<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, 2000
[ ] 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 August 8,
2000 was 6,747,079.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999, and the six months ended
June 30, 2000 and 1999 4
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2000 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 6
Consolidated Statements of Comprehensive Income (Loss)
for the three months ended June 30, 2000 and 1999, and
the six months ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 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 6. Exhibits and Reports on Form 8-K 14
</TABLE>
SIGNATURES 14
2
<PAGE> 3
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 24,551 $ 19,161
Short term investments - 501
Accounts receivable, net of allowance for doubtful accounts
of $215 and $251 3,191 4,405
Inventories 2,334 2,946
Prepaid expenses 572 282
-------- --------
Total current assets 30,648 27,295
Equipment and leasehold improvements, net of accumulated
depreciation of $2,661 and $2,347 1,259 1,424
Computer software development costs, net of accumulated
amortization of $1,930 and $1,227 1,557 2,107
Goodwill, net of accumulated amortization of $524 and $481 443 486
Prepaid license fees and other assets 1,094 584
-------- --------
$ 35,001 $ 31,896
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 678 $ 1,154
Accrued expenses 2,117 1,634
Advance payments and deferred revenue 1,387 1,472
-------- --------
Total liabilities 4,182 4,260
-------- --------
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 6,692,712 shares
in 2000 and 6,541,483 shares in 1999 67 65
Additional paid-in capital 48,293 46,547
Accumulated deficit (16,759) (17,681)
Accumulated other comprehensive loss (782) (1,295)
-------- --------
Net stockholders' equity 30,819 27,636
-------- --------
$ 35,001 $ 31,896
======== ========
</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,
-------------------------- -----------------------
2000 1999 2000 1999
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 6,471 $ 4,631 $ 12,308 $ 10,636
Cost of revenues 1,630 1,454 3,329 3,724
------------ ------------ ---------- -----------
Gross profit 4,841 3,177 8,979 6,912
------------ ------------ ---------- -----------
Research and development expenses 1,843 1,602 3,671 2,715
Sales and marketing expenses 1,570 1,789 3,011 3,611
General and administrative expense 1,009 559 1,868 1,132
Amortization of acquired intangible assets 21 23 42 46
Recovery of CyberGuard advance (138) - (275) -
------------ ------------ ---------- -----------
Total operating expenses 4,305 3,973 8,317 7,504
------------ ------------ ---------- -----------
Operating income (loss) 536 (796) 662 (592)
Interest income, net 305 26 536 46
------------ ------------ ---------- -----------
Income (loss) before income taxes 841 (770) 1,198 (546)
Income tax expense 276 244 276 280
------------ ------------ ---------- -----------
Net income (loss) $ 565 $ (1,014) $ 922 $ (826)
============ ============ ========== ===========
Income (loss) per common share -- basic and diluted
Basic $ 0.08 $ (0.19) $ 0.14 $ (0.15)
============ ============ ========== ===========
Diluted $ 0.08 $ (0.19) $ 0.13 $ (0.15)
============ ============ ========== ===========
Weighted average number of common shares outstanding:
Basic 6,669 5,405 6,640 5,359
Diluted 7,011 5,405 7,177 5,359
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
INFORMATION RESOURCE ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2000
(Unaudited -- in thousands)
<TABLE>
<CAPTION>
Accumulated
Common stock Additional other Net
---------------- paid-in Accumulated comprehensive stockholders'
Shares Amount capital deficit income (loss) equity
------ ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999 6,541 $ 65 $ 46,547 $ (17,681) $ (1,295) $ 27,636
Stock options exercised including
income tax benefit of $276 144 2 1,660 1,662
Stock warrants exercised 7 - 118 - - 118
Net income - - - 922 - 922
Foreign currency
translation adjustment - - - - (108) (108)
Unrealized gain from available-
for-sale securities - - - - 621 621
Other - - (32) - - (32)
----- ---- -------- --------- ------ --------
Balance at June 30, 2000 6,692 $ 67 $ 48,293 $ (16,759) $ (782) $ 30,819
===== ==== ======== ========= ====== ========
</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,
-----------------------
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 922 $ (826)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,042 434
Amortization of acquired intangible assets 42 46
Income tax benefit from exercise of stock options 276 -
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 1,113 (207)
(Increase) decrease in inventories 679 62
(Increase) decrease in prepaid expenses (247) (145)
Increase (decrease) in accounts payable (372) (283)
Increase (decrease) in accrued expenses 362 (35)
Increase (decrease) in deferred revenues (85) 268
Other 163 37
----------- ----------
Net cash provided by (used in) operating activities 3,895 (649)
----------- ----------
Cash flows from investing activities:
Sales of short-term investments 501 -
Equipment expenditures (164) (291)
Additions to computer software development costs (153) (290)
----------- ----------
Net cash provided by (used in) investing activities 184 (581)
----------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,386 1,421
Proceeds from exercise of stock warrants 118 392
Other (100) 5
----------- ----------
Net cash provided by financing activities 1,404 1,818
----------- ----------
Effect of exchange rate changes on cash (93) (574)
----------- ----------
Net increase in cash and cash equivalents 5,390 14
Cash and cash equivalents at beginning of period 19,161 5,866
----------- ----------
Cash and cash equivalents at end of period $ 24,551 $ 5,880
=========== ==========
Cash paid for:
Interest expense $ - $ -
=========== ==========
Income taxes $ 57 $ -
=========== ==========
</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,
------------------- ----------------
2000 1999 2000 1999
------- --------- ------ -------
<S> <C> <C> <C> <C>
Net income (loss) $ 565 $ (1,014) $ 922 $ (826)
Other comprehensive income (loss):
Unrealized gain from available-for-sale securities 621 - 621 -
Foreign currency translation adjustment 68 (308) (108) (843)
------- --------- ------ --------
Comprehensive income (loss) $1,254 $ (1,322) $ 1,435 $(1,669)
====== ========= ======= ========
</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 pursuant to the rules and regulations of the Securities and Exchange
Commission and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules or
regulations. The interim financial statements are unaudited, but reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary to present a fair statement of results for the interim
periods presented. These financial statements should be read in conjunction with
the financial statements and the notes thereto in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The results of operations for
the interim period are not necessarily indicative of results to be expected in
future periods.
(2) Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
As of
--------------------------
June 30, December 31,
------- ------------
2000 1999
------- ------------
<S> <C> <C>
Raw materials $ 1,348 $ 1,366
Finished goods 986 1,580
------- ------------
Total $ 2,334 $ 2,946
======= ============
</TABLE>
(3) Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
As of
--------------------------
June 30, December 31,
------- ------------
2000 1999
------- ------------
<S> <C> <C>
Accrued salaries and commissions $ 1,144 $ 1,110
Other 973 524
------- ------------
Total $ 2,117 $ 1,634
======= ============
</TABLE>
(4) Income Taxes
Income tax expense at June 30, 2000 was calculated by applying an
estimated effective annual tax rate to income generated in the United States
during the six month period. The income tax expense for the six months ended
June 30, 1999 represents income taxes for the Company's Swiss subsidiary. The
income tax expense for the six months ended June 30, 2000 is offset by the tax
benefit of non-qualified stock option exercises which is recorded as additional
paid-in capital rather than as a reduction to income tax expense.
(5) Earnings 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 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 basic and diluted EPS is summarized as follows (in
thousands):
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -----------------
2000 1999 2000 1999
----- --------- ----- ------
<S> <C> <C> <C> <C>
Net income (loss) $ 565 $ (1,014) $ 922 $(826)
===== ========= ===== ======
Weighted-average common shares outstanding -- basic 6,669 5,405 6,640 5,359
Effect of dilutive securities-options 342 - 537 -
----- --------- ----- ------
Adjusted weighted average common shares
outstanding -- diluted 7,011 5,405 7,177 5,359
===== ========= ===== ======
</TABLE>
During 1999, diluted loss per common share is equal to basic loss per
common share because if potentially dilutive securities were included in the
computation, the result would be anti-dilutive. These potentially dilutive
securities consist primarily of stock options.
(6) Segments of the Company and Related Information
The Company has three reportable segments: products, chips and software
designed and manufactured in the United States for sale to companies that will
embed the Company's products into their products for ultimate sale to end-users
("Technology Operations"), network security products designed and manufactured
in the United States for direct sales to end-users ("Product Operations"), and
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 Technology
Operations and Product Operations include some international sales mainly to
South America and Asia. Information presented below is as of and for the three
and six month periods ended June 30, 2000 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ----------------------
2000 1999 2000 1999
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Technology operations $ 3,690 $ 1,297 $ 6,360 $ 2,238
Product operations 2,157 1,545 4,519 2,999
European operations 624 1,789 1,429 5,399
------- ------- -------- ----------
Consolidated revenues $ 6,471 $ 4,631 $ 12,308 $ 10,636
======= ======= ======== ==========
Intersegment revenues:
Technology operations $ - $ - $ - $ -
Product operations 128 (70) 104 -
European operations 6 - 1 -
------- ------- -------- ----------
Intersegment revenues $ 134 $ (70) $ 105 $ -
======= ======= ======== ==========
Reconciling items:
Intersegment revenues $ (134) $ 70 $ (105) $ -
------- ------- -------- ----------
Total consolidated revenues $ 6,471 $ 4,631 $ 12,308 $ 10,636
======= ======= ======== ==========
Operating income (loss):
Technology operations $ 763 $ (636) $ 865 $ (1,562)
Product operations 295 (654) 710 (1,305)
European operations (522) 494 (913) 2,275
------- ------- -------- ----------
Consolidated operating income (loss) $ 536 $ (796) $ 662 $ (592)
======= ======= ======== ==========
Income (loss) before income taxes:
Technology operations $ 952 $ (628) $ 1,163 $ (1,548)
Product operations 398 (647) 926 (1,289)
European operations (509) 505 (891) 2,291
------- ------- -------- ----------
Consolidated income (loss) before income taxes $ 841 $ (770) $ 1,198 $ (546)
======= ======= ======== ==========
Depreciation and amortization:
Technology operations $ 138 $ 59 $ 622 $ 113
Product operations 190 149 387 292
European operations 37 37 75 75
------- ------- -------- ----------
Consolidated depreciation and amortization $ 365 $ 245 $ 1,084 $ 480
======= ======= ======== ==========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
As of
------------------------
June 30, June 30,
(in thousands) 2000 1999
-------------- --------- ---------
<S> <C> <C>
Segment assets:
Technology operations $ 13,877 $ 2,181
Product operations 15,639 8,937
European operations 5,485 7,816
-------- --------
Consolidated segment assets $ 35,001 $ 18,934
======== ========
Long-lived assets:
United States $ 2,627 $ 3,037
Switzerland 189 174
-------- --------
Consolidated long-lived assets $ 2,816 $ 3,211
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ----------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Geographic Information
Revenues:
United States $ 5,472 $ 2,638 $ 10,246 $ 4,860
Switzerland 500 727 1,116 3,230
Other foreign countries 499 1,266 946 2,546
------- ------- -------- --------
Consolidated revenues $ 6,471 $ 4,631 $ 12,308 $ 10,636
======= ======= ======== ========
</TABLE>
For the six month period ended June 30, 2000, one commercial client of
the Technology operations and one commercial client of the Product operations
accounted for 38% and 13%, respectively, of the Company's consolidated revenues.
For the six month period ended June 30, 1999, one commercial client of the
European operations and one commercial client of the Technology operations
accounted for 15% and 11%, respectively, of the Company's consolidated revenues.
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, and other competitive factors leading to a decrease in
anticipated revenues and gross profit margins and product development expenses.
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 and systems that enable the deployment of secure VPN solutions over
the Internet and other shared public networks 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
10
<PAGE> 11
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 original equipment manufacturer market. Management believes
that growth in the market for products that provide secure remote access to
computer networks will require the Company to increase its future investments in
development, sales and marketing activities. These investments will enable 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.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues 100 % 100 % 100 % 100 %
Cost of revenues 25 31 27 35
---------- ----------- ----------- ----------
Gross profit 75 69 73 65
---------- ----------- ----------- ----------
Research and development expenses 29 35 30 25
Sales and marketing expenses 24 40 24 34
General and administrative expenses 16 12 16 11
Recovery of CyberGuard advance (2) - (2) -
---------- ----------- ----------- ----------
Total operating expenses 67 87 68 70
---------- ----------- ----------- ----------
Operating income (loss) 8 (18) 5 (5)
Interest income, net 5 1 4 -
---------- ----------- ----------- ----------
Income (loss) before income taxes 13 (17) 9 (5)
Income tax expense 4 5 2 3
---------- ----------- ----------- ----------
Net income (loss) 9 % (22)% 7 % (8)%
========== =========== =========== ==========
</TABLE>
The Company has three reportable segments: products, chips and software
designed and manufactured in the United States for sale to companies that will
embed the Company's products into their products for ultimate sale to end-users
("Technology Operations"), network security products designed and manufactured
in the United States for direct sales to end-users ("Product 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 Technology
Operations and Product Operations include some international sales mainly to
South America and Asia.
Six months ended June 30, 2000 compared to Six months ended June 30, 1999
Revenues increased 16%, or $1,672,000, to $12,308,000 for the six
months ended June 30, 2000, from $10,636,000 in 1999. The Technology Operations
revenues increased $4,122,000 mainly due to shipments of a software VPN product,
Safenet/Soft-PK to several customers. Revenues from the Product Operations
segment increased $1,520,000 primarily due to large shipments of VPN products to
several large enterprises as well as an overall increased demand for Safenet VPN
products. The European Operations revenues decreased $3,970,000 as a result of
the reduction in the demand of legacy products in Europe.
Gross margin increased to 73% for the six months ended June 30, 2000,
from 65% in 1999. Margins on sales of software licenses and Safenet DSP Chips in
the Technology Operations segment led the increase with an overall 86% gross
margin
11
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compared to a 1999 gross margin of 70% made up of primarily development
project sales. Product Operations' margins increased to 64% from 53% on strong
sales of higher margin, VPN products versus lower margin, legacy products in
1999. The gross margin for the European operations decreased to 45% from 70% in
1999 as a result of lower revenues available to recover fixed costs.
Research and development expenses increased 35%, or $956,000, to
$3,671,000 for the six months ended June 30, 2000, from $2,715,000 in 1999. The
increase is primarily attributable to increased personnel costs related to the
Company's software and integrated circuit development projects in Technology
Operations, and the completion of several large consulting contracts during 1999
under which $563,000 of research and development expenses were directly
attributable to cost of goods sold. As a percentage of revenues, the expenses
were 30% and 26% in 2000 and 1999, respectively.
Sales and marketing expenses decreased 17%, or $600,000 to $3,011,000
for the six months ended June 30, 2000, from $3,611,000 in 1999 due to a
decrease in personnel and their salaries, telephone, travel and related expenses
as well as due to a scaled down participation in trade shows versus 1999. As a
percentage of revenues, the expenses were 24% and 34% in 2000 and 1999,
respectively.
General and administrative expenses increased 65%, or $736,000, to
$1,868,000 for the six months ended June 30, 2000, from $1,132,000 in 1999. The
increase is primarily due to professional fees incurred to export software
developed in the United States to the European Operations segment, costs
associated with strengthening the executive management team in both the U.S. and
Europe, and professional services related to strategic initiative planning. As a
percentage of revenues, the expenses were 15% and 11% of revenues in 2000 and
1999, respectively.
Income tax expense for the six months ended June 30, 2000 of $276,000
was for estimated tax expense on income in the United States. The 1999 income
tax expense of $280,000 was for estimated taxes on the income of the European
Operations that has no estimated income tax liability in 2000. 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 assets 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 net income of $922,000 for the six months ended June
30, 2000 compared to a net loss of $826,000 for the same period in 1999. The
diluted income per common share was $0.13 in 2000 compared to a ($0.15) loss per
common share in 1999.
Three Months ended June 30, 2000 compared to Three Months ended June 30, 1999
Revenues increased 40%, or $1,840,000, to $6,471,000 for the three
months ended June 30, 2000, from $4,631,000 in 1999. Technology Operations'
revenues increased $2,393,000 mainly as a result of shipments of a software VPN
product, Safenet/Soft-PK. Revenues from the Product Operations segment increased
$612,000 primarily due to increased demand for Safenet VPN products. The
European Operations' revenues decreased $1,165,000 as a result of the reduction
in demand of legacy products in Europe.
Gross margin increased to 75% for the three months ended June 30, 2000,
from 69% in 1999. Margins on sales of software licenses and Safenet DSP Chips in
the Technology Operations segment led the increase with an overall 88% gross
margin on a significantly higher revenue volume than the 1999 gross margin of
87% which was made up of primarily software licenses and development project
sales. Product Operations' margins increased to 63% from 53% in 1999 on sales of
VPN products. The gross profit margin for the European operations decreased to
35% from 69% in 1999 as a result of lower revenues available to recover fixed
costs.
Research and development expenses increased 15%, or $241,000, to
$1,843,000 for the three months ended June 30, 2000, from $1,602,000 in 1999.
The increase is primarily attributable to increased personnel related costs
associated with the Company's software and integrated circuit development
projects in Technology Operations. As a percentage of revenues, the expenses
were 28% and 35% in 2000 and 1999, respectively.
Sales and marketing expenses decreased to 12%, or $219,000, or
$1,570,000 for the three months ended June 30, 2000, from $1,789,000 in 1999 due
to a decrease in personnel and their salaries, telephone, travel and related
expenses as well as due to a scaled down participation in trade shows versus
1999. As a percentage of revenues, the expenses were 24% and 39% in 2000 and
1999, respectively.
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<PAGE> 13
General and administrative expenses increased 81%, or $450,000, to
$1,009,000 for the three months ended June 30, 2000, from $559,000 in 1999. The
increase is primarily due to professional fees incurred to strengthen the
executive management team in both Europe and the U.S. and for professional
services related to strategic initiative planning. As a percentage of revenues,
the expenses were 16% and 12% of revenues in 2000 and 1999, respectively.
The 2000 income tax expense of $276,000 was for estimated taxes on the
income in the United States. The 1999 income tax expense of $244,000 was for
estimated taxes on the income of the European Operations that has no estimated
income tax liability in 2000. 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 assets 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 net income of $565,000 for the three months ended June
30, 2000 compared to a net loss of $1,014,000 for the same period in 1999. The
diluted income per common share was $0.08 in 2000 compared to a ($0.19) loss per
common share in 1999.
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, 2000, the Company had working capital of $26,466,000 including
cash and cash equivalents of $24,551,000.
For the six months ended June 30, 2000, cash and cash equivalents
increased $5,390,000. Significant sources of cash for the Company in 2000
included $3,895,000 from operating activities and $1,504,000 from the exercise
of stock options and warrants.
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
in the fiscal year 2001 and is not expected to have a material impact on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The Company will be required to adopt this SAB in the fourth
quarter of fiscal year 2000. The Company is currently evaluating the impact of
the SAB on its revenue recognition practices and has not yet determined the
impact that the adoption of this SAB will have 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, 2000, the
Company's investment in its Swiss subsidiary was approximately $4,578,000. A 10%
change in the average Swiss Franc exchange rate for the six months ended June
30, 2000 would have changed the Company's reported earnings for the period by
approximately $65,000. A 10% change in the June 30, 2000 Swiss Franc exchange
rate would have changed the Company's reported currency translation adjustment
for six months ended June 30, 2000 by approximately $354,000.
At June 30, 2000, 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.
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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-K.
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on June 22, 2000
related to the termination of our independent auditors, KPMG.
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 11, 2000 /s/ Anthony A. Caputo
----------------------
ANTHONY A. CAPUTO
Chairman, President and Chief Executive Officer
August 11, 2000 /s/ Carole D. Argo
-------------------
CAROLE D. ARGO
Senior Vice President and Chief Financial Officer
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