<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] 1Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 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 October 29, 1999 was 28,173,777.
<PAGE> 2
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
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 11
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ------ ------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 13,355 $ 11,149
Accounts receivable, net 86,362 87,637
Prepaid expenses and other 10,402 9,223
--------- ---------
Total Current Assets 110,119 108,009
--------- ---------
Property and equipment, at cost 199,867 177,443
Accumulated depreciation (116,907) (97,940)
--------- ---------
Net property and equipment 82,960 79,503
Investments 9,304 9,792
Other assets 178,416 171,989
--------- ---------
$ 380,799 $ 369,293
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capitalized leases $ 370 $ 521
Accounts payable 41,397 43,640
Accrued compensation and benefits 19,603 20,925
Accrued property, payroll and other taxes 5,755 4,486
Accrued expenses 14,519 11,287
Deferred revenue 33,392 21,940
--------- ---------
Total Current Liabilities 115,036 102,799
--------- ---------
Long-term debt 3,060 4,575
Deferred income taxes, net 15,324 14,017
Other liabilities 9,513 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, 28,158,516 and
27,867,884 shares issued and
outstanding, respectively 281 279
Capital in excess of par value 190,648 190,701
Retained earnings 51,323 49,778
Accumulated other comprehensive loss (4,386) (2,306)
--------- ---------
Total Stockholders' Equity 237,866 238,452
--------- ---------
$ 380,799 $ 369,293
========= =========
</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
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Information services revenues $ 136,092 $ 125,346 $ 405,684 $ 373,928
Costs and expenses:
Information services sold (121,322) (112,978) (366,371) (329,386)
Selling, general and administrative expenses (12,849) (14,709) (38,772) (37,680)
--------- --------- --------- ---------
(134,171) (127,687) (405,143) (367,066)
--------- --------- --------- ---------
Operating profit (loss) 1,921 (2,341) 541 6,862
Equity in earnings of affiliated companies 84 142 180 436
Minority interests benefit (expense) 1,170 110 3,455 (26)
Interest expense and other, net (501) (749) (1,091) (959)
--------- --------- --------- ---------
Earnings (loss) before income taxes 2,674 (2,838) 3,085 6,313
Income tax (expense) benefit (1,346) 1,300 (1,540) (2,500)
--------- --------- --------- ---------
Net earnings (loss) $ 1,328 $ (1,538) $ 1,545 $ 3,813
========= ========= ========= =========
Net earnings (loss) per common share - basic $ .05 $ (.05) $ .06 $ .13
========= ========= ========= =========
Net earnings (loss) per common and
common equivalent share - diluted $ .05 $ (.05) $ .06 $ .13
========= ========= ========= =========
Weighted average common shares - basic 28,120 28,708 28,022 28,746
========= ========= ========= =========
Weighted average common and
common equivalent shares - diluted 28,267 28,708 28,081 29,283
========= ========= ========= =========
</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
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,545 $ 3,813
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of deferred data procurement costs 89,655 83,493
Depreciation 19,985 16,990
Amortization of capitalized software costs and intangibles 5,086 5,334
Deferred income tax expense 1,540 2,500
Equity in earnings of affiliated companies and minority interests (3,635) (410)
Other (1,187) (1,216)
Change in assets and liabilities:
Increase (decrease) in accounts receivable, net 1,146 (3,460)
Decrease (increase) in other current assets (1,179) 2,927
Decrease (increase) in accounts payable and accrued liabilities 937 (4,995)
Increase in deferred revenue 11,452 5,622
Other, net 4,095 (1,440)
--------- ---------
Total adjustments 127,895 105,345
--------- ---------
Net cash provided by operating activities 129,440 109,158
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred data procurement costs (98,098) (90,085)
Purchase of property, equipment and software (24,569) (26,986)
Capitalized software costs (5,457) (6,210)
Other, net 3,414 319
--------- ---------
Net cash used in investing activities (124,710) (122,962)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) (1,588) 8,782
Purchases of Common Stock (1,036) (16,938)
Proceeds from exercise of stock options and other 871 8,260
--------- ---------
Net cash provided (used) by financing activities (1,753) 104
EFFECT OF EXCHANGE RATE CHANGES ON CASH (771) 199
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,206 (13,501)
Cash and cash equivalents at beginning of period 11,149 20,925
--------- ---------
Cash and cash equivalents at end of period $ 13,355 $ 7,424
========= =========
</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, 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.
Earnings per Common and Common Equivalent Share: Net earnings per
share is based upon the weighted average number of shares of common stock
outstanding during each period. Net earnings per common and common equivalent
share--diluted is based upon the weighted average number of shares of common
stock and common stock equivalents outstanding during each period. Common stock
equivalents are entirely comprised of stock options.
NOTE 2 - 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
1999 1998
------ ------
<S> <C> <C>
Interest $ 770 $ 396
Income taxes 130 1,317
</TABLE>
6
<PAGE> 7
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Billed $ 67,515 $ 71,141
Unbilled 23,241 21,258
--------- ---------
90,756 92,399
Reserve for accounts receivable (4,394) (4,762)
--------- ---------
$ 86,362 $ 87,637
========= =========
</TABLE>
NOTE 4 - OTHER ASSETS
Other assets were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Deferred data procurement costs -
net of accumulated amortization of
of $137,235 in 1999 and $123,440 in 1998 $144,561 $138,356
Intangible assets, including goodwill -
net of accumulated amortization of
$15,068 in 1999 and $13,616 in 1998 16,604 18,610
Capitalized software costs - net of
accumulated amortization of $5,694
in 1999 and $3,701 in 1998 12,385 9,876
Other 4,866 5,147
-------- --------
$178,416 $171,989
======== ========
</TABLE>
7
<PAGE> 8
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 5 - LONG TERM DEBT
Long-term debt was as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Bank borrowings $ 2,250 $ 3,000
Capitalized leases and other 1,180 2,096
------- -------
3,430 5,096
Less current maturities (370) (521)
------- -------
$ 3,060 $ 4,575
======= =======
</TABLE>
In February, 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.
8
<PAGE> 9
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 $23.6 million is
currently available for such distributions under the most restrictive of these
covenants. The bank credit agreement also 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 and
nine months ended September 30, 1999 and 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 1,328 ($1,538) $ 1,545 $ 3,813
Foreign currency translation
adjustment 2,105 (851) (2,080) (2,424)
------- ------- ------- -------
Comprehensive income (loss) $ 3,433 ($2,389) $ (535) $ 1,389
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
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 table and discussion present certain information
regarding the operations of the Company by geographic segment as of September
30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
U.S. Services $ 103,627 $ 98,120 $ 311,580 $ 292,063
International Services 32,465 27,226 94,104 81,865
--------- --------- --------- ---------
Total $ 136,092 $ 125,346 $ 405,684 $ 373,928
========= ========= ========= =========
Operating Results:
U.S. Services $ 8,536 $ 3,407 $ 20,779 $ 24,494
International Services:
Operating loss (3,350) (3,858) (12,561) (12,819)
Equity in earnings of
affiliated companies 84 142 180 436
Minority interest benefit (expense) 1,170 110 3,455 (26)
--------- --------- --------- ---------
Subtotal--International Services (2,096) (3,606) (8,926) (12,409)
Corporate and other expenses (3,265) (1,890) (7,677) (4,813)
--------- --------- --------- ---------
Operating Results 3,175 (2,089) 4,176 7,272
Interest expense and other, net (501) (749) (1,091) (959)
--------- --------- --------- ---------
Earnings (loss) before income taxes $ 2,674 $ (2,838) $ 3,085 $ 6,313
========= ========= ========= =========
</TABLE>
10
<PAGE> 11
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 earnings were $1.3
million or $.05 per diluted share for the third quarter of 1999 compared to a
consolidated net loss of ($1.5) million or ($.05) per diluted share for the
corresponding 1998 quarter. The Company's consolidated net earnings were $1.5
million or $.06 per diluted share for the nine months ended September 30, 1999
compared to consolidated net earnings of $3.8 million or $.13 per diluted share
for the corresponding 1998 period.
Consolidated revenues for the quarter ended September 30, 1999
were $136.1 million, an increase of 9% over the corresponding quarter in 1998.
This increase was the result of revenue growth of $5.5 million, 6%, in the U.S.
services business and a $5.2 million, 19%, increase in the international
business. Consolidated revenues were $405.7 million for the nine months ended
September 30, 1999, an increase of 8% over the corresponding period of 1998.
This increase was the result of revenue growth of $19.5 million, 7%, in the U.S.
services business and a $12.2 million, 15%, increase in the international
business.
Consolidated costs of information services sold increased 7% to
$121.3 million for the three months ended September 30, 1999 compared to costs
of $113.0 million for the third quarter of 1998. The increase was in large part
due to growing European operations and shut-down costs related to operations in
Turkey. Consolidated costs of information services sold increased 11% to $366.4
million for the nine months ended September 30, 1999. Major components of the
1999 increase included a $15.9 million increase in compensation expense
resulting from higher employee costs in the U.S. and growing European
operations, and costs related to increased data collection efforts resulting
from the Company's expanded convenience store and household panel operations.
Consolidated selling, general and administrative ("SG&A") expenses
decreased 13% to $12.8 million for the three months ended September 30, 1999 and
increased 3% to $38.8 million for the nine months ended September 30, 1999.
Third quarter 1999 SG&A expenses reflect higher legal costs which were more than
offset by costs relating to the transformation of the Company's U.S. sales,
marketing and other operating functions included in the third quarter of 1998.
The year-to-date increase was primarily associated with 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 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.
11
<PAGE> 12
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
In the third quarter of 1999, revenues from the Company's U.S.
services business were $103.6 million, an increase of 6% over the corresponding
1998 quarter. For the nine months ended September 30, 1999, revenues from the
Company's U.S. services business were $311.6 million, an increase of 7% over the
corresponding 1998 period. These revenue increases were due primarily to the
increased sales of the Company's product tracking services including its
retailer specific and all-store databases and its 55,000 in-home scanning panel
operation. Revenue gains in these areas helped offset lower revenue caused by
several client losses. Revenue growth through the year 2000 may continue to be
dampened by the impact of these client losses. Operating Results for the
Company's U.S. services business were $8.5 million in the third quarter of 1999
versus $3.4 million in the third quarter of 1998. Third quarter 1999 U.S.
operating results reflect increased revenues with relatively flat expense
growth, representing the impact of cost containment programs. Operating Results
for the Company's U.S. services business were $20.8 million for the nine months
ended September 30, 1999 compared to $24.5 million for the corresponding 1998
period. The U.S. operating margins for the nine months ended September 30, 1999
were negatively affected by higher employee costs, Year 2000 costs and increased
data collection expenses experienced in the first half of 1999.
Third quarter 1999 revenues from the Company's International
services business, primarily from Europe, were $32.5 million, an increase of 19%
over the corresponding 1998 quarter. International services revenues were $94.1
million for the nine months ended September 30, 1999, an increase of 15% over
the corresponding 1998 period. These increases reflect continued strong growth
in each of the major European businesses, offset somewhat by the effect of
weaker Euro-currencies against the dollar. Excluding foreign exchange effects,
European revenues for 1999 increased 26% over the third quarter of 1998 and 20%
over the first nine months of 1998. Operating Results for the International
service business were a ($2.1) million loss for the third quarter of 1999
compared to the ($3.6) million loss in the corresponding 1998 quarter. The large
revenue increase caused Operating Results to improve by 42%, despite shut-down
costs related to operations in Turkey and lower margins in Germany due to higher
production and data collection costs. Operating Results for the International
services business were a ($8.9) million loss for the nine months ended September
30, 1999, a 28% improvement compared to the ($12.4) million loss for the
corresponding 1998 period. These improvements were largely due to continued
revenue growth, partially offset by costs associated with start-up losses in
Spain, which began operations in May, 1998, and shut-down costs related to
operations in Turkey.
Corporate and other expenses increased for the three and nine
months ended September 30, 1999 primarily due to higher legal costs attributable
to the Company's anti-trust litigation.
12
<PAGE> 13
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Project Delta: In the third quarter of 1999, the Company initiated
a comprehensive program, named Project Delta, the objective of which is to
improve productivity and operating efficiencies and reduce the Company's
on-going cost structure in its U.S. operations. The first phase of Project Delta
includes the identification and assessment of potential operating efficiencies
in the Company's various U.S. functional areas. The first phase of the project
is expected to be completed in the fourth quarter of 1999. Depending on the
findings and the timing of the implementation of those findings, the Company may
be required to record a special charge against earnings. Such a charge would
provide for severance and other costs related to a reduction in staffing and
non-recurring costs associated with changes in the way in which the Company may
conduct business or be organized in the future.
LIQUIDITY AND CAPITAL RESOURCES
Financings: In February, 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 $23.6 million is
currently available for such distributions under the most restrictive of these
covenants. The bank credit agreement also contains covenants which restrict the
Company's ability to incur additional indebtedness.
The Company's current cash resources include $13.4 million of cash
and $57.7 million available under its 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.
Cash Flow: Consolidated net cash provided by operating activities
was $129.4 million for the nine months ended September 30, 1999 compared to
$109.2 million for the same period in 1998. This increase was primarily
attributable to continued improvements in the collection of the Company's U.S.
receivables and higher advance payments by clients. Consolidated cash flow used
in net investing activities was ($124.7) million in 1999 compared to ($123.0)
million for the same period in 1998. Investing activities in 1999 reflect higher
expenditures for data procurement primarily related to the release of retailer
specific data in certain European countries and timing of its domestic data
payments. Net cash provided (used) before financing activities was $4.7 million
for the nine months ended September 30, 1999 compared to ($13.8) for the same
period in 1998. Consolidated cash flow provided (used) by net financing
activities reflects borrowings of $2.3 million under the Company's revolving
line of credit in 1999.
13
<PAGE> 14
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Financing activities include $1.0 million and $16.9 million of purchases of the
Company's common stock for the nine months ended September 30, 1999 and 1998,
respectively.
Other Deferred Costs and Capital Expenditures: Consolidated
deferred data procurement expenditures were $98.1 million for the nine months
ended September 30, 1999 and $90.1 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, causal and other data which are an
essential part of the Company's database. Such expenditures were $61.2 million
and $57.9 million for the periods ended September 30, 1999 and 1998,
respectively, for the Company's U.S. services business and $36.9 million and
$32.2 million, respectively, for the Company's International services business.
Consolidated capital expenditures were $24.6 million and $27.0
million for the nine months ended September 30, 1999 and 1998, respectively.
Capital expenditures for the Company's U.S. services business were $20.7 million
and $22.5 million, while depreciation expense was $16.6 million and $13.4
million for the nine months ended September 30, 1999 and 1998, respectively. The
capital expenditures for the Company's International service business were $3.9
million and $4.5 million while depreciation expense was $3.4 million and $3.6
million, for the nine months ended September 30, 1999 and 1998, respectively.
Consolidated capitalized software development costs, primarily in
the U.S., were $5.5 million and $6.2 million for the nine months ended September
30, 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 September 30, 1999,
the Company had purchased and retired 1,980,400 shares under the plan at an
average cost of $12.24 per share. During the first nine months of 1999, the
Company purchased 118,600 shares at an average cost of $8.73 per share.
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.
14
<PAGE> 15
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. The Company is also 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 key 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.
15
<PAGE> 16
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 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 were unsatisfactory, the
Company continues to follow up with all critical retailers to determine their
Year 2000 readiness. Meanwhile, the Company has defined a contingency plan
should a key U.S. or European 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 identified certain systems which might be negatively
impacted by Year 2000. In addition, the Company has built and is currently
utilizing a Year 2000 test environment to assess compliance on programs
affecting major services to clients. The vast majority of remediation and
testing for major services to clients has been successfully completed.
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
the end of November, 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 the scope of the Company's obligation to
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 that its
outstanding obligations for remediation are not significant.
16
<PAGE> 17
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Data Interfaces with Client Applications: As part of its ongoing
services, the Company has assigned each of its client service teams the task of
identifying and coordinating the resolution of 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 the Company to identify and correct all Year 2000 issues
affecting client applications 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 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 $7 million to $9 million and will be funded
through operating cash flow. To date, the Company estimates that approximately
$6 million has been spent.
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, inefficiencies, and
temporary disruptions in service 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.
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 continues to develop contingency
plans to be implemented as part of its efforts to identify and correct Year 2000
issues affecting its internal systems. Most contingency planning was completed
in the third quarter of 1999 with the remainder expected to be completed in the
fourth 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 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 subsequently 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.
18
<PAGE> 19
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
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 InfoScan services to the Company's clients in euros and
to pay bills, receive payments, invoice and 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 either the euro or 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.
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, the success of
implementing cost containment initiatives, 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.
19
<PAGE> 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 Page
----------- ---------------------- ----
27 Financial Data Schedule (filed herewith). EF
b. Reports on Form 8-K.
None.
20
<PAGE> 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/ Gary M. Hill
-----------------------------------------
Gary M. Hill
Executive Vice President
and Chief Financial Officer
(Authorized officer of Registrant and
Principal Financial Officer)
/s/ Sheri L. Huston
-----------------------------------------
Sheri L. Huston
Senior Vice President
and Controller
(Principal Accounting Officer)
November 12, 1999
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,355
<SECURITIES> 0
<RECEIVABLES> 90,756
<ALLOWANCES> 4,394
<INVENTORY> 0
<CURRENT-ASSETS> 110,119
<PP&E> 199,867
<DEPRECIATION> 116,907
<TOTAL-ASSETS> 380,799
<CURRENT-LIABILITIES> 115,036
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 237,585
<TOTAL-LIABILITY-AND-EQUITY> 380,799
<SALES> 0
<TOTAL-REVENUES> 405,684
<CGS> 0
<TOTAL-COSTS> 405,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,091
<INCOME-PRETAX> 3,085
<INCOME-TAX> 1,540
<INCOME-CONTINUING> 1,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,545
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
