<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, 1998
[ ] 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 4, 1998
was 5,463,727.
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INFORMATION RESOURCE ENGINEERING, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets as of December 31, 1998 and March 31, 3
1997
Consolidated Statements of Operations for the three months ended
March, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity for the three
months ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 6
Consolidated Statements of Comprehensive Income (Loss) for the
three months ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II. OTHER INFORMATION 13
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 13
</TABLE>
2
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- --------------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,887 $ 7,222
Short-term investments -- 2,339
Accounts receivable 3,077 3,217
Inventories 3,042 2,915
Prepaid expenses 307 357
-------- --------
Total current assets 15,313 16,050
Equipment and leasehold improvements, net of accumulated
depreciation of $1,418 and $1,321 1,512 1,576
Computer software development costs, net of accumulated
amortization of $590 and $498 1,464 1,407
Goodwill, net of accumulated amortization of $296 and $265 928 958
Prepaid license fee and other assets 1,524 1,540
-------- --------
$ 20,741 $ 21,531
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 12 $ 17
Accounts payable 1,737 1,035
Accrued expenses 1,326 1,737
Advance payments and deferred revenue 323 762
-------- --------
Total current liabilities 3,398 3,551
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 5,463,727
shares in 1998 and 5,462,727 in 1997 55 55
30,930 30,929
Additional paid-in capital
Accumulated deficit (12,744) (12,235)
Accumulated other comprehensive income (898) (769)
-------- --------
Net stockholders' equity 17,343 17,980
-------- --------
$ 20,741 $ 21,531
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Revenues $ 4,886 $ 3,150
Cost of Revenues 2,257 1,461
------------ -------------
Gross Profit 2,629 1,689
Operating Expenses
Research and development expenses 881 937
Sales and marketing expenses 1,816 1,648
General and administrative expense 509 636
Amortization of acquired intangible assets 31 31
------------ -------------
3,237 3,252
Operating loss (608) (1,563)
Interest income, net 99 139
Loss before income taxes (509) (1,424)
Income taxes - -
------------ -------------
Net loss (509) (1,424)
============ =============
Loss per common share - basic and diluted $ (0.09) $ (0.26)
Weighted average number of shares outstanding 5,463 5,459
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Common stock Additional Accumulated other Net
------------ paid-in Accumulated comprehensive stockholders'
Shares Amount capital Deficit income equity
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 1998
Balance at beginning of
period 5,463 $55 $30,929 $(12,235) $ (769) $17,980
Stock options
exercised 1 -- 1 -- -- 1
Net loss -- -- -- (509) -- (509)
Foreign currency
translation
adjustment -- -- -- -- (129) (129)
----- ----- ------- --------- ------- -------
Balance at end of
period 5,464 $55 $30,930 $(12,744) $ (898) $17,343
===== ===== ======= ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Common stock Additional Accumulated other Net
------------ paid-in Accumulated comprehensive stockholders'
Shares Amount capital Deficit income equity
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1997
Balance at beginning
of period 5,458 $55 $30,918 $ (8,597) $(514) $21,862
Stock options
exercised 4 -- 8 -- -- 8
Net loss -- -- -- (1,424) -- (1,424)
Foreign currency
translation
adjustment -- -- -- -- (227) (227)
----- ----- ------- -------- ------- -------
Balance at end of
period 5,462 $55 $30,926 $(10,021) $(741) $20,219
===== ===== ======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited - in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (509) $(1,424)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 207 203
Amortization of acquired intangible assets 31 31
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 176 (1,638)
(Increase) decrease in inventories (183) (73)
Increase in prepaid expenses -- (277)
Increase in accounts payable 663 141
Increase (decrease) in accrued expenses (391) 256
Increase (decrease) in deferred revenues (430) (7)
Other 64 25
------ -------
Net cash used in operating activities (372) (2,763)
------ -------
Cash flows from investing activities:
Purchase of short-term investments -- (6,019)
Sales of short-term investments 2,339 --
Equipment expenditures (54) (105)
Additions to computer software development costs (149) (141)
------ -------
Net cash provided by (used in) investing activities 2,136 (6,265)
------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering expense 1 8
Payments of long-term debt (5) (4)
------ -------
Net cash provided by (used in) financing activities (4) 4
------ -------
Effect of exchange rate changes on cash (95) (141)
------ -------
Net increase (decrease) in cash and cash equivalents 1,665 (9,165)
Cash and cash equivalents at beginning of period 7,222 11,917
------ -------
Cash and cash equivalents at end of period $8,887 $ 2,752
====== =======
Cash paid for
Interest expense $ -- $ 1
====== =======
Income taxes $ -- $ --
====== =======
</TABLE>
See accompanying notes to consolidated financial statements
6
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Loss $ (509) $ (1,424)
Other comprehensive income, net of tax
Foreign currency translation adjustments (129) (227)
------------ ------------
Comprehensive income (loss) $ (638) $ (1,651)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
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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.
(2) Revenues
Four customers accounted for a total of 45% of revenues in the three month
period ended March 31, 1998. One customer accounted for 18% of revenues in the
three month period ended March 31, 1997.
Revenues from non-U.S. clients were 44% and 41% in the three month periods
ended March 31, 1998 and 1997, respectively. The majority of these revenues
were derived from sales to unaffiliated customers of the Company by its Swiss
subsidiary.
(3) Inventories
Inventories consists of the following at March 31, 1998:
<TABLE>
<S> <C>
Raw materials $1,652
Finished goods 1,390
------
Total $3,042
======
</TABLE>
(4) Accrued Expenses
Accrued expenses consists of the following at March 31, 1998:
<TABLE>
<S> <C>
Accrued salaries and commissions $930
Other 396
------
Total $1,326
======
</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 $160,000 and $476,000 was
required at March 31, 1998 and 1997, respectively The cumulative valuation
allowance at March 31, 1998 was $3,739,000.
(6) Loss per Common Share
The Company adopted SFAS No. 128, Earnings per Share, during the year ended
December 31, 1997. Statement 128 establishes revised standards for computing
and presenting earnings per share (EPS) data. It requires dual presentation of
"basic" and "diluted" EPS on the face of the statements of income and
reconciliation of the numerators and denominators used in the basic and diluted
EPS calculations. As required by SFAS No. 128, EPS data for prior periods
presented have been restated to conform to the new standard.
8
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INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(UNAUDITED) (Continued)
(6) Continued
Basic EPS is calculated by dividing net loss by the weighted-average number of
common shares outstanding for the applicable period. Diluted EPS is calculated
after adjusting the numerator and the denominator of the basic EPS calculation
for the effect of all dilutive potential common shares outstanding during the
period. Information related to the calculation of net loss per share of common
stock is summarized as follows for the quarter ended March 31:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
Basic Diluted Basic Diluted
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss
attributable to
common
stockholders $ (509,571) $ (509,571) $ (1,424,145) $ (1,424,145)
- ----------------------------------------------------------------------------------------------------------
Weighted-average
shares outstanding 5,463,449 5,463,449 5,459,240 5,459,240
Dilutive securites - - - -
options
- ----------------------------------------------------------------------------------------------------------
Adjusted weighted-
average shares
used in EPS
computation 5,463,449 5,463,449 5,459,240 5,459,240
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(7) Accumulated other comprehensive income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. It does not, however, specify when to
recognize or how to measure items that make up comprehensive income.
SFAS No. 130 is effective for both interim and annual periods beginning after
December 15, 1997 and as a result was adopted by the Company during the three
months ended March 31, 1998. Comparative financial statements have been
provided and earlier periods have been reclassified to reflect the provisions
of this statement.
9
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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. The Company's Swiss subsidiary,
GRETACODER Data Systems AG ("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 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 continue 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. However, there can be no
assurance that these strategies will be successful.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
------ -----
<S> <C> <C>
Revenues 100 % 100 %
Cost of revenues 46 46
------ -----
Gross profit 54 54
Operating expenses
Research and development expenses 18 29
Sales and marketing expenses 37 52
General and administrative expenses 10 20
Amortization of acquired intangible assets 6 1
------ -----
66 102
------ -----
Operating loss (12) (48)
Interest income, net 2 4
------ -----
Loss before income taxes (10) (44)
Income taxes -- --
------ -----
Net loss (10)% (44)%
====== =====
</TABLE>
Three Months ended March 31, 1998 Compared to Three Months ended March 31, 1997
Revenue for the first quarter of 1998 was $4.9 million, an increase of $1.7
million, or 55%, from $3.2 million for the first quarter of 1997. The increase
was primarily a result of increased sales in Safenet(TM) and GDS products.
Also, professional services provided by engineering contributed to increased
revenue in the first quarter of 1998.
Gross margin remained flat at 54% in the three months ended March 31, 1998
compared to the same period in 1997.
Research and development expenses were approximately $881,000 for the three
months ended 1998, a $56,000 decrease from the same period in 1997. The
decrease is primarily attributable to lower level of outside engineering
expenses reported by the company's subsidiary, GDS.
Sales and marketing expenses increased by 10% to $1.8 million compared to
$1.6 million for the same period in 1997. The increase is primarily related to
increased personnel related costs and increased public relations and
marketing activities.
General and administrative expenses decreased to $509,000 from $636,000 in
1997, a decrease of $127,000, or 20%. The primary reason for the decrease was
a result of personnel transfers from G&A to other departments within the
company, and decreased outside service expenses from the same quarter in 1997.
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.
The Company had a net loss of $509,000 for the three months ended March 31,
1998 compared to a net loss of $1.4 million for the same period in 1997. The
loss per common share was $0.09 in 1998 compared to $0.26 in 1997.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, 1998, the Company had cash and short-term investments of $8.9
million. Working capital totaled $11.9 million at the end of the first quarter
1998.
In August 1996, the Company signed a two year Joint Development and Marketing
Agreement with CyberGuard Corporation ("CyberGuard"). The companies have
developed and intend to market 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. As of March 31, 1998, the Company has utilized $42,000 in credits
against the prepaid license fee. The agreement provides that in the event that
it 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 termination with interest at the prime rate.
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 recognizes revenues upon shipment of finished products,
such recognition may be irregular and uneven, thereby disparately impacting
quarterly operating results and balance sheet comparisons.
12
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
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, 1998
By:/s/Anthony A. Caputo
--------------------
ANTHONY A. CAPUTO,
Chairman, President and Chief Executive Officer
May 13, 1998
By:/s/Richard G. Tennant
---------------------
RICHARD G. TENNANT,
Senior Vice President,
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1998 FOR INFORMATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH RESOURCE ENGINEERING
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,887
<SECURITIES> 0
<RECEIVABLES> 3,137
<ALLOWANCES> 60
<INVENTORY> 3042
<CURRENT-ASSETS> 15,313
<PP&E> 2,930
<DEPRECIATION> 1,418
<TOTAL-ASSETS> 20,741
<CURRENT-LIABILITIES> 3,398
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 17,287
<TOTAL-LIABILITY-AND-EQUITY> 20,741
<SALES> 4,886
<TOTAL-REVENUES> 4,886
<CGS> 2,257
<TOTAL-COSTS> 2,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (509)
<INCOME-TAX> 0
<INCOME-CONTINUING> (509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (509)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
