<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 March 31, 1999
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 April 30, 1999 was 27,864,806.
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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 18
Signatures 19
2
<PAGE> 3
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
- ------ -------------- -----------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 9,578 $ 11,149
Accounts receivable, net 92,306 87,637
Prepaid expenses and other 10,705 9,223
---------- ----------
Total Current Assets 112,589 108,009
---------- ----------
Property and equipment, at cost 184,726 177,443
Accumulated depreciation (103,482) (97,940)
---------- ----------
Net property and equipment 81,244 79,503
Investments 10,444 9,792
Other assets 172,707 171,989
---------- ----------
$ 376,984 $ 369,293
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current maturities of capitalized
leases $ 501 $ 521
Accounts payable 39,496 43,640
Accrued compensation and benefits 13,492 20,925
Accrued property, payroll and
other taxes 5,300 4,486
Accrued expenses 12,760 11,287
Deferred revenue 31,380 21,940
---------- ----------
Total Current Liabilities 102,929 102,799
---------- ----------
Long-term debt 14,560 4,575
Deferred income taxes, net 13,300 14,017
Other liabilities 11,320 9,450
STOCKHOLDERS' EQUITY
Preferred stock-authorized, 1,000,000
shares, $.01 par value; none
issued -- --
Common stock - authorized 60,000,000
shares, $.01 par value,
27,864,806 and 27,867,884 shares
issued and outstanding,
respectively 279 279
Capital in excess of par value 190,651 190,701
Retained earnings 49,527 49,778
Accumulated other comprehensive loss (5,582) (2,306)
---------- ----------
Total Stockholders' Equity 234,875 238,452
---------- ----------
$ 376,984 $ 369,293
========== ==========
The accompanying notes are an integral part of these statements.
3
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INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31
--------
1999 1998
---- ----
Information services revenues $ 131,745 $ 119,190
Costs and expenses:
Information services sold (120,731) (104,369)
Selling, general and administrative
expenses (12,788) (11,535)
---------- ----------
(133,519) (115,904)
---------- ----------
Operating profit (loss) (1,774) 3,286
Interest expense and other, net (166) (165)
Equity in earnings of affiliated companies 194 74
Minority interests benefit 1,185 115
---------- ----------
Earnings (loss) before income taxes (561) 3,310
Income tax benefit (expense) 310 (1,400)
---------- ----------
Net earnings (loss) $ (251) $ 1,910
========== ==========
Net earnings (loss) per common
share - basic $ (.01) $ .07
========== ==========
Net earnings (loss) per common and
common equivalent share - diluted $ (.01) $ .07
========== ==========
Weighted average common shares - basic 27,865 28,671
========== ==========
Weighted average common and
common equivalent shares - diluted 27,865 28,946
========== ==========
The accompanying notes are an integral part of these statements.
4
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INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31
-------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (251) $ 1,910
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Amortization of deferred data
procurement costs 29,168 27,087
Depreciation 6,438 5,497
Amortization of capitalized software
costs and intangibles 1,753 1,556
Deferred income tax expense (benefit) (310) 1,400
Equity in earnings of affiliated
companies and minority interests (1,379) (189)
Other (440) 365
Change in assets and liabilities:
Increase in accounts receivable, net (4,751) (3,942)
Decrease (increase) in other
current assets (1,481) 2,109
Decrease in accounts payable and
accrued liabilities (9,289) (6,898)
Increase in deferred revenue 9,440 8,278
Other, net (746) (1,343)
---------- ----------
Total adjustments 28,403 33,920
---------- ----------
Net cash provided by
operating activities 28,152 35,830
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred data procurement costs (32,270) (29,278)
Purchase of property, equipment
and software (8,919) (6,336)
Capitalized software costs (1,580) (2,285)
Other, net 2,890 97
---------- ----------
Net cash used in
investing activities (39,879) (37,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) 9,965 (416)
Purchases of Common Stock -- (3,839)
Proceeds from exercise of stock options
and other (85) 812
---------- ----------
Net cash provided (used) by
financing activities 9,880 (3,443)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 276 (416)
---------- ----------
Net decrease in cash and
cash equivalents (1,571) (5,831)
Cash and cash equivalents at
beginning of period 11,149 20,925
---------- ----------
Cash and cash equivalents at end
of period $ 9,578 $ 15,094
========== ==========
The accompanying notes are an integral part of these statements.
5
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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, 1998. 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 in
international operations. The equity method of accounting is used for
investments in which the Company has a 20% to 50% ownership interest 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 1998 condensed consolidated
financial statements have been reclassified to conform to the 1999 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.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
Cash paid for interest and income taxes during the period was as follows
(in thousands):
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
---- ----
Interest $270 $304
Income taxes 304 372
6
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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):
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Billed $ 63,893 $ 71,141
Unbilled 32,819 21,258
---------- ----------
96,712 92,399
Reserve for accounts receivable (4,406) (4,762)
---------- ----------
$ 92,306 $ 87,637
========== ==========
NOTE 4 - OTHER ASSETS
- ---------------------
Other assets were as follows (in thousands):
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Deferred data procurement costs -
net of accumulated amortization of
$138,648 in 1999 and $123,440 in 1998 $ 138,839 $ 138,356
Intangible assets, including goodwill -
net of accumulated amortization of
$14,331 in 1999 and $13,616 in 1998 17,895 18,610
Capitalized software costs - net of
accumulated amortization of $3,580
in 1999 and $3,701 in 1998 10,625 9,876
Other 5,348 5,147
---------- ----------
$ 172,707 $ 171,989
========== ==========
7
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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):
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
Bank borrowings $ 13,750 $ 3,000
Capitalized leases and other 1,311 2,096
---------- ----------
15,061 5,096
Less current maturities (501) (521)
---------- ----------
$ 14,560 $ 4,575
========== ==========
On February 10, 1999 the Company amended its existing $75 million bank
revolving credit facility to (1) reduce the maximum commitments to $60 million,
(2) extend the termination date to 2002, and (3) amend certain financial
covenants and other terms and conditions of the agreement. The amended facility
has floating rate options at or below prime and commitment fees of up to .25%
payable on the unused portion.
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 $20.5 million is
currently available for such distributions under the most restrictive of these
covenants. The bank credit agreement contains covenants which restrict the
Company's ability to incur additional indebtedness.
NOTE 6 - COMPREHENSIVE 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 months
ended March 31, 1999 and 1998 were as follows (in thousands):
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
---- ----
Net earnings (loss) $ (251) $ 1,910
Foreign currency translation
adjustment (3,276) (865)
---------- ----------
Comprehensive income (loss) $ (3,527) $ 1,045
========== ==========
8
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INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 7 - 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 tables and discussion present certain information regarding
the operations of the Company by geographic segment as of March 31, 1999 and
1998 (in thousands):
Segmented Results:
1999 1998
---- ----
Revenues:
U.S. Services $ 102,324 $ 94,572
International Services 29,421 24,618
---------- ----------
Total $ 131,745 $ 119,190
========== ==========
Operating Results:
U.S. Services $ 5,222 $ 9,551
International Services:
Operating loss (5,042) (4,988)
Equity in earnings of affiliated
companies 194 74
Minority interest benefit 1,185 115
---------- ----------
Subtotal--International Services (3,663) (4,799)
Corporate and other expenses (1,954) (1,277)
---------- ----------
Operating Results (395) 3,475
Interest expense and other, net (166) (165)
---------- ----------
Earnings (loss) before income taxes $ (561) $ 3,310
========== ==========
9
<PAGE> 10
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operations: The Company's consolidated net loss was ($0.3) million or
($.01) per diluted share for the first quarter of 1999 compared to consolidated
net earnings of $1.9 million or $.07 per diluted share for the corresponding
1998 quarter. Consolidated revenues for the quarter ended March 31, 1999 were
$131.7 million, an increase of 11% over the corresponding quarter in 1998. This
increase was the result of revenue growth of $7.8 million in the U.S. services
business and a $4.8 million increase in international revenues.
Consolidated costs of information services sold increased 16% to $120.7
million for the three months ended March 31, 1999 compared to $104.4 million for
the first quarter of 1998. The major components of the 1999 increases included:
(a) a $6.9 million increase in compensation expense resulting from higher
salaries in the U.S. and growing European operations; (b) costs related to
increased data collection efforts and (c) a $2.1 million increase in the
amortization of deferred data procurement costs, principally in European
operations.
Consolidated selling, general and administrative expenses increased 11% to
$12.8 million for the three months ended March 31, 1999. This increase was
primarily attributable to employee-related costs related to the reorganization
and transformation of the Company's U.S. sales, marketing and other operating
functions, and higher legal costs in the U.S. The increased legal costs related
to the Company's anti-trust lawsuit against the Dun and Bradstreet Corporation,
ACNielsen Company and IMS International, Inc. The case is currently in the
discovery and deposition phase, and the Company anticipates that it will
continue to incur a high level of legal expenses as the case continues to
progress toward trial.
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.
In the first quarter of 1999, revenues from the Company's U.S. services
business were $102.3 million, an increase of 8% over the corresponding 1998
quarter. This revenue increase was due primarily to the increased use of the
Company's product tracking services including its retailer specific and
all-store (i.e. Census) databases. Operating Results for the Company's U.S.
services business were $5.2 million in the first quarter of 1999 versus $9.6
million in the first quarter of 1998. The U.S. operating margin was negatively
affected by sharply higher employee costs and increased data collection expenses
related to the Company's expanded convenience store and household panel
operations.
10
<PAGE> 11
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
First quarter 1999 revenues from the Company's International services
business, primarily from Europe, were $29.4 million, an increase of 20% over the
corresponding 1998 quarter. This increase reflects continued strong growth in
each of the major European businesses. Operating Results for the International
service business were a ($3.7) million loss for the first quarter of 1999, a 24%
improvement compared to the ($4.8) million loss in the corresponding 1998
quarter. This improvement was largely due to the strong revenue growth,
partially offset by incremental costs associated with the launch of the
Company's InfoScan service in Spain.
Corporate and other expenses increased for the three months ended March 31,
1999 due to higher legal costs, primarily attributable to the Company's
anti-trust litigation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash resources include its $9.6 million consolidated
cash balance and $46.2 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: On February 10, 1999 the Company amended its existing $75
million bank revolving credit facility to (1) reduce the maximum commitments to
$60 million, (2) extend the termination date to 2002, and (3) amend certain
financial covenants and other terms and conditions of the agreement. The amended
facility has floating rate options at or below prime and commitment fees of up
to .25% payable on the unused portion.
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 $20.5 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 $28.2
million for the three months ended March 31, 1999 compared to $35.8 million for
the same period in 1998. This reduction was primarily attributable to lower
earnings and higher net working capital. Consolidated cash flow used in net
investing activities was ($39.9) million in 1999 compared to ($37.8) million for
the same period in 1998. Investing activities in 1999 reflect higher
expenditures for data procurement related to the release of retailer specific
data in certain European countries. Net cash used before financing activities
was ($11.7) million for the three months ended March 31, 1999 compared to ($2.0)
for the same period in 1998. Consolidated cash flow provided (used) by net
financing activities was $9.9 million for the three months ended March 31, 1999
compared to ($3.4) million for the same period in 1998. The Company borrowed
$10.8 million under its revolving line of credit in
11
<PAGE> 12
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
1999. Financing activities in 1998 include $3.8 million of purchases of the
Company's common stock under its stock-purchase plan.
Other Deferred Costs and Capital Expenditures: Consolidated deferred data
procurement expenditures were $32.3 million for the three months ended March 31,
1999 and $29.3 million for the same period in 1998. 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, casual and other data which are an essential part
of the Company's database. Such expenditures were $19.7 million and $18.9
million for the three month periods ended March 31, 1999 and 1998, respectively,
for the Company's U.S. services business and $12.6 million and $10.4 million,
respectively, for the Company's International services business.
Consolidated capital expenditures were $8.9 million and $6.3 million for
the three months ended March 31, 1999 and 1998, respectively. Capital
expenditures for the Company's U.S. services business were $7.5 million and $5.2
million, while depreciation expense was $5.3 million and $4.4 million for the
three months ended March 31, 1999 and 1998, respectively. The Company's
International services business capital expenditures were $1.4 million and $1.1
million while depreciation expense was $1.1 million and $1.1 million, for the
three months ended March 31, 1999 and 1998, respectively.
Consolidated capitalized software development costs, primarily in the U.S.,
were $1.6 million and $2.3 million for the three months ended March 31, 1999 and
1998, respectively.
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. As of March 31, 1999, the
Company had purchased and retired 1,861,800 shares under the plan at an average
cost of $12.46 per share. No common stock purchases were made in the first
quarter of 1999.
NOL Carryforwards: As of December 31, 1998, the Company had cumulative U.S.
Federal net operating loss ("NOL") carryforwards of approximately $67.9 million
that expire primarily in 2009 and 2011. Certain of these carryforwards have not
been examined by the Internal Revenue Service and, therefore, are subject to
adjustment. At December 31, 1998, the Company also had general business tax
credit carryforwards of approximately $9.6 million which expire primarily
between 1999 and 2012, and are available to reduce future Federal income tax
liabilities. In addition, at December 31, 1998, various foreign subsidiaries of
IRI had aggregate cumulative NOL carryforwards for foreign income tax purposes
of approximately $10.9 million, which are subject to various income tax
provisions of each respective country. Approximately $3.6 million of these
foreign NOLs may be carried forward indefinitely, while the remaining $7.3
million expire in 2000 through 2003.
12
<PAGE> 13
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Impact of Inflation: Inflation has slowed in recent years and is currently
not an important determinant of the Company's results of operations. To the
extent permitted by competitive conditions, the Company passes increased costs
on to customers by adjusting sales prices and, in the case of multi-year
contracts, through consumer price index provisions in such agreements.
YEAR 2000 ISSUES
Background: Many systems (including 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 to produce correct results if "00" is interpreted to
mean "1900". For the Company, 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 third parties including significant suppliers, such as 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 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 of
remediation.
Risks: 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 InfoScan tracking services;
(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.
13
<PAGE> 14
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Third Party Retailers: The Company has identified and 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. To the extent that
retailer responses to Year 2000 readiness surveys are unsatisfactory, the
Company is following up to assess whether all critical retailers are Year 2000
compliant. 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. The Company is also investigating alternative sources or
methodologies 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 reviewed 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 largely Year 2000 compliant
due to the Company's main feature of programming design which accounts for data
by "weeks" as opposed to calendar dates. However, the Company has identified
certain systems which might be negatively impacted by Year 2000. Appropriate
remediation efforts are underway to address these issues. In addition, the
Company has built a Year 2000 test environment to assess compliance on programs
affecting major services to clients. The test environment also provides an
ongoing benefit to the Company for future programs developed by the Company. The
Company estimates that remediation and testing for major services to clients
will be completed by the third quarter of 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 by 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 have determined 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 believes it has completed the identification of all material custom
application issues and has no significant obligation for remediation.
Data Interfaces with Client Applications: As part of its ongoing services,
the Company has begun making inquiries of major clients to identify and resolve
potential Year 2000 issues resulting from Company 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
14
<PAGE> 15
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
for remediation and any related costs, as the decision to allow the Company to
conduct such investigations on a timely basis resides with each client.
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 $10 million to $12 million and will be funded
through operating cash flow. Through March 31, 1999, the Company estimates that
approximately $3 million has been spent and expensed, and of the remaining
estimated costs, up to approximately $4 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 on a timely basis. 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 potentially 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 their 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.
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. This is an ongoing process of which the bulk of
the contingency plans will be completed in the third quarter of 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.
15
<PAGE> 16
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
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.
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, which
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. During the transition period, which ends
on January 1, 2002, the entities within participating countries have the option
of accounting for their transactions in either euros or their legacy currencies.
Euros are currently available for non-cash transactions only; euro bills and
coins will be available for cash transactions at the conclusion of the
transition period. No later than July 1, 2002, the participating countries will
withdraw their legacy currencies from circulation and they will cease to be
legal tender. Participating countries have ceded certain aspects of their
monetary policy authority, including money supply and official interest rates
for the euro, to the European Central Bank.
As the Company has operations in several of the participating countries, it
will be affected by issues surrounding the introduction of and transition to the
euro. The Company's European Executive Committee ("the Committee") is charged
with formulating and executing all aspects of the Company's response concerning
the conversion to the euro.
The Committee is currently investigating the impact of the euro on all
computer systems that affect the Company. Specific systems concerns include the
ability to provide its clients InfoScan services in euros and to pay bills, to
receive payments, to invoice and to provide pricing in euros. The Company
expects all systems issues to be resolved by the conclusion of the transition
period and accordingly, anticipates no significant interruptions in its business
operations.
During the transition period, the Company's clients have the right to
settle transactions in both the euro and legacy currencies. The Company may also
be affected by other economic, legal, political, and social factors relating to
the transition to the euro. The Company may also be impacted by: the ability of
the banking systems to function smoothly during and after the transition period;
the monetary policy as set by the European Central Bank; the interpretation of
the Company's contracts and tax laws, regulations and treaties within the
European Union, United States and the World Trade Organization; and by
additional macroeconomic and other factors beyond the Company's control.
16
<PAGE> 17
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
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 and European currency conversion 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.
17
<PAGE> 18
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
----------- ---------------------- ----
27 Financial Data Schedule (filed herewith). EF
b. Reports on Form 8-K.
None.
18
<PAGE> 19
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)
May 14, 1999
19
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