10-Q 1 e10-q.txt QUARTERLY REPORT 1 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 0-11428 INFORMATION RESOURCES, INC. --------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2947987 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 North Clinton Street, Chicago, Illinois 60661 ------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 726-1221 -------------- Indicate by check mark whether the registrant (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 12 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 ----- ----- The number of shares of the registrant's common stock, $.01 par value per share outstanding, as of July 31, 2000 was 29,072,773. 2 INFORMATION RESOURCES, INC. AND SUBSIDIARIES INDEX ----- PAGE NUMBER ------ PART I. FINANCIAL INFORMATION ---------------------------------- Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION -------------------------- Item 1 - Legal Proceedings 20 Item 4 - Submission of Matters to a 20 Vote of Security Holders Item 6 - Exhibits and Reports Form 8-K 21 Signatures 22 2 3 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS JUNE 30, 2000 DECEMBER 31, 1999 ------ ------------- ----------------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 4,948 $ 8,077 Accounts receivable, net 104,615 94,125 Prepaid expenses and other 9,714 8,569 ------------- ------------ Total Current Assets 119,277 110,771 ------------- ------------ Property and equipment, at cost 216,501 204,535 Accumulated depreciation (137,749) (123,550) ------------- ------------ Net property and equipment 78,752 80,985 Investments 9,669 9,624 Other assets 167,594 167,100 ------------- ------------ $ 375,292 $ 368,480 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Current maturities of capitalized leases $ 1,668 $ 55 Accounts payable 51,076 49,616 Accrued compensation and benefits 12,642 23,838 Accrued property, payroll and other taxes 1,822 4,813 Accrued expenses 8,146 11,475 Accrued restructuring costs 8,144 8,885 Deferred revenue 36,918 23,163 ------------- ------------ Total Current Liabilities 120,416 121,845 ------------- ------------ Long-term debt 29,713 10,764 Deferred income taxes, net -- 2,269 Other liabilities 8,257 8,627 STOCKHOLDERS' EQUITY Preferred stock-authorized, 1,000,000 shares, $.01 par value; none issued -- -- Common stock - authorized 60,000,000 shares, $.01 par value, 29,072,773 and 29,068,657 shares issued and outstanding, respectively 291 291 Additional paid-in capital 199,122 198,863 Retained earnings 26,849 31,390 Accumulated other comprehensive loss (9,356) (5,569) ------------- ------------ Total Stockholders' Equity 216,906 224,975 ------------- ------------ $ 375,292 $ 368,480 ============= ============ The accompanying notes are an integral part of these statements. 3 4 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ---------------- JUNE 30, JUNE 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Information services revenues $ 133,931 $ 137,847 $ 263,072 $ 269,592 Costs and expenses: Information services sold (119,216) (124,318) (238,822) (245,049) Selling, general and administrative expenses (14,304) (13,135) (27,242) (25,923) Restructuring and other charges (2,082) - (5,639) - --------- --------- --------- --------- (135,602) (137,453) (271,703) (270,972) --------- --------- --------- --------- Operating profit (loss) (1,671) 394 (8,631) (1,380) Interest expense and other, net (697) (424) (1,511) (590) Equity in earnings (losses) of affiliated companies 157 (98) 270 96 Minority interests benefit 642 1,100 1,849 2,285 --------- --------- --------- --------- Earnings (loss) before income taxes (1,569) 972 (8,023) 411 Income tax (expense) benefit 582 (504) 3,482 (194) --------- --------- --------- --------- Net earnings (loss) $ (987) $ 468 $ (4,541) $ 217 ========= ========= ========= ========= Net earnings (loss) per common share - basic $ (.03) $ .02 $ (.16) $ .01 ========= ========= ========= ========= Net earnings (loss) per common and common equivalent share - diluted $ (.03) $ .02 $ (.16) $ .01 ========= ========= ========= ========= Weighted average common shares - basic 29,071 28,080 29,070 27,973 ========= ========= ========= ========= Weighted average common and common equivalent shares - diluted 29,071 28,098 29,070 27,990 ========= ========= ========= ========= The accompanying notes are an integral part of these statements. 4 5 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED ---------------- JUNE 30, -------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (4,541) $ 217 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Amortization of deferred data procurement costs 60,170 59,193 Depreciation 14,791 13,014 Amortization of capitalized software costs and intangibles 2,854 3,225 Restructuring and other charges, net of cash payments (1,015) -- Deferred income tax (benefit) expense (3,482) 194 Equity in earnings of affiliated companies and minority interests (2,115) (2,381) Other 129 (857) Change in assets and liabilities: Accounts receivable (10,030) (8,405) Other current assets (1,145) (2,552) Accounts payable and accrued liabilities (16,819) (851) Deferred revenue 13,755 11,300 Other, net 1,041 1,847 --------- --------- Net cash provided by operating activities 53,593 73,944 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Deferred data procurement costs (63,717) (64,476) Purchase of property, equipment and software (7,810) (15,053) Capitalized software costs (1,233) (3,454) Other, net 311 2,890 --------- --------- Net cash used in investing activities (72,449) (80,093) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings 15,373 7,961 Purchases of Common Stock -- (95) Proceeds from exercise of stock options and other -- (92) --------- --------- Net cash provided by financing activities 15,373 7,774 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 354 (1,212) --------- --------- Net increase (decrease) in cash and cash equivalents (3,129) 413 Cash and cash equivalents at beginning of period 8,077 11,149 --------- --------- Cash and cash equivalents at end of period $ 4,948 $ 11,562 ========= ========= The accompanying notes are an integral part of these statements. 5 6 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION Principles of consolidation: The condensed consolidated financial statements include the accounts of Information Resources, Inc. and all wholly or majority owned subsidiaries and affiliates (collectively "the Company"). Minority interests reflect the non-Company owned stockholder interests in international operations. The equity method of accounting is used for investments in which the Company has a 20% to 50% ownership interest because it exercises significant influence over operating and financial policies. All significant intercompany accounts and transactions have been eliminated in consolidation. Interim financial statements: The interim financial statements are unaudited, but include all adjustments (consisting of normal recurring adjustments) necessary, in the opinion of management, for a fair statement of financial position and results of operations for the period presented. The preparation of interim financial statements necessarily relies on estimates, requiring the use of caution in estimating results for the full year based on interim results of operations. Reclassifications: Certain amounts in the 1999 condensed consolidated financial statements have been reclassified to conform to the 2000 presentation. Earnings (Loss) per Common and Common Equivalent Share: Net earnings (loss) per share is based upon the weighted average number of shares of common stock outstanding during each period. Net earnings (loss) per common and common equivalent share-diluted is based upon the weighted average number of shares of common stock and common stock equivalents, entirely comprised of stock options, outstanding during each period. In 2000, common stock equivalents were excluded from the weighted average shares outstanding calculation because they were anti-dilutive. NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid (received) for interest and income taxes during the period was as follows (in thousands): SIX MONTHS ENDED ---------------- JUNE 30, --------- 2000 1999 ---- ---- Interest $ 1,376 $ 622 Income taxes (356) 229 Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. During the six months ended June 30, 2000, the Company acquired mainframe computer equipment in exchange for a capital lease obligation recorded at $5.6 million. The Company repaid a portion of the capital lease obligation during the second quarter of 2000. 6 7 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable were as follows (in thousands): JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Billed $ 82,494 $ 73,605 Unbilled 25,857 24,294 --------- --------- 108,351 97,899 Reserve for accounts receivable (3,736) (3,774) --------- --------- $ 104,615 $ 94,125 ========= ========= NOTE 4 - OTHER ASSETS Other assets were as follows (in thousands): JUNE 30, 2000 DECEMBER 31, 1999 ------------- ---------------- Deferred data procurement costs - net of accumulated amortization of of $139,099 in 2000 and $141,531 in 1999 $ 139,913 $ 140,285 Intangible assets, including goodwill - net of accumulated amortization of $11,390 in 2000 and $15,050 in 1999 10,117 11,659 Capitalized software costs - net of accumulated amortization of $4,760 in 2000 and $3,149 in 1999 7,275 7,799 Other 10,289 7,357 --------- --------- $ 167,594 $ 167,100 ========= ========= 7 8 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 5 - LONG TERM DEBT Long-term debt was as follows (in thousands): JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Bank borrowings $ 27,600 $ 10,000 Capitalized leases and other 3,781 819 --------- --------- 31,381 10,819 Less current maturities (1,668) (55) --------- --------- $ 29,713 $ 10,764 ========= ========= The financial covenants in the bank credit agreement, as well as in the lease agreement for the Company's Chicago headquarters, require the Company to maintain a minimum tangible net worth and to meet certain cash flow coverage and leverage ratios. The agreements also limit the Company's ability to declare dividends or make distributions to holders of capital stock, or redeem or otherwise acquire shares of the Company. Approximately $8.4 million is currently available for such distributions under the most restrictive of these covenants. The bank credit agreement contains covenants which restrict the Company's ability to incur additional indebtedness. NOTE 6 - COMPREHENSIVE LOSS The comprehensive loss summary shown below sets forth certain items that affect stockholders' equity but are excluded from the presentation of net earnings. The components of comprehensive loss were as follows (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, -------- -------- 2000 1999 2000 1999 -------- ----- -------- -------- Net earnings (loss) $ (987) $ 468 $ (4,541) $ 217 Foreign currency translation Adjustment (1,688) (909) (3,787) (4,185) -------- ----- -------- -------- Comprehensive loss $ (2,675) $(441) $ (8,328) $ (3,968) ======== ===== ========= ======== 8 9 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 7 - COMMITMENTS, CONTINGENCIES AND LITIGATION On July 29, 1996, IRI filed an action against The Dun & Bradstreet Corp., The A.C. Nielsen Company (now a subsidiary of ACNielsen) and IMS International, Inc. (collectively, "the Defendants") in the United States District Court for the Southern District of New York entitled Information Resources, Inc. v. The Dun & Bradstreet Corp., et. al. No. 96 CIV. 5716 (the "Action"). IRI alleged that, among other things, the Defendants violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. Sections 1 and 2, by engaging in a series of anti-competitive practices aimed at excluding the Company from various export markets for retail tracking services and regaining monopoly power in the United States market for such services. By the Action, the Company seeks to enjoin the Defendants' anti-competitive practices and to recover damages in excess of $350.0 million, prior to trebling. The Action is more particularly described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. On July 13, 2000, the District Court in a procedural ruling held that IRI lacked standing to assert claims for injury suffered from Defendants' activities in foreign markets where IRI operates through subsidiaries or companies owned by joint ventures and dismissed such claims. The District Court left open the issue of whether those subsidiaries and joint ventures could sue in the United States for injury suffered from Defendants' activities in the foreign markets where they operate. NOTE 8 - SEGMENT INFORMATION The Company's business information services are conducted almost exclusively in the United States and Europe. The Company's operations in other markets account for approximately 1% of consolidated revenues. The executive management of the Company considers revenues from third parties and the aggregation of operating profit (loss), equity earnings (losses) and minority interests, ("Operating Results"), on a geographic basis to be the most meaningful measure of the operating performance of each respective geographic segment and of the Company as a whole. 9 10 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) The following table presents certain information regarding the operations of the Company by geographic segments (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: U.S. Services $ 101,392 $ 105,629 $ 199,780 $ 207,953 International Services 32,539 32,218 63,292 61,639 --------- --------- --------- --------- Total Revenue $ 133,931 $ 137,847 $ 263,072 $ 269,592 ========= ========= ========= ========= Operating Results: U.S. Services $ 5,751 $ 7,021 $ 8,560 $ 12,243 International Services: Operating loss (1,399) (4,169) (4,958) (9,211) Equity in earnings (losses) of affiliated companies 157 (98) 270 96 Minority interest benefit 642 1,100 1,849 2,285 --------- --------- --------- --------- International Services (600) (3,167) (2,839) (6,830) Corporate and other expenses (3,941) (2,458) (6,594) (4,412) Restructuring and other charges (a) (2,082) - (5,639) - --------- --------- --------- --------- Operating Results (872) 1,396 (6,512) 1,001 Interest expense and other, net (697) (424) (1,511) (590) --------- --------- --------- --------- Earnings loss before income taxes $ (1,569) $ 972 $ (8,023) $ 411 ========= ========= ========= ========= (a) Restructuring and other charges for the U.S. Services, International and Corporate were $1.7 million, $1.3 million and $(.9) million, respectively, for the three months ended June 30, 2000 and $4.2 million, $2.3 million and $(.9) million, respectively, for the six months ended June 30, 2000. 10 11 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 9 - RESTRUCTURING AND OTHER CHARGES RESTRUCTURING In the third quarter of 1999, the Company initiated a comprehensive cost reduction program named Project Delta. The first phase of Project Delta included the identification and assessment of potential operating efficiencies in the Company's various U.S. functional areas and was completed in the fourth quarter of 1999. The cost reduction program implementation began in the first quarter of 2000, with cost savings of approximately $6.0 million to $8.0 million achieved year to date. Certain restructuring costs were not eligible for accrual in 1999 and were recorded in the first two quarters of 2000. For the quarter and year to date June 30, 2000, the restructuring charges included in Restructuring and Other Charges in the Statement of Operations consist of the following (in thousands): THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2000 JUNE 30, 2000 ------------- ------------- Termination benefits $1,417 $2,676 Disposition of excess office space 198 750 Transition of German production to U.S. facility 1,243 2,199 Other costs of project 131 921 ------ ------ $2,989 $6,546 ====== ====== A restructuring reserve was established in the fourth quarter of 1999 to reflect the outstanding obligations related to the fourth quarter 1999 restructuring charges. The following table reflects the additional restructuring charges incurred in the first half of 2000 and all cash payments made to date (in thousands): 11 12 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED)
2000 ACTIVITY ----------------------- LIABILITY AT LIABILITY AT DECEMBER 31, 1999 PROVISION CASH JUNE 30, 2000 ----------------- --------- ---- ------------- Termination benefits $8,391 $2,676 $(4,105) $6,962 Disposition of excess office space 494 117 (117) 494 Transition of German production to U.S. facility - 2,199 (1,584) 615 Other costs of project - 921 (848) 73 ------ ------ ------- ------ 8,885 5,913 (6,654) 8,144 Non-cash provision - 633 - - ------ ------ ------- ------ $8,885 $6,546 $(6,654) $8,144 ====== ====== ======= ======
Termination Benefits: In the fourth quarter of 1999, the Company expected to terminate 325 full-time positions during 2000 impacting virtually all areas of the U.S. business, including operations, client services, technology and marketing, as well as Corporate headquarters. As of June 30, 2000, $4.1 million of accrued termination benefits have been disbursed and 152 employees have been terminated under various Project Delta initiatives. Additional provisions have been made throughout the year to cover retention and relocation incentive costs that were not eligible for accrual at December 31, 1999. Disposition of Excess Office Space: As a result of planned headcount reductions and space not currently utilized, the Company has decided to vacate certain facilities. The Company recorded $.6 million of charges relating to accelerated depreciation on leasehold improvements and furniture and fixtures and $.2 million in lease buyouts associated with these facilities in the first half of 2000. Transition of German Production to U.S. Facility: The Company made a decision in the fourth quarter of 1999 to transfer production services for IRI/GfK Retail Services GmbH from an external vendor in Germany to the Company's U.S. headquarter facility in order to enhance its InfoScan offering in Germany and to reduce future production costs. In the first half of 2000, charges of approximately $2.2 million were recorded related to this transition. Other Restructuring Costs: Other restructuring costs relate primarily to the final fees paid to the Boston Consulting Group for assistance in the identification and execution of the Project Delta objectives. OTHER CHARGES In the fourth quarter of 1999, Restructuring and Other Charges included a $.9 million charge for a non-current receivables reserve. This reserve was reversed in the second quarter of 2000 pursuant to a settlement agreement reached with the other party. 12 13 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following narrative discusses the results of operations, liquidity and capital resources for the Company on a consolidated basis. This section should be read in conjunction with IRI's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein. RESULTS OF OPERATIONS The Company's consolidated net loss was $1.0 million or $.03 per diluted share for the second quarter of 2000 compared to consolidated net income of $.5 million or $.02 per diluted share for the corresponding 1999 quarter. The Company's consolidated net loss was $4.5 million or $.16 per diluted share for the six months ended June 30, 2000 compared to consolidated net income of $.2 million or $.01 per diluted share for the corresponding 1999 period. Excluding restructuring and other charges, net income (loss) for the quarter and year to date 2000 was $.3 million and ($1.2) million, respectively, or $.01 and ($.04) per diluted share. Second Quarter Versus Prior Year Consolidated revenues for the quarter ended June 30, 2000 were $133.9 million, a decrease of 3% over the corresponding quarter in 1999. U.S revenues were $101.4 million, a decrease of 4% compared to the prior year due to the delayed financial impact of client losses experienced in 1999. International revenues increased 1% to $32.5 million. Excluding foreign exchange effects, European revenues for the second quarter increased 13% over the prior year reflecting continued strong revenue growth in each of the major European businesses. Consolidated costs of information services sold decreased 4% to $119.2 million for the three months ended June 30, 2000 compared to costs of $124.3 million for the second quarter of 1999. The decline in expenses resulted primarily from the Company's cost reduction initiative, Project Delta, and the continued strengthening of the U.S. dollar against European currencies. These savings were offset slightly by increased costs related to the investment in the Company's CPGNetwork internet-based delivery service and other strategic opportunities. Consolidated selling, general and administrative expenses increased 9% to $14.3 million for the three months ended June 30, 2000 compared to $13.1 million for the second quarter of 1999. The increase was primarily due to costs incurred during 2000 to pursue new strategic opportunities for the Company, including internet-based business initiatives. 13 14 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Operating income, before restructuring and other charges of $2.1 million, was $1.2 million for the second quarter of 2000 compared to $1.4 million in the prior year. Improvements in the performance of the international operations and reduced U.S. expenses offset the decline in U.S. revenues resulting from 1999 client losses. Restructuring and other charges are discussed below. Interest and other expenses were $.7 million for the second quarter of 2000 compared to $.4 million in the prior year due to higher bank borrowings during 2000. First Half Versus Prior Year Consolidated revenues were $263.1 million for the six months ended June 30, 2000, a decrease of 2% over the corresponding period of 1999. U.S. business revenues decreased 4% to $199.8 million for the first half of 2000 compared to the prior year. The decline was due to the delayed financial impact on the current period's revenues of 1999 client losses. International revenues were up 3% to $63.3 million over the first half of 1999. Excluding the impact of foreign exchange rates, European revenues for the first half of 2000 increased 14% over the prior year. Consolidated costs of information services sold decreased 3% to $238.8 million for the six months ended June 30, 2000 compared to costs of $245.0 million for the first half of 1999. Expenses declined primarily due to savings achieved through the Project Delta cost reduction initiative and the continued strengthening of the U.S. dollar against European currencies. These savings were offset slightly by increased costs related to the investment in the Company's CPGNetwork internet-based delivery service and other strategic opportunities. Consolidated selling, general and administrative expenses increased 5% to $27.2 million for the six months ended June 30, 2000 compared to $25.9 million for the first half of 1999. The increase is primarily attributable to the costs incurred during 2000 to pursue new strategic opportunities for the Company, including internet-based business initiatives. For the first half of 2000, the Company's operating loss, before restructuring and other charges of $5.6 million, was $.9 million compared to operating income of $1.0 million in the prior year. Results were below prior year because of the delayed financial impact of 1999 U.S. client losses on revenues partially offset by improved international performance and reduced U.S. expenses resulting from the Company's Project Delta cost reduction initiatives. 14 15 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Restructuring and other charges are discussed below. Interest and other expenses were $1.5 million for the six months ended June 30, 2000 compared to $.6 million in the prior year due to higher bank borrowings during the first half of 2000. The Company's effective income tax rate is greater than the U.S. Federal statutory rate due to certain unbenefited foreign losses, goodwill amortization and other nondeductible expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's current cash resources include its $4.9 million consolidated cash balance and $31.3 million available under the Company's bank revolving credit facility. The Company anticipates that it will have sufficient funds from these sources and internally generated funds from its U.S. operations to satisfy its cash needs for the foreseeable future. Financings The financial covenants in the bank credit agreement, as well as in the lease agreement for the Company's Chicago headquarters, require the Company to maintain a minimum tangible net worth and to meet certain cash flow coverage and leverage ratios. The agreements also limit the Company's ability to declare dividends or make distributions to holders of capital stock, or redeem or otherwise acquire shares of the Company. Approximately $8.4 million is currently available for such distributions under the most restrictive of these covenants. The bank credit agreement also contains covenants that restrict the Company's ability to incur additional indebtedness. Cash Flow Consolidated net cash provided by operating activities was $53.6 million for the six months ended June 30, 2000 compared to $73.9 million for the same period in 1999. This reduction was primarily attributable to lower earnings resulting from restructuring charges and timing of payments of accounts payable and accrued liabilities. Consolidated cash flow used in net investing activities was $72.4 million in 2000 compared to $80.1 million for the same period in 1999. Net cash used before financing activities was $18.8 million for the six months ended June 30, 2000 compared to $6.2 million for the same period in 1999. Consolidated cash flow provided by financing activities reflects borrowings of $17.6 million under its revolving line of credit in 2000 compared to $8.8 million in the prior year. 15 16 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Other Deferred Costs and Capital Expenditures Consolidated deferred data procurement expenditures were $63.7 million for the six months ended June 30, 2000 and $64.5 million for the same period in 1999. These expenditures are amortized over a period of 28 months and include payments and services to retailers for point-of-sale data and other costs related to collecting, reviewing and verifying panel, causal and other data which are an essential part of the Company's database. Such expenditures were $36.6 million and $40.2 million for the periods ended June 30, 2000 and 1999, respectively, for the Company's U.S. services business and $27.1 million and $24.3 million, respectively, for the Company's International services business. Consolidated capital expenditures were $7.8 million and $15.1 million for the six months ended June 30, 2000 and 1999, respectively. Capital expenditures for the Company's U.S. services business were $5.5 million and $13.0 million, while depreciation expense was $12.5 million and $10.7 million for the six months ended June 30, 2000 and 1999, respectively. During the first half of 2000, the Company acquired mainframe computer equipment in exchange for a capital lease obligation recorded at $5.6 million. The Company's International services business capital expenditures were $2.3 million and $2.1 million for the six months ended June 30, 2000 and 1999, respectively, while depreciation expense was $2.3 million for the first half of both 2000 and 1999. Consolidated capitalized software development costs, primarily in the U.S., were $1.2 million and $3.5 million for the six months ended June 30, 2000 and 1999, respectively. Impact of Inflation Inflation has slowed in recent years and is currently not an important determinant of the Company's results of operations. To the extent permitted by competitive conditions, the Company passes increased costs on to customers by adjusting sales prices and, in the case of multi-year contracts, through consumer price index provisions in such agreements. RESTRUCTURING CHARGES In the third quarter of 1999, the Company initiated a comprehensive program named Project Delta, with the objective to improve productivity and operating efficiencies to reduce the Company's on-going cost structure in its U.S. operations. The first phase of Project Delta included the identification and assessment of potential operating efficiencies in the Company's various U.S. functional areas and was completed in the fourth quarter of 1999. The cost reduction program implementation began in the first quarter of 2000, with cost savings of approximately $6.0 million to $8.0 million achieved year to date. The Company expects that annualized cost savings in certain expenses of at least $15.0 million will be achievable in the U.S. operations by the end of 2000. 16 17 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Certain costs were not eligible for accrual in 1999 and were recorded during the first six months of 2000. For the quarter and year to date June 30, 2000, the components of the restructuring charges included in Restructuring and Other Charges in the Statement of Operations consist of the following (in thousands): THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2000 JUNE 30, 2000 ------------- ------------- Termination benefits $1,417 $2,676 Disposition of excess office space 198 750 Transition of German production to U.S. facility 1,243 2,199 Other costs of project 131 921 ------ ------ $2,989 $6,546 ====== ====== Changes in the restructuring reserve, including cash payments, for the six months ended June 30, 2000 are as follows (in thousands):
2000 ACTIVITY -------------------------- LIABILITY AT LIABILITY AT DECEMBER 31, 1999 PROVISION CASH JUNE 30, 2000 ----------------- --------- ---- ------------- Termination benefits $8,391 $2,676 $(4,105) $6,962 Disposition of excess office space 494 117 (117) 494 Transition of German production to U.S. facility - 2,199 (1,584) 615 Other costs of project - 921 (848) 73 ------ ------ ------- ------ 8,885 5,913 (6,654) 8,144 Non-cash provision - 633 - - ------ ------ ------- ------ $8,885 $6,546 $(6,654) $8,144 ====== ====== ======= ======
Termination Benefits: In the fourth quarter of 1999, the Company expected to terminate 325 full-time positions during 2000 impacting virtually all areas of the U.S. business, including operations, client services, technology and marketing, as well as Corporate headquarters. As of June 30, 2000, $4.1 million of accrued termination benefits have been disbursed and 152 employees have been terminated under various Project Delta initiatives. Additional provisions have been made throughout the year to cover retention and relocation incentive costs that were not eligible for accrual at December 31, 1999. 17 18 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Disposition of Excess Office Space: As a result of planned headcount reductions and space not currently utilized, the Company has decided to vacate certain facilities. The Company recorded $.6 million of charges relating to accelerated depreciation on leasehold improvements and furniture and fixtures and $.2 million in lease buyouts associated with these facilities in the first half of 2000. Transition of German Production to U.S. Facility: The company made a decision in the fourth quarter of 1999 to transfer production of IRI/GfK Retail Services GmbH from an external vendor in Germany to the U.S. headquarter facility in order to enhance its InfoScan offering in Germany and to reduce future production costs. In the first half of 2000, charges of approximately $2.2 million were recorded related to this transition. The transition is expected to be completed during the fourth quarter of 2000, with estimated future costs that cannot currently be accrued of approximately $2.2 million. Other Restructuring Costs: Other restructuring costs primarily relate to final fees paid to the Boston Consulting Group for assistance in the identification and execution of the Project Delta objectives. Future Restructuring Charges: The Company believes that it is solidly progressing on its previously announced restructuring activities, and that the restructuring provisions recorded will be adequate to cover the estimated restructuring costs. The Company anticipates that it will continue to incur restructuring charges in 2000 for items that do not meet the criteria for accrual and for future restructurings. The Company expects to incur additional costs of $8.0 million to $10.0 million relating to the first phase of Project Delta which could not be accrued as of June 30, 2000. In addition, the Company has begun the initial stages of reviewing its International and information technology operations to assess potential restructuring costs and benefits. The Company cannot yet estimate the costs for these future restructuring programs. OTHER CHARGES In the fourth quarter of 1999, Restructuring and Other Charges included a $.9 million charge for a non-current receivables reserve. This reserve was reversed in the second quarter of 2000 pursuant to a settlement agreement reached with the other party. EUROPEAN CURRENCY CONVERSION ISSUES In accordance with the 1992 treaty of the European Union, on January 1, 1999, a new single European currency, the Euro, became legal tender. The Euro will replace the sovereign currencies ("legacy currencies") of the eleven initial members of the European Union ("participating countries"). On this date, fixed conversion rates between the Euro and the legacy currencies in those particular countries were established. 18 19 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. As the Company has operations in several of the participating countries, it will be affected by issues relating to the introduction of and transition to the Euro. The Company's European Executive Committee is charged with formulating and executing all aspects of the Company's plan concerning the conversion to the Euro. The Company does not expect the cost of any system modifications to be material or result in any material increase in transaction costs. The Company will continue to evaluate the impact of the Euro, however, based on currently available information, management does not believe the introduction of the Euro will have a material adverse impact on the Company's financial condition or overall trends in results of operations. FORWARD LOOKING INFORMATION All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward looking. In particular, statements regarding industry prospects, our future results of operations or financial position, and statements preceded by, followed by or that include the words "intends," "estimates," "believes," "expects," "anticipates," "should," "could," or similar expressions, are forward-looking statements and reflect our current expectations and are inherently uncertain. The Company's actual results may differ significantly from our expectations for a number of reasons, including risks and uncertainties relating to customer renewals of service contracts, the timing of significant new customer engagements, the success of implementing Project Delta, competitive conditions, the potential for future client losses, changes in client spending for the non-contractual services the Company offers, the release of chain-specific data by European retailers, foreign currency exchange rates, European currency conversion issues and other factors beyond the Company's control. These risks and uncertainties are described herein and in reports and other documents filed by the Company with the Securities and Exchange Commission. 19 20 INFORMATION RESOURCES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 29, 1996, IRI filed an action against The Dun & Bradstreet Corp., The A.C. Nielsen Company (now a subsidiary of ACNielsen) and IMS International, Inc. (collectively, "the Defendants") in the United States District Court for the Southern District of New York entitled Information Resources, Inc. v. The Dun & Bradstreet Corp., et. al. No. 96 CIV. 5716 (the "Action"). IRI alleged that, among other things, the Defendants violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. Sections 1 and 2, by engaging in a series of anti-competitive practices aimed at excluding the Company from various export markets for retail tracking services and regaining monopoly power in the United States market for such services. By the Action, the Company seeks to enjoin the Defendants' anti-competitive practices and to recover damages in excess of $350.0 million, prior to trebling. The Action is more particularly described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. See "Legal Proceedings" contained therein. On July 13, 2000, the District Court in a procedural ruling held that IRI lacked standing to assert claims for injury suffered from Defendants' activities in foreign markets where IRI operates through subsidiaries or companies owned by joint ventures and dismissed such claims. The District Court left open the issue of whether those subsidiaries and joint ventures could sue in the United States for injury suffered from Defendants' activities in the foreign markets where they operate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Annual Meeting. On May 19, 2000, Information Resources held its annual meeting of shareholders. As of that date, shareholders of the Company's common shares outstanding were entitled to 29,068,657 votes. At the meeting, the Company's shareholders voted on the following matters: (1) election of three directors, for three year terms; (2) approval of the Information Resources, Inc. Employee Stock Purchase Plan. 20 21 INFORMATION RESOURCES, INC. AND SUBSIDIARIES, CONT'D PART II OTHER INFORMATION Each matter was approved by the shareholders. The votes cast for, against and abstentions as to each such matter were as follows: Votes For Votes Against Abstention --------- ------------- ---------- Election of Directors: Joseph P. Durrett 20,899,992 -- 3,903,961 Bruce A. Gescheider 24,640,544 -- 163,409 John D.C. Little, Ph.D. 24,584,973 -- 218,980 Approval of the Information Resources, Inc. Employee Stock Purchase Plan 21,470,832 3,296,426 36,695 A more detailed description of the matters voted on by shareholders of the Company at this meeting is included in the definitive Proxy Statement dated April 19, 2000 and incorporated herein by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit No. Description of Exhibit Page ----------- ---------------------- ---- 10(kk) Amendment to employment letter agreement dated EF June 16, 2000 between the Company and Edward Kuehnle. 10(ll) Amended and Restated 1992 Stock Option Plan, EF as amended effective June 29, 2000. 10(mm) 1992 Executive Stock Option Plan, as amended EF effective June 29, 2000. 10(nn) Employee Nonqualified Stock Option Plan, as EF amended effective June 29, 2000. 10(oo) Employment letter agreement dated May 19, 2000 EF between the Company and Mary K. Sinclair. 27 Financial Data Schedule (filed herewith). EF b. Reports on Form 8-K. None. 21 22 INFORMATION RESOURCES, INC. AND SUBSIDIARIES 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 RESOURCES, INC. --------------------------- (Registrant) /s/ ANDREW G. BALBIRER ----------------------------------- Andrew G. Balbirer Executive Vice President and Chief Financial Officer (Authorized Officer of Registrant) /s/ MARY K. SINCLAIR ----------------------------------- Mary K. Sinclair Controller (Principal Accounting Officer) August 11, 2000 22