 20,164,156
<TOTAL-LIABILITY-AND-EQUITY> 23,312,136
<SALES> 3,150,116
<TOTAL-REVENUES> 3,150,116
<CGS> 1,461,191
<TOTAL-COSTS> 1,461,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,286
<INCOME-PRETAX> (1,424,145)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,424,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,424,145)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
