<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 September 30, 1999
[ ] 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 office)
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 October 26,
1999 was 5,532,818.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets as of September 30, 1999 3
(unaudited) and December 31, 1998
Consolidated Statements of Operations for the three 4
months and nine months ended September 30, 1999 and
1998 (unaudited)
Consolidated Statement of Stockholders' Equity for the 5
nine months ended September 30, 1999 (unaudited)
Consolidated Statements of Cash Flows for the nine 6
months ended September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Comprehensive Income (Loss) for the 7
three months and nine months ended September 30, 1999 and
1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 13
PART II. OTHER INFORMATION 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
2
<PAGE> 3
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 7,175 $ 5,866
Accounts receivable, net of allowance for doubtful accounts
of $283 and $87 3,036 4,919
Inventories 3,216 3,533
Prepaid expenses 302 304
--------------------- ---------------------
Total current assets 13,729 14,622
Equipment and leasehold improvements, net of accumulated
depreciation of $2,217 and $1,822 1,462 1,556
Computer software development costs, net of accumulated
amortization of $1,064 and $748 1,646 1,527
Goodwill, net of accumulated amortization of $457 and $387 563 632
Prepaid license fees and other assets 620 604
--------------------- ---------------------
$ 18,020 $ 18,941
===================== =====================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,212 $ 1,493
Accrued expenses 1,815 1,733
Advance payments and deferred revenue 499 315
--------------------- ---------------------
Total liabilities 3,526 3,541
--------------------- ---------------------
Stockholders' equity:
Preferred stock, $.01 par value per share.
Authorized 500 shares, none issued and outstanding - -
Common stock, $.01 par value per share.
Authorized 15,000 shares, issued 5,524 shares
and 5,467 shares 55 55
Additional paid-in capital 32,418 31,042
Accumulated deficit (17,039) (14,621)
Accumulated other comprehensive loss (937) (380)
Treasury stock, at cost, 1 shares and 174 shares (3) (696)
--------------------- ---------------------
Net stockholders' equity 14,494 15,400
--------------------- ---------------------
$ 18,020 $ 18,941
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 3,783 $ 6,809 $ 14,420 $ 16,099
Cost of revenues 1,476 2,941 5,200 7,040
------------ ----------- ----------------- -----------
Gross profit 2,307 3,868 9,220 9,059
------------ ----------- ----------------- -----------
Research and development expenses 1,650 1,236 4,365 3,238
Sales and marketing expenses 1,434 1,818 5,045 5,458
General and administrative expense 868 631 2,000 2,026
Recovery of CyberGuard advance (238) - (238) -
Amortization of acquired intangible assets 23 31 69 92
------------ ----------- ----------------- -----------
Total operating expenses 3,737 3,716 11,241 10,814
------------ ----------- ----------------- -----------
Operating income (loss) (1,430) 152 (2,021) (1,755)
Interest income, net 25 53 71 231
------------ ----------- ----------------- -----------
Income (loss) before income taxes (1,405) 205 (1,950) (1,524)
Income tax expense 188 150 468 150
------------ ----------- ----------------- -----------
Net income (loss) $ (1,593) $ 55 $ (2,418) $ (1,674)
============ =========== ================= ===========
Income (loss) per common share - basic and diluted $ (0.29) $ 0.01 $ (0.45) $ (0.31)
============ =========== ================= ===========
Weighted average number of common shares outstanding
Basic 5,514 5,415 5,411 5,448
Diluted 5,514 5,431 5,411 5,448
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Common stock Additional
-------------------------- paid-in Accumulated
Shares Amount capital deficit
----------- ------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Balance at beginning of
period 5,467 $ 55 $ 31,042 $ (14,621)
Stock options exercised 34 - 875 -
Placement agent
warrants exercised 23 - 392 -
Stock option compensation - - 104 -
Net loss - - - (2,418)
Foreign currency
translation adjustment - - - -
Other - - 5 -
----------- ------------- ----------------- -------------------
Balance at end of period 5,524 $ 55 $ 32,418 $ (17,039)
=========== ============= ================= ===================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other Net
comprehensive Treasury stock stockholders'
income (loss) Shares Amount equity
----------------------- --------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $ (380) 174 $ (696) $ 15,400
Stock options exercised - (173) 693 1,568
Placement agent
warrants exercised - - - 392
Stock option compensation - - - 104
Net loss - - - (2,418)
Foreign currency
translation adjustment (557) - - (557)
Other - - - 5
----------------------- --------------- -------------- ---------------------
Balance at end of period $ (937) 1 $ (3) $ 14,494
======================= =============== ============== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,418) $ (1,674)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 775 626
Amortization of acquired intangible assets 69 92
Stock option compensation 104 -
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable 1,745 (1,728)
Decrease (increase) in inventories 183 (735)
Decrease (increase) in prepaid expenses 1 (56)
(Decrease) increase in accounts payable (242) 668
Increase in accrued expenses 160 89
Increase (decrease) in deferred revenues 185 (92)
Other (21) 21
-------------- ---------------
Net cash provided by (used in) operating activities 541 (2,789)
-------------- ---------------
Cash flows from investing activities:
Purchase of short-term investments - (500)
Sales of short-term investments - 2,839
Equipment expenditures (377) (336)
Additions to computer software development costs (436) (383)
-------------- ---------------
Net cash provided by (used in) investing activities (813) 1,620
-------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,568 9
Proceeds from exercise of warrants 392 -
Other 5 -
Treasury stock purchases - (696)
Payments of long-term debt - (17)
-------------- ---------------
Net cash provided by (used in) financing activities 1,965 (704)
-------------- ---------------
Effect of exchange rate changes on cash (384) 213
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,309 (1,660)
Cash and cash equivalents at beginning of period 5,866 7,222
-------------- ---------------
Cash and cash equivalents at end of period $ 7,175 $ 5,562
============== ===============
Cash paid for:
Interest expense $ - $ 1
============== ===============
Income taxes $ - $ -
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net income (loss) $ (1,593) $ 55
Other comprehensive income (loss) - Foreign currency
translation adjustment 286 441
----------------- ----------------
Comprehensive income (loss) $ (1,307) $ 496
================= ================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net income (loss) $ (2,418) $ (1,674)
Other comprehensive income (loss) - Foreign currency
translation adjustment (557) 317
----------------- ----------------
Comprehensive income (loss) $ (2,975) $ (1,357)
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements for
Information Resource Engineering, Inc. and its subsidiaries ("IRE") have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim reporting and instructions to Form 10-Q. Interim reporting
requirements do not include all of the information and notes required by GAAP
for complete financial statements. Under GAAP, management must make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, the reported amounts of revenue and
expenses during the reporting period, and related disclosures. Actual results
could differ from those estimates. In the opinion of management, these financial
statements include all adjustments, consisting only of normal recurring items,
necessary for a fair presentation.
(2) Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
As of
----------------------------------------------
September 30, December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Raw materials $ 1,599,000 $ 1,778,000
Finished goods 1,617,000 1,755,000
-------------------- ---------------------
Total $ 3,216,000 $ 3,533,000
==================== =====================
</TABLE>
(3) Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
As of
----------------------------------------------
September 30, December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Salaries and commissions $ 1,121,000 $ 1,050,000
Income taxes 279,000 319,000
Other 415,000 364,000
-------------------- ---------------------
Total $ 1,815,000 $ 1,733,000
==================== =====================
</TABLE>
(4) Income Taxes
The income tax expense for the three months and the nine months ended
September 30, 1999 represents estimated income taxes for IRE's Swiss subsidiary.
(5) Reserve/Recovery for CyberGuard Advance
As more fully disclosed in Note 11 to the Consolidated Financial
Statements in IRE's Form 10-K for the year ended December 31, 1998, IRE could
not ascertain the ultimate viability of CyberGuard Corporation ("CyberGuard") at
December 31, 1998. Accordingly, IRE reserved for amounts due from CyberGuard
that totaled $772,000 after CyberGuard failed to honor its obligation to repay
the remaining advance at December 31, 1998. In June 1999, IRE negotiated a
settlement wherein CyberGuard will pay IRE a total of $650,000 to discharge
its obligation in full. CyberGuard made payments of $238,000 during the three
months ended September 30, 1999, and owes payments of $137,000 in the fourth
quarter of 1999 and $275,000 in 2000. Such amounts will be recognized by IRE
upon receipt.
(6) Segments of IRE and Related Information
IRE has two reportable segments: Domestic Operations, which design and
build network security products in the United States, and European Operations,
which design and build network security products in Switzerland. The segments
are
8
<PAGE> 9
strategic business units that offer different products and are managed
separately because each segment requires different technology and marketing
strategies. The domestic operations have export sales, mainly to South America
and Asia. The European operations have export sales, mainly to Western Europe.
In the nine months ended September 30,1999, the European operations had
one significant commercial client, as measured by sales volume, that totaled 11%
of IRE's consolidated revenues. In the same period of 1998, the domestic
operations' sales to one commercial client and the European operations' sales to
one commercial client totaled 14% and 13%, respectively, of IRE's consolidated
revenues.
<TABLE>
<CAPTION>
Three Months Nine Months
(in thousands) Ended September 30, Ended September 30,
-------------- ------------------------------------ --------------------------------
1999 1998 1999 1998
----------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Revenues from external customers:
Domestic operations $ 2,165 $ 2,925 $ 7,403 $ 8,691
European operations 1,618 3,884 7,017 7,408
----------------- ---------------- ------------- ----------------
Consolidated revenues $ 3,783 $ 6,809 $ 14,420 $ 16,099
================= ================ ============= ================
Operating income (loss):
Domestic operations $ (1,750) $ (1,381) $ (4,616) $ (3,663)
European operations 320 1,533 2,595 1,908
----------------- ---------------- ------------- ----------------
Consolidated operating income (loss) $ (1,430) $ 152 $ (2,021) $ (1,755)
================= ================ ============= ================
Income (loss) before income taxes:
Domestic operations $ (1,735) $ (1,336) $ (4,571) $ (3,449)
European operations 330 1,541 2,621 1,925
----------------- ---------------- ------------- ----------------
Consolidated income (loss) before income taxes $ (1,405) $ 205 $ (1,950) $ (1,524)
================= ================ ============= ================
Depreciation and amortization:
Domestic operations $ 326 $ 207 $ 731 $ 602
European operations 38 39 113 116
----------------- ---------------- ------------- ----------------
Consolidated depreciation and amortization $ 364 $ 246 $ 844 $ 718
================= ================ ============= ================
Geographic Information
Revenues:
United States $ 2,037 $ 2,410 $ 6,897 $ 7,422
Switzerland 397 2,566 3,627 4,808
Other foreign countries 1,349 1,833 3,896 3,869
----------------- ---------------- ------------- ----------------
Consolidated revenues $ 3,783 $ 6,809 $ 14,420 $ 16,099
================= ================ ============= ================
As of
--------------------------------
September December
30, 1999 31, 1998
------------- ----------------
Segment assets:
Domestic operations $ 10,098 $ 9,603
European operations 7,922 9,338
------------- ----------------
Consolidated segment assets $ 18,020 $ 18,941
============= ================
Long-lived assets:
United States $ 2,938 $ 2,879
Switzerland 733 836
Other foreign countries - -
------------- ----------------
Consolidated long-lived assets $ 3,671 $ 3,715
============= ================
</TABLE>
9
<PAGE> 10
(7) Income (Loss) Per Common Share
Basic earnings per share ("EPS") is calculated by dividing net income
(loss) by the weighted-average number of common shares outstanding for the
applicable period. Diluted EPS is calculated by adjusting the numerator and the
denominator of the basic EPS calculation for the effect, if any, of all dilutive
potential common shares outstanding during the period. The following table
presents the data used in the calculation of basic and diluted EPS:
<TABLE>
<CAPTION>
Three Months Nine Months
(in thousands) Ended September 30, Ended September 30,
-------------------------------- ------------------------------------
1999 1998 1999 1998
------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,593) $ 55 $ (2,418) $ (1,674)
============= ================ ================= ================
Weighted-average common shares outstanding - basic 5,514 5,415 5,411 5,448
Effect of dilutive securities-options - 16 - -
------------- ---------------- ----------------- ----------------
Adjusted weighted average common shares
outstanding - diluted 5,514 5,431 5,411 5,448
============= ================ ================= ================
</TABLE>
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
that may cause IRE's actual results in future periods to differ materially from
forecasted results. Those risks include, among others, uncertainty associated
with the receipt and timing of future customer orders, price pressures,
achieving technical and product development milestones, negotiating favorable
strategic agreements with original equipment manufacturers ("OEM"), sufficient
cash flow to support IRE's liquidity requirements, competitive factors that
could lead to a decrease in anticipated revenues and gross profits, the amount
and timing of research and development expenditures, and Year 2000 issues.
OVERVIEW
IRE designs, manufactures and markets cost-effective Virtual Private
Network (VPN) solutions that enable organizations to use the Internet and other
shared networks for private communications. IRE's technology and products are
used in VPN and electronic commerce applications by financial institutions,
government agencies, large corporations, telecommunication and Internet service
providers to secure data transmissions on private and public computer networks.
IRE has two reportable segments: Domestic Operations, which design and
build network security products in the United States; and European Operations,
which design and build network security products in Switzerland. The segments
are strategic business units that offer different products and are managed
separately because each segment requires different technology and marketing
strategies. The domestic operations have export sales, mainly to South America
and Asia. The European operations have export sales, mainly to Western Europe.
IRE'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. IRE's expense levels are
based, in part, on expectations of future revenues. IRE's historical revenues
have varied substantially in size and timing from quarter-to-quarter and
year-to-year. Therefore, results for a particular period, or period-to-period
comparisons of recorded sales and profits may not be indicative of future
operating results.
IRE's management is committed to the Company's long-term profitability
thereby maximizing shareholder value. Management believes that, in order to
achieve long-term profitability, IRE should exploit the opportunity provided by
the growth in the market for products that provide secure remote access to
computer networks and pursue market share. Consequently, IRE has undertaken
various strategies to increase revenues and improve future operating results,
which include transitioning from a products-based to an OEM technology company.
New product offerings, such as our SafeNet/Soft-PK(TM) client software for
Internet security and SafeNet/DSP(TM) "Internet Security System on a Chip",
support
10
<PAGE> 11
this OEM strategy. IRE's strategies have required maintaining or increasing
expenditures for development, sales, and marketing activities. There can be no
assurance that these strategies will be successful.
RESULTS OF OPERATIONS
The following table presents IRE's Consolidated Statements of Operations
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
----------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues 100 % 100 %
Cost of revenues 39 43
---------------- ----------------
Gross profit 61 57
---------------- ----------------
Research and development expenses 44 18
Sales and marketing expenses 38 27
General and administrative expenses 23 9
Recovery of CyberGuard advance (6) -
Amortization of acquired intangible assets - 1
---------------- ----------------
Total operating expenses 99 55
---------------- ----------------
Operating loss (38) 2
Interest income, net 1 1
---------------- ----------------
Loss before income taxes (37) 3
Income tax expense 5 2
---------------- ----------------
Net income (loss) (42)% 1 %
================ ================
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Revenues 100 % 100 %
Cost of revenues 36 44
--------------- ----------------
Gross profit 64 56
--------------- ----------------
Research and development expenses 30 20
Sales and marketing expenses 35 34
General and administrative expenses 14 12
Recovery of CyberGuard advance (2) -
Amortization of acquired intangible assets 1 1
--------------- ----------------
Total operating expenses 78 67
--------------- ----------------
Operating loss (14) (11)
Interest income, net - 2
--------------- ----------------
Loss before income taxes (14) (9)
Income tax expense 3 1
--------------- ----------------
Net income (loss) (17)% (10)%
=============== ================
</TABLE>
Nine Months ended September 30, 1999, compared with Nine Months ended
September 30, 1998
Revenues decreased 10%, or $1.7 million, to $14.4 million for the nine
months ended September 30, 1999, from $16.1 million in 1998. European
operations' revenues decreased $391,000 primarily as a result of lower legacy
product sales. Domestic operations' revenues declined $1.3 million, consisting
of a $1.2 million increase in OEM licensing revenues, a $1.1 million decline in
development revenues from OEM contracts, and a $1.4 million decline in product
sales. OEM licensing revenues totaled $1.4 million for nine months ended
September 30, 1999, compared with $225,000 for the same period in 1998.
Gross profit margin increased to 64% for the nine months ended September
30, 1999, from 56% in 1998. European operations' gross profit margin increased
10 percentage points primarily due to demand for certain higher-margin products
in the first and second quarters. Domestic operations' gross profit margin
increased 5 percentage points as higher-margin software products and licensing
revenues replaced hardware products and development revenues.
Research and development expenses increased 35%, or $1.2 million, to $4.4
million for the nine months ended September 30, 1999, from $3.2 million in 1998.
Personnel cost for the domestic operations' development projects was the primary
cause of the increase, owing to higher average headcount principally to support
the OEM strategies as well as higher average compensation reflecting employment
market influences for technology professionals.
Sales and marketing expenses decreased 8%, or $413,000, to $5.0 million
for the nine months ended September 30, 1999, from $5.5 million in 1998. The
decrease is primarily related to the domestic operations' lower personnel and
travel costs, reflecting lower average headcount as IRE transitions to an OEM
business model, and a decline in commissions as revenues declined.
General and administrative expenses decreased 1%, or $26,000, to $2.0
million for the nine months ended September 30, 1999, from $2.0 million in 1998.
The primary reason for the decrease was $316,000 of expenses in 1998 related to
a contested proxy solicitation process for the election of directors. In 1999,
IRE increased allowances for doubtful accounts $200,000 and recorded stock
option compensation expense of $104,000.
11
<PAGE> 12
The 1999 expenses were reduced by $238,000 related to recoveries of
amounts due from CyberGuard, which IRE reserved in the fourth quarter of 1998
due to significant concerns over CyberGuard's liquidity as discussed in IRE's
Form 10-K for December 31, 1998. IRE expects to receive additional recoveries
totaling $137,000 in the fourth quarter of 1999 and $275,000 in 2000. Such
amounts will be recorded upon receipt.
The 1999 income tax expense of $468,000 represents estimated taxes on the
income of the European operations, compared with $150,000 in the same period of
1998. IRE had no United States income tax benefit in either period. A valuation
allowance for the full amount of the United States net deferred tax asset has
been established since IRE's ability to use the United States net operating loss
is dependent upon future taxable income.
IRE had a net loss of $2.4 million for the nine months ended September 30,
1999, compared with a net loss of $1.7 million for the same period in 1998. The
diluted loss per common share was $0.45 in 1999, compared with a loss per common
share of $0.31 in 1998.
Three Months ended September 30, 1999, compared with Three Months ended
September 30, 1998
Revenues decreased 44%, or $3.0 million, to $3.8 million for the three
months ended September 30, 1999, from $6.8 million in 1998. The European
operations' revenues decreased $2.3 million primarily as a result of lower
legacy product sales. Domestic operations' revenues decreased $760,000,
consisting of a $490,000 increase in OEM licensing revenues, a $298,000 decline
in development revenues from OEM contracts, and a $952,000 decline in product
sales. OEM licensing revenues totaled $490,000 for three months ended September
30, 1999, compared with none for the same period in 1998.
Gross profit margin increased to 61% for the three months ended September
30, 1999, from 57% in 1998. Gross profit for the European operations increased 2
percentage points due to changes in product mix. Gross profit for the domestic
operations increased 10 percentage points as higher-margin software products and
licensing revenues replaced hardware products and development revenues.
Research and development expenses increased 33%, or $414,000, to $1.7
million for the three months ended September 30, 1999, from $1.2 million in
1998. The increase is primarily attributable to increased personnel costs
related to OEM development projects in the domestic operations.
Sales and marketing expenses decreased 21%, or $384,000, to $1.4 million
for the three months ended September 30, 1999, from $1.8 million in 1998. The
decrease is primarily related to lower personnel and travel costs for both the
domestic and European operations.
General and administrative expenses increased 38%, or $237,000, to
$868,000 for the three months ended September 30, 1999, from $631,000 in 1998.
In 1999, IRE increased allowances for doubtful accounts $200,000 and recorded
stock option compensation expense of $35,000.
The 1999 expenses were reduced by $238,000 related to recoveries of
amounts due from CyberGuard, which IRE reserved in the fourth quarter of 1998
due to significant concerns over CyberGuard's liquidity as discussed in IRE's
Form 10-K for December 31, 1998. IRE expects to receive additional recoveries
totaling $137,000 in the fourth quarter of 1999 and $275,000 in 2000. Such
amounts will be recorded upon receipt.
The 1999 income tax expense of $188,000 represents estimated taxes on the
income of the European operations, compared with $150,000 in the same period of
1998. IRE had no United States income tax benefit in either period. A valuation
allowance for the full amount of the United States net deferred tax asset has
been established since IRE's ability to use the United States net operating loss
is dependent upon future taxable income.
IRE had a net loss of $1.6 million for the three months ended September
30, 1999, compared with net income of $55,000 for the same period in 1998. The
diluted loss per common share was $0.29 in 1999, compared with income per common
share of $0.01 in 1998.
LIQUIDITY AND FINANCIAL POSITION
IRE's management believes that its current cash resources, together with
cash flows from operations, will be sufficient to meet its needs for the next
year. At September 30, 1999, IRE had working capital of $10.2 million, including
cash and cash equivalents of $7.2 million.
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<PAGE> 13
The significant sources of cash in 1999 were $541,000 from operating
activities, mainly attributable to collections of accounts receivable, and $2.0
million from the exercise of stock options and warrants. The significant uses of
cash in 1999 included $813,000 for equipment expenditures and additions to
computer software development costs.
YEAR 2000
Many computer systems, software products, and embedded chips used only a
two-digit code for year dates rather than a four-digit code. Such two-digit date
codes may not properly distinguish the year 2000 from 1900. If not corrected,
these computer applications and other control devices could fail or create
erroneous results by, at or beyond the year 2000. As a result, computer systems,
software and other equipment may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Management believes that IRE's
products have been made Year 2000 compliant in the ordinary course of business.
In addition, IRE utilizes third-party software and equipment in its operations
that may not be Year 2000 compliant. If this third-party software or equipment
does not operate properly with regard to the year 2000 and thereafter, IRE could
experience business interruptions and incur unanticipated expenses to remedy any
such problems, which could have a material adverse effect on IRE's business,
financial condition, and results of operations.
IRE has formed a Year 2000 task force consisting of employees with
expertise in areas management believes could be affected if not Year 2000
compliant. This task force has undertaken a program to address the Year 2000
issue with respect to IRE's information systems, non-information systems and
certain systems of its major clients and suppliers. The task force's objectives
are to assess the problem, develop remedies, test the remedies and prepare
contingency plans.
IRE has reviewed its information systems and its non-information systems,
which include telephone and security systems. Management believes that IRE's
systems are substantially in compliance with Year 2000 requirements and that any
remedial efforts and incremental costs to complete this process will not have a
material impact on its operations or financial results. While a small amount of
testing and contingency planning has not been completed, we expect these steps
to be completed in the next 30 days.
The Year 2000 task force has also initiated communications with key
suppliers and clients to determine the extent to which IRE is vulnerable to such
parties' failure to remediate Year 2000 issues. No critical supplier or
significant client has indicated that it will not be Year 2000 compliant.
Besides third-party Year 2000 failures, the purchasing patterns of clients or
potential clients may be affected by Year 2000 issues if they expend significant
resources to correct their current systems. These expenditures may result in
reduced funds available to purchase products and services such as those offered
by IRE, which could have a material adverse effect on IRE's business, operating
results, financial condition, and results of operations.
INFLATION AND SEASONALITY
Management does not believe that inflation will significantly impact IRE's
business. Management does not believe IRE's business is seasonal, however,
because revenues are recognized upon shipment of finished products, such
recognition may be irregular and uneven, thereby disparately impacting quarterly
operating results and balance sheet comparisons.
CHANGE IN ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities to establish accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value. Adoption of SFAS No. 133 is required for the fiscal
year 2001 and is not expected to have a material impact on IRE's financial
position or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IRE's major market risk is to fluctuations in foreign currency exchange
rates, principally related to the Swiss Franc. As of September 30, 1999, IRE's
investment in its Swiss subsidiary was approximately $6.8 million. A 10% change
in the September 30, 1999 Swiss Franc exchange rate would have changed IRE's
reported currency translation adjustment for nine months ended September 30,
1999 by approximately $608,000. A 10% change in the average Swiss Franc exchange
rate for the nine months ended September 30, 1999 would have changed IRE's
reported earnings for the nine months by approximately $223,000.
13
<PAGE> 14
At September 30, 1999, IRE did not have any interest bearing obligations.
In addition, IRE does not hold any derivative instruments and does not have any
commodity risk.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)On June 10, 1999, a holder of a placement agent warrant issued in November
1995 exercised the warrant to purchase 23,050 shares of our Common Stock. The
aggregate proceeds to IRE were $391,850. The holder of this warrant has
exercised his demand registration right to have IRE file with the Securities
and Exchange Commission a registration statement on Form S-3 relating to the
Common Stock underlying the warrants. IRE is in the process of preparing a
registration statement. The other two holders of the placement warrants have
not exercised their right to purchase remaining 6,950 shares of Common Stock
at $17.00 per share.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on July 28, 1999.
(b) The following six directors were elected for a term of one year or
until their respective successors have been duly elected or
appointed:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
Anthony A. Caputo 5,160,472 156,125
Thomas A. Brooks 5,160,472 156,125
Shelley A. Harrison 5,120,072 196,525
Ira A. Hunt, Jr. 5,160,472 156,125
Douglas E. Kozlay 5,160,472 156,125
Bruce R. Thaw 5,129,612 186,985
</TABLE>
(c) The shareholders approved the Company's 1999 Employee Stock Option
Plan. There were 3,183,378 shares cast in favor of and 380,002 voted
against the proposal, with 32,389 shares abstaining.
(d) The shareholders approved the Company's 1999 Stock Bonus Plan. There
were 2,662,314 shares cast in favor of and 951,235 voted against the
proposal, with 35,239 shares abstaining.
(e) The shareholders approved the Company's Non-Employee Director Stock
Option Plan. There were 3,283,775 shares cast in favor of and 278,422
voted against the proposal, with 33,592 shares abstaining.
The shareholders failed to approve the following amendments, which
required a favorable vote of 2,699,845 shares to be approved:
(f) An amendment to the Restated Certificate of Incorporation to create a
staggered Board of Directors received 2,462,017 shares cast in favor
of the proposal, 1,163,432 shares voted against, 23,339 shares
abstained, and there were 1,667,809 broker non-vote shares.
(g) An amendment to the Restated Certificate of Incorporation to require
shareholder action to be taken at a meeting received 2,461,089 shares
cast in favor of the proposal, 1,151,020 shares voted against, 36,679
shares abstained, and there were 1,667,809 broker non-vote shares.
(h) An amendment to the Restated Certificate of Incorporation to require
a supermajority vote for amendment or repeal of the Company's By-Laws
or certain provisions of the Restated Certificate of Incorporation
received 2,377,930 shares cast in favor of the proposal, 1,184,340
voted against, 33,499 shares abstained, and there were 1,720,828
broker non-vote shares.
14
<PAGE> 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 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.
October 28, 1999 /s/ Anthony A. Caputo
---------------------------------
ANTHONY A. CAPUTO
Chairman, President and Chief
Executive Officer
October 28, 1999 /s/ Carole D. Argo
---------------------------------
CAROLE D. ARGO
Senior Vice President, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 FOR INFORMATION
RESOURCE ENGINEERING, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,175
<SECURITIES> 0
<RECEIVABLES> 3,319
<ALLOWANCES> 283
<INVENTORY> 3,216
<CURRENT-ASSETS> 13,729
<PP&E> 3,679
<DEPRECIATION> 2,217
<TOTAL-ASSETS> 18,020
<CURRENT-LIABILITIES> 3,526
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 14,439
<TOTAL-LIABILITY-AND-EQUITY> 18,020
<SALES> 14,420
<TOTAL-REVENUES> 14,420
<CGS> 5,200
<TOTAL-COSTS> 5,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,950)
<INCOME-TAX> 468
<INCOME-CONTINUING> (2,418)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,418)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
