Electronic transfer of cash protected by Md. firm's gear

MONEY'S HIGH-TECH GUARDIAN

September 28, 1993|By Kim Clark | Kim Clark,Staff Writer

A hundred years ago, banks hired tough-looking riflemen to guard strongboxes of cash as they made deliveries via stagecoach. Three decades ago, they manacled cash-filled briefcases to burly couriers.

But now that money is moved by a few clicks of computer keys, banks are taking on a new breed of hired guns to stop potential hijackers on the electronic highways -- like mild-mannered Anthony Caputo and his technology whizzes at Information Resource Engineering Inc.

For customers ranging from First National Bank of Maryland to the Internal Revenue Service, IRE's computer chip-filled boxes of information scramblers are a main line of defense against high-tech crooks.

The 33-worker White Marsh company has been winning growing attention and plaudits for its handling of the emerging market of electronic financial security.

Since Mr. Caputo took over as chairman, sales of the company's scramblers have risen from $290,000 in 1987 to $3.1 million last year. And the company, which lost $98,000 in 1987, reported a $713,000 profit in 1992. In addition, it ended 1992 with almost no debt and more than $4 million in the bank.

Although the company suffered a financial setback recently -- sales dived and profits evaporated in its most recently reported quarter -- Mr. Caputo was named Maryland's high-technology entrepreneur of the year by Inc. magazine this summer.

The growth and praise shows how far the company has come from its start 10 years ago, when two former National Security Agency engineers working in a Columbia basement thought that the existing scramblers -- with their switches, and dials -- should be easier for busy people such as bankers to use.

So they made a plain-looking aluminum box whose only exterior feature was a slot for a "smart card," a plastic card with a computer chip embedded in it. The information on the chip is scrambled and cannot be copied without the company's key.

Inside the box, however, is a sophisticated computer that can scramble information using a system with 72 quadrillion -- that is a 72 with 15 zeros following it -- potential solutions. If someone were to try a million decoding keys a second, it could take up to 2,000 years to find the right code.

Bankers and other money managers hook up an IRE box to a computer and, whenever they want to transfer funds or vital information, insert their smart card and type their password. A similar box on the other end unscrambles it.

Banks liked the IRE scramblers from the start, but by 1986, the founders realized the company needed cash to meet the growing demand. Enter Mr. Caputo.

Mr. Caputo, who headed a Philadelphia company called Tact Technology, made and sold lower-tech security devices for banks. He ended up buying an 80 percent stake in IRE for $100,000. He later took over as chairman.

Although sales nearly tripled from 1987 to 1989, the company lost hundreds of thousands of dollars, and Mr. Caputo couldn't afford to pay himself for most of that time.

By 1989, Mr. Caputo realized the company would need more cash to meet growing demand. So he took the company public, selling 250,000 shares at $6 a share. Last year, IRE completed a $3.6 million secondary offering to raise more capital and allow it to look for acquisition targets.

Although he hopes the company will keep growing at 40 percent to 50 percent a year, Mr. Caputo concedes IRE will have to scramble to keep up with increasingly clever thieves as well as intensifying competition among security providers.

IRE's encryption system -- the government-approved standard called Data Encryption Standard, or DES -- has come under fire from some computer experts, who warn that it is not secure.

Mr. Caputo doubts that the code could be broken, but says the company is prepared to switch to a new encoding system if the government changes its standard.

Financial concerns are more pressing, though. Despite IRE's success at winning high-profile financial clients, the company is still comparatively tiny -- by its own account it holds less than 3 percent of the nation's estimated $150 million-a-year bank electronic security market.

There are no big players in the market, and electronic security is a comparatively new field. But IRE faces challenges because most of its competitors use the same DES coding system, and some of its competitors have been around longer.

In addition, IRE has stumbled financially in recent months. It reported losing $126,000 on sales of only $326,000 in the first three months of 1993, down from a profit of $168,000 on sales of $691,000 in the first quarter of 1992.

The company's stock, which rose above $13 a share in Nasdaq trading in March, closed yesterday at $9.25. The company blamed the profits downturn on a delayed shipment and said it expected to rebound by the end of 1993. But its second-quarter report has been delayed.

Richard Weinstein, director of corporate finance for Barber & Bronson Inc. of Fort Lauderdale, Fla., a stockbroker that makes a market in IRE stock, says young companies often reach points where growth becomes unmanageable. But Mr. Weinstein said he thinks IRE is at least two years from any danger of losing control of its growth.

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