10-Q 1 c58277e10-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 September 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 October 31, 2000 was 28,974,773. 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 14 PART II. OTHER INFORMATION Item 6 -- Exhibits and Reports Form 8-K 22 Signatures 23
2 3 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------ ------------------ ----------------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents ................................................. $ 12,937 $ 8,077 Accounts receivable, net .................................................. 78,495 94,125 Prepaid expenses and other ................................................ 8,920 8,569 --------- --------- Total Current Assets ................................................. 100,352 110,771 --------- --------- Property and equipment, at cost ................................................ 218,261 204,535 Accumulated depreciation ....................................................... (143,713) (123,550) --------- --------- Net property and equipment ..................................................... 74,548 80,985 Investments .................................................................... 16,366 9,624 Other assets ................................................................... 164,844 167,100 --------- --------- $ 356,110 $ 368,480 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of capitalized leases .................................. $ 1,902 $ 55 Accounts payable .......................................................... 42,398 49,616 Accrued compensation and benefits ......................................... 13,802 23,838 Accrued property, payroll and other taxes ................................. 2,810 4,813 Accrued expenses .......................................................... 13,393 11,475 Accrued restructuring costs ............................................... 6,088 8,885 Deferred revenue .......................................................... 27,043 23,163 --------- --------- Total Current Liabilities ............................................ 107,436 121,845 --------- --------- Long-term debt ................................................................. 28,291 10,764 Deferred income taxes, net ..................................................... -- 2,269 Other liabilities .............................................................. 7,556 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, 28,974,773 and 29,068,657 shares issued and outstanding, respectively ............... 291 291 Additional paid-in capital ................................................ 198,703 198,863 Retained earnings ......................................................... 26,251 31,390 Accumulated other comprehensive loss ...................................... (12,418) (5,569) --------- --------- Total Stockholders' Equity ........................................... 212,827 224,975 --------- --------- $ 356,110 $ 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 NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Information services revenues ........................................ $ 131,672 $ 136,092 $ 394,744 $ 405,684 Costs and expenses: Information services sold ......................................... (114,581) (121,322) (353,403) (366,371) Selling, general and administrative expenses ...................... (13,052) (12,849) (40,294) (38,772) Restructuring and other charges ................................... (3,157) -- (8,796) -- --------- --------- --------- --------- (130,790) (134,171) (402,493) (405,143) --------- --------- --------- --------- Operating profit (loss) .............................................. 882 1,921 (7,749) 541 Equity in earnings (loss) of affiliated companies .................... (583) 84 (313) 180 Minority interest benefit ............................................ 487 1,170 2,336 3,455 Interest expense and other, net ...................................... (1,282) (501) (2,793) (1,091) --------- --------- --------- --------- Earnings (loss) before income taxes .................................. (496) 2,674 (8,519) 3,085 Income tax (expense) benefit ......................................... (102) (1,346) 3,380 (1,540) --------- --------- --------- --------- Net earnings (loss) .................................................. $ (598) $ 1,328 $ (5,139) $ 1,545 ========= ========= ========= ========= Net earnings (loss) per common share -- basic ........................ $ (.02) $ .05 $ (.18) $ .06 ========= ========= ========= ========= Net earnings (loss) per common and common equivalent share -- diluted ............................... $ (.02) $ .05 $ (.18) $ .06 ========= ========= ========= ========= Weighted average common shares -- basic .............................. 29,046 28,120 29,061 28,022 ========= ========= ========= ========= Weighted average common and common equivalent shares -- diluted .............................. 29,046 28,267 29,061 28,081 ========= ========= ========= =========
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)
NINE MONTHS ENDED ----------------- SEPTEMBER 30, ------------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) .............................................................. $ (5,139) $ 1,545 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Amortization of deferred data procurement costs ............................. 89,996 89,655 Depreciation ................................................................ 22,224 19,985 Amortization of capitalized software costs and intangibles .................. 4,508 5,086 Restructuring and other charges, net of cash payments ....................... (1,912) -- Deferred income tax (benefit) expense ....................................... (3,380) 1,540 Equity in earnings of affiliated companies and minority interests ........... (2,023) (3,635) Other ....................................................................... 225 (1,187) Change in assets and liabilities: Accounts receivable ....................................................... 15,957 1,146 Other current assets ...................................................... (351) (1,179) Accounts payable and accrued liabilities .................................. (18,186) 937 Deferred revenue .......................................................... 3,880 11,452 Other, net ................................................................ (4,761) 4,095 --------- --------- Net cash provided by operating activities ........................... 101,038 129,440 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Deferred data procurement costs .................................................. (92,867) (98,098) Purchase of property, equipment and software ..................................... (13,259) (24,569) Investment in joint venture ...................................................... (1,940) -- Capitalized software costs ....................................................... (1,490) (5,457) Other, net ....................................................................... 994 3,414 --------- --------- Net cash used in investing activities ............................... (108,562) (124,710) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) ...................................................... 13,790 (1,588) Purchases of Common Stock ........................................................ (675) (1,036) Proceeds from exercise of stock options and other ................................ -- 871 --------- --------- Net cash provided by (used in) financing activities ................. 13,115 (1,753) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... (731) (771) --------- --------- Net increase in cash and cash equivalents ........................... 4,860 2,206 Cash and cash equivalents at beginning of period ............................... 8,077 11,149 --------- --------- Cash and cash equivalents at end of period ..................................... $ 12,937 $ 13,355 ========= =========
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):
NINE MONTHS ENDED ----------------- SEPTEMBER 30, ------------- 2000 1999 ---- ---- Interest $2,529 $770 Income taxes (277) 130
Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. During the nine months ended September 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 and third quarters 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):
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Billed $60,514 $73,605 Unbilled 21,293 24,294 ------ ------ 81,807 97,899 Reserve for accounts receivable (3,312) (3,774) ------- ------- $78,495 $94,125 ======= =======
NOTE 4 -- OTHER ASSETS Other assets were as follows (in thousands):
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Deferred data procurement costs -- net of accumulated amortization of $138,189 in 2000 and $141,531 in 1999 $137,864 $140,285 Intangible assets, including goodwill -- net of accumulated amortization of $11,390 in 2000 and $15,050 in 1999 9,688 11,659 Capitalized software costs -- net of accumulated amortization of $5,756 in 2000 and $3,149 in 1999 6,682 7,799 Other 10,610 7,357 -------- -------- $164,844 $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):
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Bank borrowings $24,750 $10,000 Capitalized leases and other 5,443 819 ------- ------- 30,193 10,819 Less current maturities (1,902) (55) ------- ------- $28,291 $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 $4.6 million is currently available for such distributions under the most restrictive of these covenants. The bank credit agreement contains covenants that restrict the Company's ability to incur additional indebtedness. NOTE 6 -- COMPREHENSIVE INCOME (LOSS) The comprehensive income (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 income (loss) were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- Net earnings (loss) $ (598) $1,328 $ (5,139) $ 1,545 Foreign currency translation adjustment (3,062) 2,105 (6,849) (2,080) ------- ----- -------- ------- Comprehensive income (loss) $(3,660) $3,433 $(11,988) $ (535) ======= ====== ======== =======
8 9 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 7 -- STOCK REPURCHASE During the third quarter of 2000, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in August 2000. The program, approved by the Company's Board of Directors, authorizes the periodic repurchase of up to 1,000,000 shares of its common stock on the open market, or in privately negotiated transactions, depending upon market conditions and other factors. The Company purchased 102,200 shares of common stock aggregating $.7 million during the third quarter of 2000. The shares are currently being held in treasury and will be sold to employees in connection with the Company's Employee Stock Purchase Plan. NOTE 8 -- JOINT VENTURE During the third quarter of 2000, the Company and Mosaic Group Inc. organized a joint venture company, Mosaic InfoForce, L.P. (MIF), in which the Company currently has a 49% ownership interest and Mosaic Group Inc. owns the remainder. The Company's domestic data collection, audit and merchandising business will be operated by MIF. The Company's investment of $1.9 million in MIF is being accounted for using the equity method of accounting. NOTE 9 -- 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: U.S. Services $98,589 $103,627 $298,369 $311,580 International Services 33,083 32,465 96,375 94,104 -------- -------- -------- -------- Total Revenue $131,672 $136,092 $394,744 $405,684 ======== ======== ======== ======== Operating Results: U.S. Services $6,020 $8,536 $ 14,580 $ 20,779 International Services Operating Loss (1,320) (3,350) (6,278) (12,561) Equity in earnings of affiliated companies 157 84 427 180 Minority interest benefit International Services 487 1,170 2,336 3,455 -------- -------- -------- -------- (676) (2,096) (3,515) (8,926) Corporate and other expenses (661) (3,265) (7,255) (7,677) Equity in losses of affiliated companies (740) - (740) - Restructuring and other charges (a) (3,157) - (8,796) - -------- -------- -------- -------- Operating Results 786 3,175 (5,726) 4,176 Interest expense and other, net (1,282) (501) (2,793) (1,091) -------- -------- -------- -------- Earnings (loss) before income taxes $ (496) $ 2,674 $ (8,519) $ 3,085 ======== ======== ======== ========
(a) Restructuring and other charges for the U.S. Services, International and Corporate were $1.2 million, $2.0 million and $0 million, respectively, for the three months ended September 30, 2000 and $5.4 million, $4.3 million and $(0.9) million, respectively, for the nine months ended September 30, 2000. 10 11 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 10 -- 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 $11.0 million to $13.0 million achieved year to date. Certain restructuring costs were not eligible for accrual in 1999 and were recorded in the first three quarters of 2000. For the quarter and year to date September 30, 2000, the restructuring charges included in Restructuring and Other Charges in the Statement of Operations consist of the following (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------ ------------------ Termination benefits $ 730 $3,406 Discontinued activities 1,603 1,603 Disposition of excess office space (231) 519 Transition of German Production to U.S. facility 980 3,179 Other costs of project 75 997 ------ ------ $3,157 $9,704 ------ ------
A restructuring accrual 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 three quarters 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 SEPTEMBER 30, 2000 ----------------- --------- ---- ------------------ Termination benefits $8,391 $3,406 $ (7,035) $4,762 Discontinued activities -- 928 -- 928 Disposition of excess office space 494 (114) (371) 9 Transition of German production to U.S. facility -- 3,179 (2,790) 389 Other costs of project -- 997 (997) -- ------ ------ -------- ------ 8,885 8,396 (11,193) 6,088 Non-cash provision -- 1,308 -- -- ------ ------ -------- ------ $8,885 $9,704 $(11,193) $6,088 ====== ====== ======== ======
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 September 30, 2000, $7.0 million of accrued termination benefits have been disbursed and through October 31, 2000, 253 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. Discontinued Activities: During the third quarter of 2000, the Company ceased operations of entities in Japan (IRI Apollo K.K.) and Australia (Information Resources Australia Pty, Ltd.) which were responsible for distributing Apollo software. The Company has entered into agreements with its 40% owned affiliate, Information Resources Japan Ltd. and an unrelated company in Australia to distribute its Apollo software. In connection with the cessation of local operations, the Company reserved $.3 million and $.6 million, respectively, relating to the Japan and Australia businesses. During the third quarter of 2000, it was determined that certain equipment used by the Company's field staff to collect retail information will no longer be utilized after the second quarter of 2001. Accordingly, the Company recognized a non-cash charge of $1.1 million in the third quarter of 2000 relating to accelerated depreciation on this equipment. 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 $(.1) million in lease buyouts associated with these facilities in the first nine months of 2000. 12 13 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) 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. As of September 30, 2000, charges of approximately $3.2 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 $0.9 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. 13 14 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 $.6 million or $.02 per diluted share for the third quarter of 2000 compared to consolidated net income of $1.3 million or $0.05 per diluted share for the corresponding 1999 quarter. The Company's consolidated net loss was $5.1 million or $.18 per diluted share for the nine months ended September 30, 2000 compared to consolidated net income of $1.5 million or $0.06 per diluted share for the corresponding 1999 period. Excluding restructuring and other charges, net income for the quarter was $1.3 million or $.05 per diluted share and year to date 2000 net income was $.1 million. Third Quarter Versus Prior Year Consolidated revenues for the quarter ended September 30, 2000 were $131.7 million, a decrease of 3.2% over the corresponding quarter in 1999. U.S revenues were $98.6 million, a decrease of 4.9% compared to the prior year due to the impact of client losses experienced in 1999, delays in the delivery of client projects that have since been corrected with a capacity upgrade and client consolidation activity. International revenues increased 1.9% to $33.1 million. Excluding foreign exchange effects, European revenues for the third quarter, which comprise 98% of total international revenues, increased 20.0% over the prior year reflecting continued strong revenue growth in most of the European businesses. Consolidated costs of information services sold decreased 5.6% to $114.6 million for the three months ended September 30, 2000 compared to costs of $121.3 million for the third quarter of 1999. The decline in expenses resulted from the Company's cost reduction initiative, Project Delta, lower U.S. revenues, adjustments during the third quarter of 2000 to personnel expense accruals 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 1.6% to $13.1 million for the three months ended September 30, 2000 compared to $12.8 million for the third quarter of 1999. 14 15 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Earnings before interest and taxes, excluding restructuring and other charges of $3.2 million, was $3.9 million for the third quarter of 2000 compared to $3.2 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. Restructuring and other charges are discussed below. Equity in earnings (losses) of affiliated companies were $(.6) million for the third quarter of 2000 compared to $.08 million in the prior year due to the Company's recognition of its share of the Mosaic InfoForce, L.P. start up costs. Interest and other expenses were $1.3 million for the third quarter of 2000 compared to $0.5 million in the prior year due to higher bank borrowings during 2000 and increased foreign currency exchange losses resulting from the continued strength of the U.S. dollar against European currencies in 2000. Third Quarter Year To Date Versus Prior Year Consolidated revenues were $394.7 million for the nine months ended September 30, 2000, a decrease of 2.7% over the corresponding period of 1999. U.S. business revenues decreased 4.2% to $298.4 million for the nine months ended September 30, 2000 compared to the prior year. The decline was due to the impact on the current period's revenues of 1999 client losses and delays in the delivery of client projects during the third quarter of 2000 that the Company has corrected with a capacity upgrade. International revenues were up 2.4% to $96.4 million over the first three quarters of 1999. Excluding the impact of foreign exchange rates, European revenues for the first nine months of 2000, which comprise 97% of total international revenues, increased 16.0% over the prior year. Consolidated costs of information services sold decreased 3.5% to $353.4 million for the nine months ended September 30, 2000 compared to costs of $366.4 million for the first nine months of 1999. Expenses declined primarily due to lower U.S. revenues, 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 3.9% to $40.3 million for the nine months ended September 30, 2000 compared to $38.8 million for the first nine months 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 nine months of 2000, the Company's earnings before interest and taxes, excluding restructuring and other charges of $8.8 million, was $3.1 million compared to operating income of $4.2 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. 15 16 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 $2.8 million for the nine months ended September 30, 2000 compared to $1.1 million in the prior year due to higher bank borrowings during 2000 and increased foreign currency exchange losses resulting from the continued strength of the U.S. dollar against European currencies in 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 $12.9 million consolidated cash balance and $34.1 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 $4.6 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 $101.0 million for the nine months ended September 30, 2000 compared to $129.4 million for the same period in 1999. This reduction was primarily attributable to lower earnings resulting from restructuring charges and the timing of payments of accounts payable and accrued liabilities. Consolidated cash flow used in net investing activity was $108.6 million in 2000 compared to $124.7 million for the same period in 1999. Net investing activity in 2000 includes the Company's initial $1.9 million investment in the Mosaic InfoForce, L.P. joint venture. During the third quarter of 2000, the Company repurchased 102,200 shares of common stock aggregating $.7 million. The shares are currently being held in treasury and will be sold to employees in connection with the Company's Employee Stock Purchase Plan. Net cash provided by financing activities was $13.1 million for the nine months ended September 30, 2000 compared to net cash used of $1.8 million for the same period in 1999. Consolidated cash flow provided by financing activities reflects borrowings of $14.8 million under its revolving line of credit in 2000 compared to $2.3 million in the prior year. 16 17 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 $92.9 million for the nine months ended September 30, 2000 and $98.1 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 $54.9 million and $61.2 million for the periods ended September 30, 2000 and 1999, respectively, for the Company's U.S. services business and $38.0 million and $36.9 million, respectively, for the Company's International services business. Consolidated capital expenditures were $13.3 million and $24.6 million for the nine months ended September 30, 2000 and 1999, respectively. Capital expenditures for the Company's U.S. services business were $9.3 million and $20.7 million, while depreciation expense was $18.8 million and $16.6 million for the nine months ended September 30, 2000 and 1999, respectively. Additionally, the Company acquired mainframe computer equipment in exchange for a capital lease obligation recorded at $5.6 million during the current year. Capital expenditures in the prior year included computer hardware and software purchases required for Year 2000 compliance. The Company's International services business capital expenditures were $4.0 million and $3.9 million, while depreciation expense was $3.4 million for each of the nine months ended September 30, 2000 and 1999. Consolidated capitalized software development costs, primarily in the U.S., were $1.5 million and $5.5 million for the nine months ended September 30, 2000 and 1999, respectively. Impact of Inflation Inflation has slowed in recent years, however the Company's results of operations are impacted by rising prices given the labor intensive nature of the business. 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 $11.0 million to $13.0 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. 17 18 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 nine months of 2000. For the quarter and year to date September 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 NINE MONTHS ENDED ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------ ------------------ Termination benefits $ 730 $3,406 Discontinued activities 1,603 1,603 Disposition of excess office space (231) 519 Transition of German production to U.S. facility 980 3,179 Other costs of project 75 997 ------ ------ $3,157 $9,704 ------ ------
Changes in the restructuring reserve, including cash payments, for the nine months ended September 30, 2000 are as follows (in thousands):
2000 ACTIVITY ------------------------------------- LIABILITY AT LIABILITY AT DECEMBER 31, 1999 PROVISION CASH SEPTEMBER 30, 2000 ----------------- --------- ---- ------------------ Termination benefits $8,391 $3,406 $ (7,035) $4,762 Discontinued activities -- 928 -- 928 Disposition of excess office space 494 (114) (371) 9 Transition of German production to U.S. facility -- 3,179 (2,790) 389 Other costs of project -- 997 (997) -- ------ ------ -------- ------ 8,885 8,396 (11,193) 6,088 Non-cash provision -- 1,308 -- -- ------ ------ -------- ------ $8,885 $9,704 $(11,193) $6,088 ====== ====== ======== ======
18 19 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. 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 September 30, 2000, $7.0 million of accrued termination benefits have been disbursed and through October 31, 2000, 253 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. Discontinued Activities: During the third quarter of 2000, the Company ceased operations of entities in Japan (IRI Apollo K.K.) and Australia (Information Resources Australia Pty, Ltd.) which were responsible for distributing Apollo software. The Company has entered into agreements with its 40% owned affiliate, Information Resources Japan Ltd. and an unrelated company in Australia to distribute its Apollo software. In connection with the cessation of local operations, the Company reserved $.3 million and $.6 million, respectively, relating to the Japan and Australia businesses. During the third quarter of 2000, it was determined that certain equipment used by the Company's field staff to collect retail information will no longer be utilized after the second quarter of 2001. Accordingly, the Company recognized a non-cash charge of $1.1 million in the third quarter of 2000 relating to accelerated depreciation on this equipment. 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 $(.1) million in lease buyouts associated with these facilities in the first three quarters 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. For the nine months ended September 30, 2000, charges of approximately $3.2 million were recorded related to this transition. The transition is expected to be completed during the first quarter of 2001, with estimated future costs that cannot currently be accrued of approximately $5.0 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. 19 20 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Future Restructuring Charges: The Company is progressing on its previously announced restructuring activities, and believes 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 for items that do not meet the criteria for accrual and for future restructurings. The Company expects to incur additional costs of $9.0 million to $10.0 million relating to the first phase of Project Delta which could not be accrued as of September 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. In the fourth quarter of 1999, Restructuring and Other Charges included a $0.9 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. 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. 20 21 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D 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. 21 22 INFORMATION RESOURCES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits Exhibit No. Description of Exhibit Page ----------- ---------------------- ---- 10.1 Employment and Change in Control Agreement between EF the Company and certain executive officers 10.2 Outsourcing Services Agreement between the Company EF and Mosaic InfoForce, L.P. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. 10.3 Information Resources, Inc. Third Amendment to EF Credit Agreement 10.4 Directors Deferred Compensation Agreement EF b. Reports on Form 8-K. None.
22 23 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) November 10, 2000 23