10-Q 1 c66018e10-q.txt QUARTERLY REPORT 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, 2001 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, 2001 was 29,313,683. 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 on Form 8-K 21 Signatures 22
2 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------ ------------------ ---------------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 9,870 $ 11,914 Accounts receivable, net 76,421 80,610 Prepaid expenses and other 7,914 11,009 --------- --------- Total Current Assets 94,205 103,533 --------- --------- Property and equipment, at cost 219,891 203,509 Accumulated depreciation (150,812) (127,777) --------- --------- Net property and equipment 69,079 75,732 Investments 14,757 15,858 Deferred income taxes 8,092 4,031 Other assets 165,886 166,006 --------- --------- $ 352,019 $ 365,160 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of capitalized leases $ 2,495 $ 2,337 Accounts payable 50,641 53,360 Accrued compensation and benefits 18,346 22,609 Accrued property, payroll and other taxes 2,761 1,980 Accrued expenses 7,323 11,372 Accrued restructuring costs 1,959 2,570 Deferred revenue 36,045 24,487 --------- --------- Total Current Liabilities 119,570 118,715 --------- --------- Long-term debt 6,723 24,628 Other liabilities 14,926 8,686 STOCKHOLDERS' EQUITY Preferred stock-authorized, 1,000,000 shares, $.01 par value; none issued -- -- Common stock - authorized 60,000,000 shares, $.01 par value, 29,327,995 and 29,069,892 shares issued and outstanding, respectively 296 294 Additional paid-in capital 200,170 198,926 Retained earnings 19,648 23,852 Accumulated other comprehensive loss (9,314) (9,941) --------- --------- Total Stockholders' Equity 210,800 213,131 --------- --------- $ 352,019 $ 365,160 ========= =========
The accompanying notes are an integral part of these statements. 3 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, ------------- ------------- 2001 2000 2001 2000 ----- ---- ---- ---- Information services revenues $ 138,166 $ 131,672 $ 415,380 $ 394,744 Costs and expenses: Information services sold (123,074) (114,581) (369,145) (353,403) Selling, general and administrative expenses (11,807) (13,052) (39,144) (40,294) Restructuring and other charges (4,209) (3,157) (12,408) (8,796) --------- --------- --------- --------- (139,090) (130,790) (420,697) (402,493) --------- --------- --------- --------- Operating profit (loss) (924) 882 (5,317) (7,749) Interest expense and other, net (354) (1,282) (2,751) (2,793) Equity in earnings (losses) of affiliated companies 5 (583) (171) (313) Minority interest benefit 770 487 2,147 2,336 --------- --------- --------- --------- Loss before income taxes (503) (496) (6,092) (8,519) Income tax (expense) benefit 15 (102) 1,889 3,380 --------- --------- --------- --------- Net loss $ (488) $ (598) $ (4,203) $ (5,139) ========= ========= ========= ========= Net loss per common share - basic $ (.02) $ (.02) $ (.14) $ (.18) ========= ========= ========= ========= Net loss per common and common equivalent share - diluted $ (.02) $ (.02) $ (.14) $ (.18) ========= ========= ========= ========= Weighted average common shares - basic 29,310 29,046 29,150 29,061 ========= ========= ========= ========= Weighted average common and common equivalent shares - diluted 29,310 29,046 29,150 29,061 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 4 INFORMATION RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,203) $ (5,139) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of deferred data procurement costs 93,045 89,996 Depreciation 21,649 22,224 Amortization of capitalized software costs and intangibles 4,487 4,508 Restructuring and other charges, net of cash payments 1,530 (1,912) Deferred income tax benefit (1,889) (3,380) Equity in earnings of affiliated companies and minority interests (1,976) (2,023) Other 558 225 Change in assets and liabilities: Accounts receivable 3,573 15,957 Other current assets 3,095 (351) Accounts payable and accrued liabilities (7,597) (18,186) Deferred revenue 11,558 3,880 Other, net 6,067 (4,761) --------- --------- Net cash provided by operating activities 129,897 101,038 CASH FLOWS FROM INVESTING ACTIVITIES: Deferred data procurement costs (96,200) (92,867) Purchase of property, equipment and software (14,568) (13,259) Capitalized software costs (1,793) (1,490) Investment in joint ventures (2,751) (1,940) Other, net 460 994 --------- --------- Net cash used in investing activities (114,852) (108,562) CASH FLOWS FROM FINANCING ACTIVITIES: Net bank borrowings (repayments) (16,000) 14,750 Purchases of Common Stock (110) (675) Proceeds from issuance of stock and exercise of stock options 927 -- Net repayments of capitalized leases (1,747) (960) --------- --------- Net cash (used) provided by financing activities (16,930) 13,115 EFFECT OF EXCHANGE RATE CHANGES ON CASH (159) (731) --------- --------- Net (decrease) increase in cash and cash equivalents (2,044) 4,860 Cash and cash equivalents at beginning of period 11,914 8,077 --------- --------- Cash and cash equivalents at end of period $ 9,870 $ 12,937 ========= =========
The accompanying notes are an integral part of these statements. 5 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. The excess of the carrying value over the net book value of investments accounted for using the equity method is amortized over ten years. 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 2000 condensed consolidated financial statements have been reclassified to conform to the 2001 presentation. Loss per Common and Common Equivalent Share: Net loss per share is based upon the weighted average number of shares of common stock outstanding during each period. Net 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 and 2001, 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, ------------- 2001 2000 ---- ---- Interest $ 1,775 $ 2,529 Income taxes 224 (277)
Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. During the nine months ended September 30, 2001, the Company acquired computer software licenses for $3.0 million in exchange for a financing obligation. 6 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, 2001 DECEMBER 31, 2000 ------------------ ----------------- Billed $ 64,973 $ 69,822 Unbilled 15,201 14,706 -------- -------- 80,174 84,528 Reserve for accounts receivable (3,753) (3,918) -------- -------- $ 76,421 $ 80,610 ======== ========
NOTE 4 - INVESTMENTS AND OTHER ASSETS Investments were as follows (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- Mosaic InfoForce, L.P., at cost plus equity in undistributed earnings $ 5,389 $ 6,101 Datos Information Resources, at cost plus equity in undistributed earnings 4,180 4,439 GfK Panel Services Benelux B.V., at cost 1,315 1,315 Middle East Market Research Bureau ("MEMRB"), at cost 2,784 2,795 Other 1,089 1,208 ------- ------- $14,757 $15,858 ======= =======
7 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) Other assets were as follows (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- Deferred data procurement costs - net of accumulated amortization of of $138,356 in 2001 and $132,884 in 2000 $144,136 $142,036 Intangible assets, including goodwill - net of accumulated amortization of $13,193 in 2001 and $12,026 in 2000 8,202 9,370 Capitalized software costs - net of accumulated amortization of $6,596 in 2001 and $4,716 in 2000 5,200 5,862 Other 8,348 8,738 -------- -------- $165,886 $166,006 ======== ========
NOTE 5 - LONG TERM DEBT Long-term debt was as follows (in thousands):
SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- Bank borrowings $ 5,000 $ 21,000 Capitalized leases and other 4,218 5,965 -------- -------- 9,218 26,965 Less current maturities (2,495) (2,337) -------- -------- $ 6,723 $ 24,628 ======== ========
8 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) In October 2001, the Company amended certain financial covenants and other terms and conditions of its $60 million bank revolving credit facility. Under the credit facility, the maximum commitment of funds available for borrowings is limited by a defined borrowing base formula related to eligible accounts receivable. Borrowings under the facility are secured by the Company's assets. The Company had $56 million of borrowing availability under the amended revolving credit facility as of November 12, 2001. The financial covenants in the amended 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 $3.5 million is currently available for such distributions under the most restrictive of these covenants. Additionally, the amended 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, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net loss $ (488) $ (598) $ (4,203) $ (5,139) Foreign currency translation adjustment 3,154 (3,062) 627 (6,849) -------- -------- -------- -------- Comprehensive income (loss) $ 2,666 $ (3,660) $ (3,576) $(11,988) ======== ======== ======== ========
NOTE 7 - STOCK REPURCHASE The Company purchased 20,000 shares of common stock aggregating $0.1 million during the first quarter of 2001 in connection with the stock repurchase program announced in August 2000. The stock repurchase program was established principally to acquire shares to fund the Company's 2000 Employee Stock Purchase Plan ("ESPP"). In June 2001, the Company sold 144,939 shares of Common Stock for $0.4 million to employees participating in the ESPP. Of the shares sold, 31,863 were previously held in treasury and 113,076 were newly issued by the Company. 9 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) 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. 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, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Revenues: U.S. Services $ 105,036 $ 98,589 $ 315,302 $ 298,369 International Services 33,130 33,083 100,078 96,375 --------- --------- --------- --------- Total Revenue $ 138,166 $ 131,672 $ 415,380 $ 394,744 ========= ========= ========= ========= Operating Results: U.S. Services $ 6,813 $ 6,020 $ 19,961 $ 14,580 International Services: Operating loss (743) (1,320) (3,332) (6,278) Equity in earnings of affiliated companies 23 157 149 427 Minority interest benefit 770 487 2,147 2,336 --------- --------- --------- --------- Subtotal -- International Services 50 (676) (1,036) (3,515) Corporate and other expenses including equity in loss of affiliated companies (2,803) (1,401) (9,858) (7,995) Restructuring and other charges (a) (4,209) (3,157) (12,408) (8,796) --------- --------- --------- --------- Operating Results (149) 786 (3,341) (5,726) Interest expense and other, net (354) (1,282) (2,751) (2,793) --------- --------- --------- --------- Loss before income taxes $ (503) $ (496) $ (6,092) $ (8,519) ========= ========= ========= =========
10 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) (a) Restructuring and other charges for the U.S. Services, International Services and Corporate were $2.0 million, $2.2 million and $0 million, respectively, for the three months ended September 30, 2001 and $1.2 million, $2.0 million and $0 million, respectively, for the three months ended September 30, 2000. Restructuring and other charges for the U.S. Services, International Services and Corporate were $6.0 million, $6.4 million and $0 million, respectively, for the nine months ended September 30, 2001 and $5.4 million, $4.3 million and $(0.9) million, respectively, for the nine months ended September 30, 2000. NOTE 9 - RESTRUCTURING AND OTHER CHARGES The Company began the Project Delta initiative in the fourth quarter of 1999 and completed the project during the third quarter of 2001, with the exception of the transition of German production to the U.S. facility. Costs associated with Project Delta continued to be incurred through the end of the third quarter of 2001. Certain restructuring and other costs were not eligible for accrual in 2000 and were recorded during 2001. For the quarter and nine months ended September 30, 2001 and 2000, the Restructuring and Other Charges included in the Statement of Operations consist of the following (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- RESTRUCTURING CHARGES Termination benefits $ 1,341 $ 730 $ 1,362 $ 3,406 Disposition of excess office space 7 (231) 24 519 Transition of German production to U.S. facility 2,067 980 6,070 3,179 Discontinued activities (17) 1,603 2,025 1,603 Other costs of project 811 75 2,927 996 OTHER CHARGES -- -- -- (907) -------- ------- ------- -------- $ 4,209 $ 3,157 $ 12,408 $ 8,796 ======== ======== ======== ========
The following table reflects restructuring and other charges accrued prior to 2001 and expenses incurred and cash payments made during the first nine months of 2001 (in thousands): 11 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED)
2001 ACTIVITY --------------------------------------------------------------------------------- LIABILITY AT LIABILITY AT DECEMBER 31, 2000 PROVISION CASH NON-CASH SEPTEMBER 30, 2001 ----------------- --------- ---- -------- ------------------ Termination benefits $ 2,029 $ 1,362 $ (2,292) $ -- $ 1,099 Disposition of excess office space -- 24 (24) -- -- Transition of German production to U.S. facility -- 6,070 (5,616) -- 454 Discontinued activities 541 2,025 (135) (2,025) 406 Other costs of project -- 2,927 (2,927) -- -- -------- -------- -------- -------- -------- $ 2,570 $ 12,408 $(10,994) $ (2,025) $ 1,959 ======== ======== ======== ======== ========
Termination Benefits: As of September 30, 2001, 394 employees have been terminated under various Project Delta initiatives. The accrual balance remaining as of September 30, 2001 represents the unpaid severance costs associated with employees terminated through the third quarter of 2001. Disposition of Excess Office Space: The Company recorded $.02 million of charges relating to lease buyouts in the first nine months of 2001 relating to office space not currently utilized. 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. data processing facility in order to enhance its InfoScan offering in Germany and to reduce future production costs. In the first three quarters of 2001, charges of approximately $6.1 million were recorded related to this transition. Discontinued Activities: During 2000, it was determined that certain equipment used in the Company's U.S. operations to collect retail information would no longer be utilized after the second quarter of 2001. Accordingly, the Company recognized a non-cash charge of $2.0 million in the first half of 2001 relating to accelerated depreciation on this equipment. Other Restructuring Costs: Other restructuring costs during the first nine months of 2001 relate primarily to the fees paid to a third party for assistance in the identification of process improvements and efficiencies within the U.S. operations. 12 INFORMATION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D. (UNAUDITED) NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of FAS 142 is expected to result in an increase in net income of approximately $900 thousand ($.02 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 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, 2000. 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 $.5 million or $(.02) per diluted share for the third quarter of 2001 compared to a consolidated net loss of $.6 million or $(.02) per diluted share for the corresponding 2000 quarter. The Company's consolidated net loss was $4.2 million or $(.14) per diluted share for the nine months ended September 30, 2001 compared to a consolidated net loss of $5.1 million or $(.18) per diluted share for the corresponding 2000 period. Excluding restructuring and other charges, net income for the quarter and year to date 2001 was $2.1 million and $3.6 million or $.07 and $.12 per diluted share compared to $1.3 million and $0.1 million, respectively, or $.05 and $.0 per diluted share for the corresponding 2000 period. Third Quarter Versus Prior Year Consolidated revenues for the quarter ended September 30, 2001 were $138.2 million, an increase of 5% over the corresponding quarter in 2000. U.S revenues were $105.0 million, an increase of 7% compared to the prior year primarily due to increased panel, analytics, and web delivery and access tools revenues. International revenues were $33.1 million for the third quarter of 2001. Excluding foreign currency exchange effects, international revenues increased 1% over the prior year. Consolidated costs of information services sold increased 7% to $123.1 million for the three months ended September 30, 2001 compared to $114.6 million for the third quarter of 2000. This increase is due to higher compensation resulting primarily from annual increases and higher employee incentive accruals. Consolidated selling, general and administrative expenses decreased 10% to $11.8 million for the three months ended September 30, 2001 compared to $13.1 million for the third quarter of 2000. This decrease is primarily due to lower training and recruiting costs. Earnings before interest and taxes, excluding restructuring and other charges of $4.2 million, was $4.1 million for the third quarter of 2001 compared to $3.9 million in the prior year, before restructuring and other charges of $3.2 million. This slight improvement is the result of better performance in both U.S. and international operations. The improvement is somewhat offset by higher corporate expenses which are the result of certain favorable adjustments made in 2000 but not in 2001. Restructuring and other charges are discussed below. Interest and other expenses were $.4 million for the third quarter of 2001, a decrease of $0.9 million over the prior year due to lower bank debt in 2001 and decreased foreign exchange losses resulting from the increased strength of the European currencies during the third quarter of 2001 as compared to the prior year. 14 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Third Quarter Year to Date Versus Prior Year Consolidated revenues were $415.4 million for the nine months ended September 30, 2001, an increase of 5% over the corresponding period of 2000. U.S. revenues increased 6% to $315.3 million for the nine months ended September 30, 2001 compared to the prior year primarily due to increased panel, analytics, and web delivery and access tools revenues. International revenues increased 4% to $100.1 million. Excluding the impact of foreign currency exchange effects, international revenues for the first nine months of 2001 increased 9% over the prior year. Consolidated costs of information services sold increased 4% to $369.1 million for the nine months ended September 30, 2001 compared to costs of $353.4 million for the corresponding period of 2000. This increase is due to higher compensation resulting primarily from annual increases, higher employee incentive accruals and the continued growth of the international business. Consolidated selling, general and administrative expenses decreased 3% to $39.1 million for the nine months ended September 30, 2001 compared to $40.3 million for the first nine months of 2000. This decrease is primarily due to lower training and recruiting costs. For the first nine months of 2001, the Company's earnings before interest and taxes, excluding restructuring and other charges of $12.4 million, was $9.1 million compared to $3.1 million in the prior year before restructuring and other charges of $8.8 million. This $6.0 million improvement is the result of better performance in both U.S. and international operations. The improvement is somewhat offset by higher corporate expenses which are the result of certain favorable adjustments made in 2000 but not in 2001. Restructuring and other charges are discussed below. Interest and other expenses were unchanged at $2.8 million for the nine months ended September 30, 2001 and 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's current cash resources include its $9.9 million consolidated cash balance and $56 million available under the Company's amended bank revolving credit facility as of November 12, 2001. 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. The Company's amended bank agreement contains covenants that restrict the Company's ability to incur additional indebtedness. Financings In October 2001, the Company amended certain financial covenants and other terms and conditions of its $60 million bank revolving credit facility. Under the credit facility, the maximum commitment of funds available for borrowings is limited by a defined borrowing base formula related to eligible accounts receivable. The facility is secured by the Company's assets. 15 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. 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 $3.5 million is currently available for such distributions under the most restrictive of these covenants. Additionally, 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 during the first nine months of 2001 was $129.9 million compared to $101.0 million for the same period in 2000. A significant part of this increase is attributed to a $10.9 million cash payment received by the Company as an early termination fee on a client contract that was to expire in 2005. As part of this arrangement, the Company also entered into a long-term contract with the client's parent. Most of this payment will be recognized as income over four years beginning in 2002. Other items affecting operating cash flow included lower severance and employee incentive payments in 2001, the timing of certain liability payments, including payroll, and higher amortization of deferred data procurement costs. Consolidated cash used in net investing activities increased $6.3 million to $114.9 million in 2001 reflecting higher expenditures for data procurement and capital, and payments made in connection with the formation of Mosaic InfoForce, L.P. Consolidated cash used by net financing activities was $16.9 million for the first nine months of 2001 reflecting repayments of bank borrowings of $16.0 million. This compares to cash provided by financing activities of $13.1 million for the same period in 2000 which included $14.8 million of borrowings under the revolving line of credit. Other Deferred Costs and Capital Expenditures Consolidated deferred data procurement expenditures were $96.2 million for the nine months ended September 30, 2001 and $92.9 million for the same period in 2000. 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 $56.3 million and $54.9 million for the periods ended September 30, 2001 and 2000, respectively, for the Company's U.S. services business and $39.9 million and $38.0 million, respectively, for the Company's International services business. 16 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. On May 1, 2001, Wal-Mart Stores, Inc. announced its decision, effective as of the beginning of August, 2001, to discontinue providing point-of-sale and related data for its U.S. business to all third party data providers, including the Company and ACNielsen Corporation. The Company has been focusing its efforts on creating an alternative data solution for its customers that will replace Wal-Mart sample-based point of sale scanner data with the Company's consumer panel data. Although this panel solution has only recently been made available to the marketplace, management believes that it will be a reasonable substitute for the Wal-Mart scanner data. If, however, the marketplace does not view the Company's Wal-Mart panel solution as a reasonable substitute for Wal-Mart scanner data, the Company's revenues and results of operations could be adversely impacted. Consolidated capital expenditures were $14.6 million and $13.3 million for the nine months ended September 30, 2001 and 2000, respectively. Capital expenditures for the Company's U.S. services business were $11.3 million and $9.3 million, while depreciation expense was $18.4 million and $18.8 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in U.S. capital expenditures is primarily due to the purchase of equipment used in connection with the panel business. The Company's International capital expenditures were $3.3 million and $4.0 million for the nine months ended September 30, 2001 and 2000, respectively, while depreciation expense was $3.3 million and $3.4 million for the nine months ended September 30, 2001 and 2000, respectively. Consolidated capitalized software development costs, primarily in the U.S., were $1.8 million for the first three quarters of 2001 and $1.5 million for the corresponding period in 2000. Software and Related Products On May 31, 2001, the Company entered into a new agreement with Oracle Corporation pursuant to which the Company was granted the right to continue to acquire new licenses to current versions of Oracle software products on favorable licensing and maintenance terms. The Company's right to use such licenses includes the right to allow its clients to use such licenses to access Company data. 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 increases provided for in such agreements. 17 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. RESTRUCTURING AND OTHER CHARGES The Company began the Project Delta initiative in the fourth quarter of 1999 and completed the project during the third quarter of 2001, with the exception of the transition of German production to the U.S. facility. Costs associated with Project Delta continued to be incurred through the end of the third quarter of 2001. Certain restructuring and other costs were not eligible for accrual in 2000 and were recorded during 2001. For the quarter and nine months ended September 30, 2001 and 2000, the Restructuring and Other Charges included in the Statement of Operations consist of the following (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- RESTRUCTURING CHARGES Termination benefits $ 1,341 $ 730 $ 1,362 $ 3,406 Disposition of excess office space 7 (231) 24 519 Transition of German production to U.S. facility 2,067 980 6,070 3,179 Discontinued activities (17) 1,603 2,025 1,603 Other costs of project 811 75 2,927 996 OTHER CHARGES -- -- -- (907) -------- -------- -------- -------- $ 4,209 $ 3,157 $ 12,408 $ 8,796 ======== ======== ======== ========
The following table reflects restructuring and other charges accrued prior to 2001 and expenses incurred and cash payments made during the first nine months of 2001 (in thousands):
2001 ACTIVITY -------------------------------------------------------------------------------- LIABILITY AT LIABILITY AT DECEMBER 31, 2000 PROVISION CASH NON-CASH SEPTEMBER 30, 2001 ----------------- --------- ---- -------- ------------------ Termination benefits $ 2,029 $ 1,362 $ (2,292) $ -- $ 1,099 Disposition of excess office space -- 24 (24) -- -- Transition of German production to U.S. facility -- 6,070 (5,616) -- 454 Discontinued activities 541 2,025 (135) (2,025) 406 Other costs of project -- 2,927 (2,927) -- -- ------- ------- -------- ------- ------- $ 2,570 $12,408 $(10,994) $(2,025) $ 1,959 ======= ======= ======== ======= =======
18 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. Termination Benefits: As of September 30, 2001, 394 employees have been terminated under various Project Delta initiatives. The accrual balance remaining as of September 30, 2001 represents the unpaid severance costs associated with employees terminated through the third quarter of 2001. Disposition of Excess Office Space: The Company recorded $.02 million of charges relating to lease buyouts in the first nine months of 2001 relating to office space not currently utilized. 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. data processing facility in order to enhance its InfoScan offering in Germany and to reduce future production costs. In the first three quarters of 2001, charges of approximately $6.1 million were recorded related to this transition. Discontinued Activities: During 2000, it was determined that certain equipment used in the Company's U.S. operations to collect retail information would no longer be utilized after the second quarter of 2001. Accordingly, the Company recognized a non-cash charge of $2.0 million in the first half of 2001 relating to accelerated depreciation on this equipment. Other Restructuring Costs: Other restructuring costs in the first three quarters of 2001 relate primarily to the fees paid to a third party for assistance in the identification of process improvements and efficiencies within the U.S. operations. Future Restructuring Charges: The Company's Project Delta cost reduction program has been completed, with the exception of the transition of German production to the U.S. data processing facility. The Company expects to incur substantially all of the remaining charges in the fourth quarter of 2001 relating to the German transition. Additionally, the Company has begun a review of its information technology operations to assess potential restructuring costs and benefits. The first phase of this review is expected to last six months beginning in the fourth quarter of 2001, and will include initial assessments of database design, transition planning and cost and savings estimates. Management estimates charges for the first phase will be approximately $3 million in the fourth quarter of 2001 with additional charges of $4 million - $6 million in the first quarter of 2002. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. 19 INFORMATION RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of FAS 142 is expected to result in an increase in net income of approximately $900 thousand ($.02 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 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 eleven members of the European Union ("participating countries"). On January 1, 1999, 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 has not incurred any material costs for system modifications and does not anticipate any material increase in transaction costs. The Company continues 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 Certain matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties are described in reports and other documents filed by the Company with the Securities and Exchange Commission including the Company's Annual Report on Form 10-K for the year 2000. 20 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 ----------- ---------------------- 10.1 Fourth Amendment to Credit Agreement dated October 16, 2001 10.2 Amended and Restated Security Agreement dated October 16, 2001
b. Reports on Form 8-K. None. 21 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 13, 2001 22