<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 June 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)
--------------------
<TABLE>
<S> <C>
Delaware 52-1287752
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
8029 Corporate Drive, Baltimore, Md. 21236
------------------------------------------
(Address of principal executive offices)
410-931-7500
-------------------------------
(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 August 5,
1999 was 5,515,955.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Information
Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and
1998 (unaudited) 4
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (unaudited) 6
Consolidated Statements of Comprehensive Income (Loss) for the
three months and six months ended June 30, 1999 and 1998
(unaudited) 7
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 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
</TABLE>
2
<PAGE> 3
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 5,880 $ 5,866
Accounts receivable, net of allowance for
doubtful accounts of $82 and $87 4,904 4,919
Inventories 3,285 3,533
Prepaid expenses 437 304
-------- --------
Total current assets 14,506 14,622
Equipment and leasehold improvements, net of accumulated
depreciation of $2,005 and $1,822 1,569 1,556
Computer software development costs, net of accumulated
amortization of $923 and $748 1,643 1,527
Goodwill, net of accumulated amortization of $434 and $387 586 632
Prepaid license fees and other assets 630 604
-------- --------
$ 18,934 $ 18,941
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,161 $ 1,493
Accrued expenses 1,581 1,733
Advance payments and deferred revenue 574 315
-------- --------
Total liabilities 3,316 3,541
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value per share.
Authorized 500,000 shares, none issued and outstanding - -
Common stock, $.01 par value per share.
Authorized 15,000,000 shares, issued 5,507,577 shares 55 55
and 5,466,527 shares
Additional paid-in capital 32,264 31,042
Accumulated deficit (15,447) (14,621)
Accumulated other comprehensive loss (1,223) (380)
Treasury stock, at cost, 8,038 shares and 174,000 shares (31) (696)
-------- --------
Net stockholders' equity 15,618 15,400
-------- --------
$ 18,934 $ 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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 4,631 $ 4,405 $ 10,636 $ 9,291
Cost of revenues 1,454 1,842 3,724 4,097
-------- -------- -------- --------
Gross profit 3,177 2,563 6,912 5,194
-------- -------- -------- --------
Research and development expenses 1,602 1,120 2,715 2,002
Sales and marketing expenses 1,789 1,823 3,611 3,640
General and administrative expense 559 886 1,132 1,395
Amortization of acquired intangible assets 23 31 46 61
-------- -------- -------- --------
Total operating expenses 3,973 3,860 7,504 7,098
-------- -------- -------- --------
Operating loss (796) (1,297) (592) (1,904)
Interest income, net 26 78 46 177
-------- -------- -------- --------
Loss before income taxes (770) (1,219) (546) (1,727)
Income tax expense 244 - 280 -
-------- -------- -------- --------
Net loss $ (1,014) $ (1,219) $ (826) $ (1,727)
======== ======== ======== ========
Loss per common share - basic and diluted $ (0.19) $ (0.22) $ (0.15) $ (0.32)
======== ======== ======== ========
Weighted average number of common shares
outstanding - basic and diluted 5,405 5,465 5,359 5,464
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other
-------------- paid-in Accumulated comprehensive
Shares Amount capital deficit income (loss)
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1999
- ------------------------------
Balance at beginning of
period 5,467 $ 55 $ 31,042 $ (14,621) $ (380)
Stock options exercised 18 - 756 - -
Placement agent
warrants exercised 23 - 392 - -
Stock option compensation - - 69 - -
Net loss - - - (826) -
Foreign currency
translation adjustment - - - - (843)
Other - - 5 - -
------ ------- -------- ---------- -----------
Balance at end of period 5,508 $ 55 $ 32,264 $ (15,447) $ (1,223)
====== ======= ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Treasury stock Net
--------------- stockholders'
Shares Amount equity
----------------- -------------
<S> <C> <C> <C>
Six months ended June 30, 1999
- ------------------------------
Balance at beginning of
period 174 $ (696) $ 15,400
Stock options exercised (166) 665 1,421
Placement agent
warrants exercised - - 392
Stock option compensation - - 69
Net loss - - (826)
Foreign currency
translation adjustment - - (843)
Other - - 5
------- --------- ----------
Balance at end of period 8 $ (31) $ 15,618
======= ========= ==========
</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>
Six Months Ended
June 30,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (826) $ (1,727)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 434 411
Amortization of acquired intangible assets 46 61
Stock option compensation 69 -
Changes in operating assets and liabilities
Increase in accounts receivable (207) (1,480)
(Increase) decrease in inventories 62 (938)
(Increase) decrease in prepaid expenses (145) 28
Increase (decrease) in accounts payable (283) 619
Decrease in accrued expenses (35) (389)
Increase (decrease) in deferred revenues 268 (171)
Other (32) 18
-------- --------
Net cash used in operating activities (649) (3,568)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments - (500)
Sales of short-term investments - 2,339
Equipment expenditures (291) (170)
Additions to computer software development costs (290) (244)
-------- --------
Net cash provided by (used in) investing activities (581) 1,425
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,421 9
Proceeds from exercise of warrants 392 -
Other 5 -
Payments of long-term debt - (10)
-------- --------
Net cash provided by (used in) financing activities 1,818 (1)
-------- --------
Effect of exchange rate changes on cash (574) (78)
Net increase (decrease) in cash and cash equivalents 14 (2,222)
Cash and cash equivalents at beginning of period 5,866 7,222
-------- --------
Cash and cash equivalents at end of period $ 5,880 $ 5,000
======== ========
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 Six Months Ended
June 30, June 30,
----------------------- ---------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (1,014) $ (1,219) $ (826) $ (1,727)
Other comprehensive income (loss):
Foreign currency translation adjustments (308) 3 (843) (126)
========= ========= ======== ========
Comprehensive loss $ (1,322) $ (1,216) $(1,669) $ (1,853)
========= ========= ======== ========
</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 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 are included.
(2) Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
As of
---------------------------
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 1,492,000 $ 1,778,000
Finished goods 1,793,000 1,755,000
----------- -----------
Total $ 3,285,000 $ 3,533,000
=========== ===========
</TABLE>
(3) Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
As of
---------------------------
June 30, December 31,
1999 1998
---------- -----------
<S> <C> <C>
Accrued salaries and commissions $ 775,000 $1,050,000
Current income taxes 370,000 319,000
Other 436,000 364,000
========== ===========
Total $1,581,000 $ 1,733,000
========== ===========
</TABLE>
(4) Income Taxes
The income tax expense for the three months and the six months ended June
30, 1999 represents current income taxes that will be paid by the Company's
Swiss subsidiary.
(5) Segments of the Company and Related Information
The Company has two reportable segments: network security products
designed and manufactured in the United States ("domestic operations") and
network security products designed and manufactured outside the United States
("European operations"). The reportable segments are strategic business units
that offer different products. The segments are managed separately because each
segment requires different technology and marketing strategies. The domestic
operations include some international sales mainly to South America and Asia.
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Six Months
(in thousands) Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external customers:
Domestic operations $ 2,842 $ 2,508 $ 5,237 $ 5,767
European operations 1,789 1,897 5,399 3,524
-------- -------- -------- --------
Consolidated revenues $ 4,631 $ 4,405 $ 10,636 $ 9,291
======== ======== ======== ========
Operating income (loss):
Domestic operations $ (1,355) $ (1,378) $ (2,867) $ (2,279)
European operations 559 82 2,275 375
-------- -------- -------- --------
Consolidated operating income (loss) $ (796) $ (1,296) $ (592) $ (1,904)
======== ======== ======== ========
Income (loss) before income taxes:
Domestic operations $ (1,340) $ (1,306) $ (2,837) $ (2,110)
European operations 570 88 2,291 383
-------- -------- -------- --------
Consolidated income (loss) before income taxes $ (770) $ (1,218) $ (546) $ (1,727)
======== ======== ======== ========
Depreciation and amortization:
Domestic operations $ 208 $ 196 $ 405 $ 395
European operations 37 38 75 77
-------- -------- -------- --------
Consolidated depreciation and amortization $ 245 $ 234 $ 480 $ 472
======== ======== ======== ========
GEOGRAPHIC INFORMATION
Revenues:
United States $ 2,638 $ 2,224 $ 4,860 $ 5,012
Switzerland 727 966 3,230 2,242
Other foreign countries 1,266 1,215 2,546 2,037
-------- -------- -------- --------
Consolidated revenues $ 4,631 $ 4,405 $ 10,636 $ 9,291
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------
June 30, December
1999 31, 1998
------- --------
<S> <C> <C>
Segment assets:
Domestic operations $11,118 $14,170
European operations 7,816 5,590
------- -------
Consolidated segment assets $18,934 $19,760
======= =======
Long-lived assets:
United States $ 3,037 $ 2,911
Switzerland 760 967
Other foreign countries - -
------- -------
Consolidated long-lived assets $ 3,797 $ 3,878
======= =======
</TABLE>
In the six months ended June 30, 1999, one commercial client of the
European operations and one commercial client of the domestic operations
accounted for 15% and 11%, respectively, of the Company's consolidated revenues.
In the same period of 1998, one commercial client of the European operations
accounted for 16% of the Company's consolidated revenues.
(6) Income (Loss) Per Common Share
Basic earning 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 after 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. Information
related to the calculation of basic and diluted EPS is summarized as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Six Months
(in thousands) Ended June 30, Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,014) $(1,219) $ (826) $(1,727)
======= ======= ======= =======
Weighted-average common shares outstanding - basic 5,405 5,465 5,359 5,464
Effect of dilutive securities-options - - - -
------- ------- ------- -------
Adjusted weighted average common shares
outstanding - diluted 5,405 5,465 5,359 5,464
======= ======= ======= =======
</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,
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, achieving technical and product development milestones, the ability
to negotiate favorable strategic agreements with original equipment
manufacturers ("OEM"), sufficient cash flow to support the Company's liquidity
requirements, and other competitive factors leading to a decrease in anticipated
revenues and gross profit margins, product development expenses and Year 2000
issues.
OVERVIEW
The Company designs, manufactures and markets enterprise network security
technology and systems that enable the deployment of secure Virtual Private
Network ("VPN") solutions over the Internet and other shared public networks.
The Company'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, such as the Internet. The Company's Swiss
subsidiary 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 products for the
Internet and the SafeNet/Security Center(TM), a high performance workstation,
which automatically manages SafeNet products and the development of integrated
circuits for the OEM market. 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.
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 periods
indicated.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues 100 % 100 % 100 % 100 %
Cost of revenues 31 42 35 44
------------ ----------- ------------- -------------
Gross profit 69 58 65 56
------------ ----------- ------------- -------------
Research and development expenses 35 25 25 22
Sales and marketing expenses 40 42 34 39
General and administrative expenses 12 20 11 15
Amortization of acquired intangible assets - 1 - 1
------------ ----------- ------------- -------------
Total operating expenses 87 88 70 77
------------ ----------- ------------- -------------
Operating loss (18) (30) (5) (21)
Interest income, net 1 2 - 2
------------ ----------- ------------- -------------
Loss before income taxes (17) (28) (5) (19)
Income tax expense 5 - 3 -
------------ ----------- ------------- -------------
Net loss (22)% (28)% (8)% (19)%
============ =========== ============= =============
</TABLE>
The Company has two reportable segments: network security products
designed and manufactured in the United States ("domestic operations") and
network security products designed and manufactured outside the United States
("European operations"). The segments are strategic business units that offer
different products. The segments are managed separately because each segment
requires different technology and marketing strategies. The domestic operations
include some international sales mainly to South America and Asia.
Six Months ended June 30, 1999 compared to Six Months ended June 30, 1998
Revenues increased 14%, or $1,345,000, to $10,636,000 for the six months
ended June 30, 1999, from $9,291,000 in 1998. The European operations' revenues
increased $1,875,000 as a result of product shipments to several financial
institutions in Europe. Revenues from the domestic operations declined $530,000.
A $750,000 increase in OEM licensing revenues was offset by a $515,000 decline
in development revenues from OEM contracts. Revenue from product sales declined
$765,000 due to a reduction in legacy product shipments that was not offset by
increased SafeNet product shipments.
Gross margin increased to 65% for the six months ended June 30, 1999, from
56% in 1998. The gross profit margin for the European operations increased 16%
due to changes in product mix. The gross profit margin for the domestic
operations increased 3% due to the replacement of hardware products with
software products and of development revenues with licensing revenues.
Research and development expenses increased 36%, or $713,000, to
$2,715,000 for the six months ended June 30, 1999, from $2,002,000 in 1998. The
increase is primarily attributable to increased personnel costs related to the
Company's development projects in the domestic operations.
General and administrative expenses decreased 19%, or $263,000, to
$1,132,000 for the six months ended June 30, 1999, from $1,395,000 in 1998. The
primary reason for the decrease were the professional fees, mailing fees and
printing costs and other expenses related to an extended, contested and
litigated proxy solicitation process in 1998 for the election of directors. At
the conclusion of the proxy contest, the Company's shareholders voted, by a wide
margin, for the incumbent directors. The expenses associated with that process
were $316,000. Stock option compensation expense of $69,000 was incurred in
1999.
The 1999 income tax expense of $280,000 was for estimated taxes on the
income of the European operations that had no income tax liability in 1998. The
Company 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 the Company's ability to use the United States net
operating loss is dependent upon future taxable income.
11
<PAGE> 12
The Company had a net loss of $826,000 for the six months ended June 30,
1999 compared to a net loss of $1,727,000 for the same period in 1998. The
diluted loss per common share was $0.15 in 1999 compared to a loss per common
share of $0.32 in 1998.
Three Months ended June 30, 1999 compared to Three Months ended June 30, 1998
Revenues increased 5%, or $226,000, to $4,631,000 for the three months
ended June 30, 1999, from $4,405,000 in 1998. The European operations' revenues
decreased $108,000 mainly as a result of a lower average Swiss franc conversion
rate in 1999. Revenues from the domestic operations increased $334,000. A
$700,000 increase in OEM licensing revenues was offset by a $469,000 decline in
development revenues from OEM contracts. Revenue from product sales increased
$103,000 due to increased SafeNet product shipments.
Gross margin increased to 69% for the three months ended June 30, 1999,
from 58% in 1998. The gross profit margin for the European operations increased
18% due to changes in product mix. The gross profit margin for the domestic
operations increased 4% due to the replacement of hardware products with
software products and of development revenues with licensing revenues.
Research and development expenses increased 43%, or $482,000, to
$1,602,000 for the three months ended June 30, 1999, from $1,120,000 in 1998.
The increase is primarily attributable to increased personnel costs related to
the Company's development projects in the domestic operations.
General and administrative expenses decreased 37%, or $327,000, to
$559,000 for the three months ended June 30, 1999, from $886,000 in 1998. The
primary reason for the decrease were the professional fees, mailing fees and
printing costs and other expenses related to the proxy contest. The expenses
associated with the proxy contest were $316,000. Stock option compensation
expense of $34,000 was incurred in 1999.
The 1999 income tax expense of $244,000 was for estimated taxes on the
income of the European operations that had no income tax liability in 1998. The
Company 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 the Company's ability to use the United States net
operating loss is dependent upon future taxable income.
The Company had a net loss of $1,014,000 for the three months ended June
30, 1999 compared to a net loss of $1,219,000 for the same period in 1998. The
diluted loss per common share was $0.19 in 1999 compared to a loss per common
share of $0.22 in 1998.
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.
At June 30, 1999, the Company had working capital of $11,190,000 including cash
and cash equivalents of $5,880,000.
The significant source of cash for the Company in 1999 was $1,813,000 from
the exercise of stock options and warrants. Significant uses of the Company's
financial resources in 1999 included $649,000 in operating activities and
$581,000 for equipment expenditures and additions to computer software
development costs.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company believes that its products have been made Year 2000 compliant in the
ordinary course of business. In addition, the Company utilizes third-party
equipment and software in its operations that may not be Year 2000 compliant.
Failure of such third-party equipment or software to operate properly with
regard to the year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
12
<PAGE> 13
The Company has formed a Year 2000 task force. The task force consists of
employees with expertise in areas the Company believes could be affected if not
Year 2000 compliant. It has undertaken a program to address the Year 2000 issue
with respect to the Company's information systems, non-information systems and
certain systems of its major customers and suppliers. The objective of this task
force is to assess the problem, to develop remedies, to test the remedies and to
prepare contingency plans.
The Company has reviewed its information systems and its non-information
systems, which include telephone and security systems, and believes that they
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 this to be
completed in the next 90 days.
As part of the program of the task force, communications have been
initiated with key suppliers and customers to determine the extent to which the
Company is vulnerable to such parties' failure to remediate Year 2000 issues. No
critical third party vendor has indicated that it will not be year 2000
compliant. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to implement the
infrastructure needed to conduct trusted and secure communications and commerce
over information networks or to purchase products and services such as those
offered by the Company, which could have a material adverse effect on the
Company's business, operating results, financial condition, and results of
operations.
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.
CHANGE IN ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It 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 the
Company's financial position or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk is to fluctuations in foreign currency
exchange rates, principally related to the Swiss Franc. As of June 30, 1999, the
Company's investment in its Swiss subsidiary was approximately $6,388,000. A 10%
change in the average Swiss Franc exchange rate for the six months ended June
30, 1999 would have changed the Company's reported earnings for the six months
by approximately $207,000. A 10% change in the June 30, 1999 Swiss Franc
exchange rate would have changed the Company's reported currency translation
adjustment for six months ended June 30, 1999 by approximately $825,000.
At June 30, 1999, the Company did not have any interest bearing
obligations. In addition, the Company 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 the Company were $391,850. The holder of this warrant has
exercised his demand registration right to have the Company file with the
Securities and Exchange Commission a registration statement on Form S-3 relating
to the Common Stock underlying the warrants. The Company 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.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
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.
August 9, 1999 /s/ Anthony A. Caputo
----------------------------------
ANTHONY A. CAPUTO
Chairman, President and
Chief Executive Officer
August 9, 1999 /s/ Carole D. Argo
----------------------------------
Carole D. Argo
Senior Vice President, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM THE
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 FOR INFORMATION RESOURCE
ENGINEERING INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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