IRE knows how to keep a secret

THE BALTIMORE SUN

When the Secret Service decided it needed help in protecting its secrets, it turned to a little-known White Marsh company called Information Resource Engineering.

When the National Security Agency was looking for more security for its IBM computing network, it asked IRE for advice. And when the FBI wanted to make sure its investigations weren't being investigated, it bought IRE equipment to confound potential snoops.

IRE, a manufacturer of computer security devices, is riding a wave of new business after years of waiting for the marketplace to catch up with its technology.

The company's first-quarter sales of $1.5 million, buoyed by a flurry of new contracts from businesses and government agencies, were more than four times higher than in the same period in 1994.

Wall Street couldn't help but notice. Since the end of last year, IRE's stock has soared from about $12 to a 52-week high of $28.25 last week, before settling back to $26.50 Friday. IRE has announced a 2-for-1 stock split effective this month, doubling its shares to 3.6 million.

While the company's high-visibility contracts with law enforcement and national security agencies have been valuable testimonials for IRE's products, company Chairman Tony Caputo pointed to another reason for the company's recent success.

"The company has taken off because we're in a business that's a key enabling technology for anyone who wants to do electronic commerce," Mr. Caputo said in an interview. "Since you can't do electronic commerce without cryptography, people are beginning to realize what IRE does."

Cryptography, the science of making and breaking secret codes, has emerged from the secrecy-shrouded government laboratories and has become a lucrative business opportunity.

IRE seems ideally placed to benefit from that trend. The company makes devices that turn words and numbers into a goulash of seemingly random characters -- foiling the wily "crackers" who break into computer networks to steal money and secret information. Not only can IRE's technology scramble and unscramble messages, it can also be used to create a "digital signature" to verify the identity of an information sender.

So far, IRE's best customers have been the government and the banking industry, but the company is interested in breaking out into the broader marketplace.

Mr. Caputo said IRE plans to test the consumer market this summer with a series of products designed to protect transactions over the Internet, the worldwide network of computer networks. He also sees potential customers in on-line services and interactive networks being planned by telephone and cable companies.

Jim Medalia, president of the New York-based Internet services firm dx.com, estimated that less than 5 percent of the sites on the Internet's World Wide Web have any kind of security.

"The issue of encryption is on everybody's mind," Mr. Medalia said. "We have talked with companies that want to either sell a product or take orders . . . who are not going to do that until they feel comfortable with the security."

Little attention

Despite its recent surge, IRE has received little attention from stock market analysts outside Barber & Bronson, the Fort Lauderdale, Fla., company that handled a secondary stock offering for the company.

Jonothan S. Martin, an analyst for Barber & Bronson, said he sees few obstacles ahead for IRE. He said the competition in its market niche is insignificant and that demand for its products is just starting to take off in the banking sector and other areas of electronic commerce.

Mr. Martin believes that even though IRE's stock price has doubled since early spring, there is still room for further gains. He said the increased liquidity resulting from the stock split would attract greater attention from both institutional and individual investors.

Big stock jump

IRE's stock took a big jump in early June after a Barber & Bronson partner praised the company on a CNBC television program. The surge put a squeeze on short sellers in the company's stock, who were forced to deliver their stock at a premium, further driving up IRE's price to where its market capitalization now stands at $50 million.

But IRE's stock already was on the upswing when that happened, reflecting its growing customer base. Its products have found their way into some of the nation's busiest and most sensitive computer networks.

According to Mr. Caputo, six of the 10 largest U.S. banks -- including Citibank and J. P. Morgan & Co. -- use IRE equipment to guard the security of their electronic money exchanges.

The Department of Energy's Lawrence Livermore Laboratories has about 1,000 IRE encryptors that it uses to secure transmission related to its nuclear weapons research.

The Treasury Department has installed IRE equipment at its regional financial centers, where it is used to authenticate the orders to write some $700 billion in government checks each year, including Social Security payments and tax refunds. And PC Week recently reported that the Internal Revenue Service will soon announce plans to buy IRE's encrypting tokens -- small devices that attach to modems and generate a random password -- for as many as 60,000 of its agents in the field.

To further bolster its government business, IRE recently signed a deal with GTE Corp. under which the large telecommunications company will include IRE products in the switching systems it sells to government agencies.

George Usher, the former project manager for the Treasury Department's electronic certification system, said IRE is one of three or four leading companies in the business of providing encryption devices for the government.

Mr. Usher said the government's use of encryption technology will increase dramatically in the years ahead, especially as the procurement process goes on-line. He said IRE will likely face more competition for future contracts but that the overall market will be much bigger.

No policy complaints

Where many companies and individuals in cryptography-related businesses have become deeply involved in the often-bitter debates over government encryption policy, IRE has maintained excellent relations with federal agencies.

For instance, while many executives in encryption-related businesses complain about the federal government's limits on exporting the strongest cryptographic software, Mr. Caputo said has no problem with the policy.

"We have not been hampered in any way," Mr. Caputo said. "That's probably a minority position in the industry that we're in."

Mr. Caputo recalled one case in which IRE lost a sale because of the curbs, but if anything, the incident reinforced his support for export controls.

He said that about five years ago an Iraqi trade delegation visited his company and placed an order for modems that would have eclipsed the company's annual revenues at the time.

But the Iraqis wanted the modems shipped to a warehouse in New York in a hurry, Mr. Caputo said, raising suspicions that they were interested in evading the federal export control process. So instead of shipping the modems, IRE called the authorities, he said.

"It was during that period when we were struggling to become profitable, and losing an order for 2,000 encryptors, certainly it hurt," he said.

About nine months later, Iraq invaded Kuwait, and a few months later the Iraqis were fighting U.S. troops in a war where the U.S. ability to intercept enemy communications was critical.

IRE's cooperative relationship with the government has yielded dividends. Coincidentally or not, IRE recently became the first U.S. company to be licensed to export cryptographic programs without a cumbersome order-by-order review, Mr. Caputo said.

Government origins

The company's sensitivity to government concerns reflects its origins. It was founded in 1983 by two former National Security Agency engineers, Douglas Kozlay and Alan Hastings.

Mr. Kozlay has remained with the company as chief technical officer and a member of the board.

Mr. Caputo, now 53, first invested in the company in 1986, intrigued by the founders' vision of moving encryption technology beyond the realm of military hardware and packaging it like consumer electronics.

The veteran computer industry executive took over management the company in 1987 and took it public in 1989.

In addition to being the company's largest shareholder, with 18.4 percent of its stock, he holds the titles of chairman, president and chief executive officer.

It hasn't all been smooth since then.

The initial public offering raised only half the capital expected because the original underwriter went out of business, Mr. Caputo said.

There were years in the late 1980s when money was so tight he didn't draw a salary.

After posting strong growth in 1991 and 1992, IRE's 1993 revenues dropped from $3.1 million to $2.6 million after a large bank canceled a $1 million order.

Last year sales rebounded to $3.4 million, but the company posted a loss.

But now, with sales on track to nearly double this year, Mr. Caputo is looking forward to the future with bold plans.

He said he expects the new sales to bring a significant expansion of the company's work force, which now stands at about 50.

He noted that the company is only using half of the 20,000 square feet it occupies.

Mr. Martin said IRE's increased visibility makes it an attractive takeover candidate, but Mr. Caputo, the company's largest shareholder, said he has no plans to cash out just as the business is getting exciting.

"When I first set out to get involved with IRE, my goal was to create a company that was a leader in the computer and communications industry," he said. "I just don't feel my job is done yet."

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