<PAGE> 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, 1998
- -- 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
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common, $.01 par value per share
Preferred Stock Purchase Rights
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 30, 1998 was 28,247,204.
<PAGE> 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 10
PART II. OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports Form 8-K 19
Signatures 20
2
<PAGE> 3
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,424 $ 20,925
Accounts receivable, net 99,854 96,209
Prepaid expenses and other 12,541 9,563
----------- ---------
Total Current Assets 119,819 126,697
----------- ---------
Property and equipment, at cost 172,439 180,043
Accumulated depreciation and amortization (94,215) (111,628)
----------- ---------
Net property and equipment 78,224 68,415
Investments 8,922 13,061
Other assets 172,041 158,447
----------- ---------
$ 379,006 $ 366,620
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------
CURRENT LIABILITIES
Current maturities of capitalized leases $ -- $ 2,266
Accounts payable 41,729 49,306
Accrued compensation and benefits 16,185 20,357
Accrued property, payroll and other taxes 3,082 3,068
Accrued expenses 11,265 6,324
Deferred revenue 26,091 20,469
----------- ---------
Total Current Liabilities 98,352 101,790
----------- ---------
Bank debt and capitalized leases 11,747 640
Deferred income taxes, net 20,312 13,660
Other liabilities 11,357 8,988
STOCKHOLDERS' EQUITY
Preferred stock-authorized, 1,000,000 shares
$.01 par value - none issued -- --
Common stock - authorized 60,000,000 shares,
$.01 par value; 28,247,204 and
28,713,943 shares issued and
outstanding, respectively 282 287
Capital in excess of par value 192,849 198,537
Retained earnings 49,745 45,932
Cumulative translation adjustment (5,638) (3,214)
----------- ---------
Total Stockholders' Equity 237,238 241,542
----------- ---------
$ 379,006 $ 366,620
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 125,346 $ 115,601 $ 373,928 $ 334,702
Costs and expenses:
Operating expenses (112,978) (101,645) (329,386) (297,818)
Selling, general and administrative expenses (14,709) (9,674) (37,680) (28,053)
----------- --------- ---------- ---------
(127,687) (111,319) (367,066) (325,871)
----------- --------- ---------- ---------
Operating profit (loss) (2,341) 4,282 6,862 8,831
Interest expense and other, net (749) (130) (959) (634)
Equity in earnings of affiliated companies 142 7 436 351
----------- --------- ---------- ---------
Earnings (loss) before income taxes and
minority interests (2,948) 4,159 6,339 8,548
Income tax (expense) benefit 1,300 (2,000) (2,500) (4,047)
----------- --------- ---------- ---------
Earnings (loss) before minority interests (1,648) 2,159 3,839 4,501
Minority interests (expense) benefit 110 (177) (26) (335)
----------- --------- ---------- ---------
Net earnings (loss) $ (1,538) $ 1,982 $ 3,813 $ 4,166
=========== ========= ========== =========
Net earnings (loss) per common share -
basic $ (.05) $ .07 $ .13 $ .15
=========== ========= ========== =========
Net earnings (loss) per common and
common equivalent share - diluted $ (.05) $ .07 $ .13 $ .14
=========== ========= ========== =========
Weighted average common shares - basic 28,708 28,610 28,746 28,307
=========== ========= ========== =========
Weighted average common and
common equivalent shares - diluted 28,708 29,468 29,283 28,861
=========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,813 $ 4,166
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of deferred data procurement costs 83,493 74,985
Depreciation expense 16,990 15,144
Amortization of capitalized software costs and intangibles 5,334 4,481
Deferred income tax provision 2,500 4,047
Equity in earnings of affiliated companies and minority interests, net (410) (16)
Other (1,216) (2,236)
Change in assets and liabilities:
Decrease (increase) in accounts receivable (3,460) 10,462
Decrease (increase) in other current assets 2,927 (38)
Decrease in accounts payable and accrued liabilities (4,995) (1,441)
Increase in deferred revenue 5,622 2,957
Other, net (1,440) 630
----------- ---------
Total adjustments 105,345 108,975
----------- ---------
Net cash provided by operating activities 109,158 113,141
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred data procurement costs (90,085) (83,240)
Purchase of property and equipment (26,986) (25,255)
Capitalized software costs (6,210) (2,648)
Proceeds from disposition of assets and other 319 2,389
----------- ---------
Net cash used in investing activities (122,962) (108,754)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank (repayments) borrowings 9,500 (5,500)
Net repayments of capitalized leases (718) (1,619)
Purchases of Common Stock (16,938) --
Proceeds from exercise of stock options and other 8,260 13,645
----------- ---------
Net cash used by financing activities 104 6,526
EFFECT OF EXCHANGE RATE CHANGES ON CASH 199 (1,115)
----------- ---------
Net increase (decrease) in cash and cash equivalents (13,501) 9,798
Cash and cash equivalents at beginning of period 20,925 12,195
----------- ---------
Cash and cash equivalents at end of period $ 7,424 $ 21,993
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in Information Resources, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997. The condensed consolidated
financial information furnished herein reflects all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the condensed consolidated financial statements for
the periods shown.
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 within
international operations, including effective February 1, 1998, IRI/GfK Retail
Services B.V. (the Netherlands). The equity method of accounting is used for
investments in which the Company has a 20% to 50% ownership and exercises
significant influence over operating and financial policies. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications: Certain amounts in the 1997 condensed consolidated
financial statements have been reclassified to conform to the 1998 presentation.
Earnings (Loss) per Common and Common Equivalent Share and Stock-Based
Compensation: 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 -- assuming dilution 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.
Adoption of Recent Statement of Financial Accounting Standards: In
July 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (collectively, "the Standards"). The
Standards are effective for fiscal years beginning after December 15, 1997. The
Company adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" in the first quarter of 1998. The Company is currently
investigating the impact of Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" for
adoption in its December 31, 1998 consolidated financial statements.
6
<PAGE> 7
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 2 - 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) for the three and
nine months ended September 30, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (1,538) $ 1,982 $ 3,813 $ 4,166
Foreign currency translation
adjustment, net of tax (476) 288 (1,468) (1,777)
--------- -------- --------- --------
Comprehensive income (loss) $ (2,014) $ 2,270 $ 2,345 $ 2,389
========= ======== ========= ========
</TABLE>
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the period was as follows
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
--------- ---------
<S> <C> <C>
Interest $ 1,033 $ 1,042
Income taxes 1,317 222
</TABLE>
NOTE 4 - THE NETHERLANDS OPERATIONS
The Company and GfK AG of Germany ("GfK") operate a joint venture which
offers a scanner-based product tracking service to the Netherlands market
operating under the InfoScan name. This scanner-based product tracking service
became fully operational in 1994. Until early 1998, this joint venture was
owned 80.1% by GfK and 19.9% by the Company. In February 1998, the Company
increased its ownership to 51% and assumed overall management responsibilities.
The Company provides production services to the joint venture through the
Company's computer facilities in Wood Dale, Illinois. The consolidation of the
Netherlands did not have a material impact on the consolidated financial results
or position of the Company.
In 1998, the Company sold a 9.9% interest in GfK Panel Services Benelux
B.V. and GfK Belgium S.A., reducing its ownership to 10%. Those companies
operate household panel services in the Netherlands and Belgium and continue to
cooperate with the Netherlands InfoScan operation in the sale and delivery of
services to common customers.
7
<PAGE> 8
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 5 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Billed $ 75,484 $ 70,761
Unbilled 29,039 29,288
-------- --------
104,523 100,049
Reserve for accounts receivable (4,669) (3,840)
-------- --------
$ 99,854 $ 96,209
======== ========
</TABLE>
NOTE 6 - OTHER ASSETS
- ---------------------
Other assets were as follows (in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Deferred data procurement costs -
net of accumulated amortization of
of $129,791 in 1998 and $108,491 in 1997 $136,716 $126,733
Intangible assets, including goodwill
primarily related to acquisitions -
net of accumulated amortization of
$12,393 in 1998 and $10,233 in 1997 19,127 16,463
Capitalized software costs - net of
accumulated amortization of $3,856
in 1998 and $3,578 in 1997 9,564 6,093
Other 6,634 9,158
-------- --------
$172,041 $158,447
======== ========
</TABLE>
8
<PAGE> 9
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 7- BANK DEBT AND CAPITALIZED LEASES
Bank debt and capitalized leases were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Bank borrowings $ 9,500 $ --
Capitalized leases 2,247 2,906
------- -------
11,747 2,906
Less current maturities -- (2,266)
------- -------
$11,747 $ 640
======= =======
</TABLE>
The Company currently has a $75.0 million bank revolving credit
facility maturing in 2001. The facility has floating interest rate options
at or below prime, and commitment fees of .15% payable on the unused
portion.
The Company's obligations under its capitalized leases have been
classified as long-term debt at September 30, 1998 as the Company has both
the intent and the ability, through its bank revolving credit facility, to
refinance these amounts on a long-term basis.
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
$61.7 million is currently available for such distributions under the most
restrictive of these covenants. The credit agreement also contains
covenants which restrict the Company's ability to incur additional
indebtedness.
9
<PAGE> 10
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's consolidated net loss was ($1.5) million or ($.05) per
diluted share for the third quarter of 1998 compared to consolidated net
earnings of $2.0 million or $.07 per diluted share for the corresponding 1997
quarter. Consolidated net earnings were $3.8 million or $.13 per diluted
share for the nine months ended September 30, 1998 compared to $4.2 million
or $.14 per diluted share for the corresponding period of 1997. Consolidated
revenues for the quarter ended September 30, 1998 were $125.3 million, an
increase of 8% over the corresponding quarter in 1997. Consolidated revenues
were $373.9 million for the nine months ended September 30, 1998, an increase
of 12% over the corresponding period of 1997. This increase was the result
of revenue growth of $21.3 million in the U.S. Services business and a $17.9
million increase in international revenues which was aided somewhat by the
consolidation of IRI's majority-owned Netherlands operation effective
February 1998.
Consolidated operating expenses increased 11% to $113.0 million for the
quarter ended September 30, 1998 compared to $101.6 million for the third
quarter of 1997. The increase in 1998 was primarily due to: (a) a $5.9
million increase in compensation expense resulting primarily from higher
salaries and higher headcount required for operations, client servicing and
international growth; (b) a $1.9 million increase in amortization of deferred
data procurement costs, principally resulting from the expansion of the
information services business in Europe; and (c) a $1.1 million increase in
operating expenses due to the consolidation of IRI/GfK Retail Services B.V.
Consolidated operating expenses increased 11% to $329.4 million for the nine
months ended September 30, 1998 compared to $297.8 million for the same
period in 1997. The increase in 1998 was primarily due to: (a) a $16.7
million increase in compensation expense; (b) a $8.3 million increase in
amortization of deferred data procurement costs; and (c) a $4.1 million
increase in operating expenses due to the consolidation of IRI/GfK Retail
Services B.V.
Consolidated selling, general and administrative expenses increased 52%
to $14.7 million for the three months ended September 30, 1998. This
increase was primarily attributable to recruiting, training and severance
costs relating to the reorganization and transformation of the Company's U.S.
sales, marketing and other operating functions, an increase in the provision
for bad debts and increases in other general expenses, including
compensation, worldwide.
Consolidated selling, general and administrative expenses increased 34%
to $37.7 million for the nine months ended September 30, 1998. This increase
was primarily attributable to legal expenses in the U.S. and the costs
relating to the transformation of the Company's U.S. sales, marketing and
other operating functions. Increased legal expenses related directly to the
Company's anti-trust lawsuit against The Dun and Bradstreet Corporation,
ACNielsen Company and IMS International, Inc. In that suit, filed in 1996,
the Company is seeking $1 billion in trebled damages from the defendants for
violations of U.S. anti-trust laws. The case is currently in the discovery
phase, and the Company anticipates that it will continue to incur its present
high level of legal expenses as the case progresses toward trial.
10
<PAGE> 11
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
For all periods presented, the Company's effective income tax rate is
greater than the U.S. Federal statutory rate due to certain unbenefitted
foreign losses, goodwill amortization and other nondeductible expenses.
Based upon discussions with financial analysts, the Company considers
the aggregation of operating profit (loss), equity earnings and minority
interests ("Operating Results"), on a geographic basis to be a meaningful
measure of the Company's operating performance. A comparative analysis of
consolidated revenues and Operating Results for the three and nine months
ended September 30, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1998 1997 1998 1997
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
U.S. Services $ 98,120 $ 93,405 292,063 $270,760
International Services 27,226 22,196 81,865 63,942
----------- ----------- ---------- --------
$ 125,346 $ 115,601 373,928 $334,702
=========== =========== ========== ========
Operating Results:
U.S. Services operating profit $ 3,407 $ 10,139 24,494 $ 27,435
International Services
Operating loss (3,858) (4,932) (12,819) (16,591)
Equity in earnings of affiliated companies 142 7 436 351
Minority interests 110 (177) (26) (335)
----------- ----------- ---------- --------
Subtotal - International (3,606) (5,102) (12,409) (16,575)
Corporate and other expenses (1,890) (925) (4,813) (2,013)
----------- ----------- ---------- --------
Operating Results $ (2,089) $ 4,112 7,272 $ 8,847
=========== =========== ========== ========
</TABLE>
In the third quarter of 1998, revenues from the Company's U.S. Services
business were $98.1 million, an increase of 5% over the corresponding 1997
quarter. U.S. revenues in the first nine months of 1998 were $292.1 million
or 8% higher than during the same period of 1997. These revenue increases
were primarily due to the increased use of the Company's services and
products particularly, its all-store (i.e. Census) scanner databases, by
existing customers. The slowdown in the U.S. revenue growth in the third
quarter of 1998 was principally due to a flattening of growth of the
Company's non-contractual services.
11
<PAGE> 12
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Third quarter 1998 revenues from the Company's International businesses,
primarily from Europe, were $27.2 million, an increase of 23% over the
corresponding 1997 quarter. For the nine months ended September 30, 1998,
International revenues were $81.9 million, an increase of 28% over the
corresponding period of 1997. Results in 1998 reflected the consolidation of
IRI's majority-owned operations in the Netherlands, IRI/GfK Retail Services,
B.V., effective February 1, 1998. Excluding the revenues from the
Netherlands, European revenues increased 19% for the third quarter of 1998
and 21% the first nine months of 1998 compared to the same periods of 1997,
respectively.
Consolidated Operating Results were a ($2.1) million loss in the third
quarter of 1998 compared to a $4.1 million profit for the third quarter of
1997. For the nine months ended September 30, 1998, consolidated Operating
Results were a $7.3 million profit compared to an $8.8 million profit for the
corresponding period of 1997.
Operating Results for the Company's U.S. businesses were $3.4 million
in the third quarter of 1998, a decrease of 66% from the third quarter of
1997. The Company's U.S. Operating Results in the third quarter were
negatively impacted by a slowdown in revenue growth. Because of the
relatively high fixed cost component of the Company's database operations,
small variations in revenue can have a significant impact on earnings
results. In addition, results were negatively affected by higher costs.
Operating Results for the U.S. businesses decreased 11% to $24.5 million for
the nine months ended September 30, 1998. This decrease was due to
increased expenses for employee related expenses, including compensation,
benefits, training, recruiting and development expenses.
Operating Results for the Company's International businesses were a
($3.6) million loss in the third quarter of 1998, 29% below the ($5.1)
million loss in the corresponding 1997 quarter. Operating Results for the
Company's International businesses were a ($12.4) million loss for the nine
months ended September 30, 1998, 25% below the ($16.6) million loss in the
corresponding 1997 period. The improved International results were
principally due to continuing revenue growth of the Company's major European
services, primarily U.K., France and Italy.
Corporate and other expenses increased $1.0 million and $2.8 million
for the three and nine months ended September 30, 1998, respectively. The
increase was primarily due to increased legal expenses in the U.S.
attributable to the anti-trust litigation and increased compensation
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash resources include its $7.4 million
consolidated cash balance and $65.5 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.
12
<PAGE> 13
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
$61.7 million is currently available for such distributions under the most
restrictive of these covenants. The credit agreement also contains
covenants which restrict the Company's ability to incur additional
indebtedness.
Cash Flow: Consolidated net cash provided by operating activities was
$109.2 million for the nine months ended September 30, 1998 compared to
$113.1 million for the same period in 1997. Lower 1998 operating cash flow
is primarily due to higher accounts receivable in 1998 compared to a large
reduction in accounts receivable during the first nine months of 1997.
Consolidated cash used in net investing activities was ($123.0) million in
1998 compared to ($108.8) million for the same period in 1997. Investing
activity in the first nine months of 1998 reflects higher expenditures for
data procurement and software development. Net cash provided (used) before
financing activities was ($13.8) million for the nine months ended September
30, 1998 and $4.4 million for the same period of 1997 primarily due to the
higher accounts receivable and investing activities in 1998. Consolidated
cash used by net financing activities was $.1 million for the nine months
ended September 30, 1998 compared to $6.5 million for the same period in
1997. The Company borrowed $9.5 million under its revolving line of credit
during 1998 and for the nine months ended September 30, 1998 purchased $16.9
million of the Company's stock under its stock purchase plan.
Common Stock Purchase Plan: In November 1997, the Company's Board of
Directors approved a plan to purchase up to two million shares of the
Company's Common Stock from time to time in the open market. Purchases
under the plan are subject to a number of considerations including the
market price of the Company's Common Stock and general market conditions.
Through September 30, 1998, the Company had purchased a cumulative total of
1,481,800 shares of its Common Stock at an average price of $13.51 per
share.
Other Deferred Costs and Capital Expenditures: Consolidated deferred
data procurement expenditures were $90.1 million for the nine months ended
September 30, 1998 and $83.2 million for the same period in 1997. 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 other data which are an essential part
of the Company's data base. Such expenditures were $57.9 million and $53.8
million for the nine month periods ended September 30, 1998 and 1997,
respectively, for the Company's U.S. services business and $32.2 million and
$29.4 million, respectively, for the Company's International services
business.
13
<PAGE> 14
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Based upon currently projected Operating Results and cash flows, the
Company's assessment is that the realizability of its International assets
is not impaired. Should actual Operating Results and cash flows be
materially lower than current projections, the Company may be required to
write down a portion of these assets in future periods.
Consolidated capital expenditures were $27.0 million and $25.3 million
for the nine months ended September 30, 1998 and 1997, respectively.
Capital expenditures for the Company's U.S. services business were $22.5
million and $21.7 million, while depreciation expense was $13.4 million and
$12.1 million for the nine months ended September 30, 1998 and 1997,
respectively. The Company's International services business capital
expenditures were $4.5 million and $3.6 million while depreciation expense
was $3.6 million and $3.0 million, for the nine months ended September 30,
1998 and 1997, respectively.
Consolidated capitalized software development costs, primarily in the
U.S., were $6.2 million and $2.6 million for the nine months ended September
30, 1998 and 1997, respectively.
NOL Carryforwards: As of December 31, 1997, the Company had cumulative
U.S. Federal net operating loss ("NOL") carryforwards of approximately $70.8
million that expire primarily in 2009 and 2011. At December 31, 1997, the
Company had general business tax credit carryforwards of approximately $9.5
million which expire primarily between 1999 and 2012, and are available to
reduce future Federal income tax liabilities. Certain of these carryforwards
have not been examined by the Internal Revenue Service and, therefore, are
subject to adjustment. In addition, at December 31, 1997, various foreign
subsidiaries of IRI had aggregate cumulative NOL carryforwards for foreign
income tax purposes of approximately $8.9 million which are subject to
various income tax provisions of each respective country. Approximately
$3.3 million of these foreign NOL's may be carried forward indefinitely,
while the remaining $5.6 million expire in 2000 and 2002.
Impact of Inflation: Inflation 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.
14
<PAGE> 15
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
YEAR 2000 ISSUES
Background: Many computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two
digits. As a result of this design decision, some of these systems could
fail to operate or produce correct results if "00" is interpreted to mean
"1900". For IRI, such failures would cause disruptions of operations
including, among other things, a temporary inability to obtain data from
retailers, process transactions, communicate information to tracking service
clients, send invoices or engage in normal business activities.
In 1996 and 1997, various internal review teams within the Company
began addressing the Year 2000 issue in their respective areas. In early
1998, a steering committee was established to represent all operating,
administrative and finance areas of the Company to direct the process of
identifying, assessing and resolving significant Year 2000 issues in a
timely manner. The process includes development of remediation plans, where
necessary, as they relate to internally used software, commercial software
applications licensed to clients, computer hardware and the use of computer
applications in the Company's data warehouse operations. In addition, the
Company is engaged in assessing the Year 2000 issue with significant
suppliers, including data vendors, and tracking service clients. Executive
management is represented on the steering committee and monitors the status
of the Company's Year 2000 plans. In addition, management reports the
status of the Year 2000 project to the Board of Directors.
The operations of office and facilities equipment, such as fax
machines, photocopiers, telephone switches, security systems elevators and
other common devices may also be affected by the occurrence of the Year
2000. The Company's current assessment of the potential effect of the Year
2000 issues on its office and facilities equipment is considered to be
minimal, in terms of risk and incremental cost.
Risk: The Company has identified potential Year 2000 risks in the
following four categories: (1) reliance upon third party retailers in the
U.S. and Europe for data for use in its tracking service; (2) processing of
data by the various computer applications in its Wood Dale, Illinois
facilities; (3) commercial software products and applications produced
and/or marketed by the Company; and (4) Company data interfaces with client
developed applications which may not be Year 2000 compliant.
Third Party Retailers: The Company has identified and has initially
contacted, using surveys, all of its critical retailers in the U.S. and
Europe to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remedy their own Year 2000
issues. It is expected that full certification of Year 2000 compliance for
all key suppliers of tracking data to the Company will be completed during
the fourth quarter of 1999. To the extent that
15
<PAGE> 16
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
responses to Year 2000 readiness are unsatisfactory, the Company intends to
follow up to insure that all critical retailers are Year 2000 compliant. In
addition, the Company is currently investigating alternative sources to
provide the Company with reasonable assurance of source retailer data should
a U.S. or European key retailer encounter unforeseen difficulties during
early 2000.
Wood Dale Computer Applications: The Company has commenced a review of
its information and operational systems used to process data in its InfoScan
tracking services in order to identify those systems that are not Year 2000
compliant. The Company has determined that its InfoScan tracking service is
currently Year 2000 compliant due to the Company's programming design which
accounts for data by "weeks" as opposed to calendar dates. However, the
Company has identified certain peripheral programs which might be negatively
impacted by Year 2000. Accordingly, it expects to build a Year 2000 test
database and a test environment to verify compliance on all programs
affecting services to clients. The test environment will also provide an
ongoing benefit to the Company for all future peripheral programs developed
by the Company. The Company estimates that completion of the test database
and test environment will occur by mid-1999.
Commercial Software Products and Applications: During 1997 the Company
began an internal review of each of its software products which it intends
to maintain through the Year 2000. Based upon this assessment, the Company
concluded that its standard policy of regular software maintenance, upgrades
and lifecycle evaluation will provide adequate assurance that the Company's
current portfolio of software products will be Year 2000 compliant prior to
mid-year 1999. In 1998 the Company began the process of identifying and
contacting clients and former clients in both the U.S. and Europe for whom
the Company previously developed custom applications. These investigations
will determine the extent to which custom applications developed by the
Company require Year 2000 remediation and whether the Company will provide
software consulting services in order to assist these clients and former
clients in such remediation. The Company expects that identification of all
material custom application issues will be completed by December 31, 1998.
To the extent that responses to Year 2000 readiness are inconclusive, the
Company intends to continue follow up through June of 1999.
Data Interfaces with Client Applications: As part of an ongoing
service, the Company has begun making inquiries of major clients to identify
and resolve potential Year 2000 issues resulting from IRI interfaces with
client applications, including any custom applications developed by clients.
However, management believes that it may not be possible for it to
determine with complete certainty that Year 2000 issues affecting client
applications can be identified or corrected due to the complexity of these
applications and the fact that these systems interact and operate with
computer systems which are not under the Company's control. Consequently,
the Company is unable to estimate a timetable for completion of this
assessment including remediation and any related costs, as the decision to
allow the Company to conduct such investigations on a timely basis resides
with each client.
16
<PAGE> 17
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Costs: The Company uses both internal and external resources in the
assessment and remediation of Year 2000 issues and believes these resources
will provide adequate support for such resolution. While the costs of
external resources are quantifiable, the costs of internal resources who
deal with data vendors and tracking service and software clients on a daily
basis on a variety of subjects, including Year 2000 issues, are difficult
for the Company to estimate. Accordingly, costs included in the Company's
disclosures are subject to uncertainty with respect to internal personnel.
The Company currently estimates that the combined 1998 and 1999 internal and
external Year 2000 project costs will range from $8 million to $12 million
and will be funded through operating cash flows. To date, the Company
estimates that approximately $2 million has been spent and expensed, and of
the remaining estimated costs, up to $5 million may be capitalized for new
systems and equipment.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 issues that could materially adversely
affect its business operations. However, management believes that it may
not be possible for it to determine with complete certainty that all Year
2000 issues affecting the Company will be identified or corrected. The
number of devices that could be affected and the interactions among these
devices are innumerable. In addition, accurate predictions of the extent of
Year 2000 problem-related failures or the severity, duration, or financial
consequences of these failures, cannot be made. As a result, management
expects that the Company could likely suffer the following consequences:
1. A significant number of operational inconveniences and
inefficiencies for the Company, its retailers and its clients may
divert management's time and attention and financial and human
resources from its ordinary business activities; and
2. A lesser number of serious system failures may require significant
efforts by the Company, its retailers or its clients to prevent or
alleviate material business disruptions.
17
<PAGE> 18
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Contingency Plans. The Company is currently developing contingency
plans to be implemented as part of its efforts to identify and correct Year
2000 issues affecting its internal systems. The Company expects to complete
its contingency plans by early to mid-1999. Depending on the systems
affected, these plans could include accelerated replacement of affected
equipment or software, short to medium-term use of backup equipment and
software, or use of contract personnel to correct on an accelerated schedule
any year 2000 issues that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company actually is
required to implement any of these contingency plans, it could have a
material effect on the Company's financial condition and results of
operations. However, based on the activities described above, the Company
does not believe that the Year 2000 issues will have a material adverse
effect on the Company's business or results of operations.
Disclaimer: The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking
statements. The Company's ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith, could be adversely impacted
by, among other things, the availability and cost of programming and testing
resources, retailers' and vendors' ability to modify proprietary software,
and unanticipated problems identified in the ongoing compliance review.
Forward Looking Information: Certain matters discussed above are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated,
including customer renewals of service contracts, the timing of significant
new customer engagements, the success of transforming its domestic
operations, competitive conditions, 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, Year 2000
issues and other factors beyond the Company's control. These risks and
uncertainties are described in reports and other documents filed by the
Company with the Securities and Exchange Commission.
18
<PAGE> 19
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<S> <C> <C> <C>
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
27 Financial Data Schedule (filed herewith). EF
</TABLE>
b. Reports on Form 8-K.
The registrant has not filed any reports on Form 8-K during the
quarter for which this report is filed.
19
<PAGE> 20
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/ Gary M. Hill
-------------------------------------
Gary M. Hill
Executive Vice President
and Chief Financial Officer
(Authorized officer of Registrant and
principal financial officer)
/s/ John P. McNicholas, Jr.
-------------------------------------
John P. McNicholas, Jr.
Senior Vice President and Controller
(Principal accounting officer)
November 12, 1998
20
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,424
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<COMMON> 282
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