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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 June 30, 2002
Transition report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934.
Commission file number 0-11428
INFORMATION RESOURCES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2947987
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 North Clinton Street, Chicago, Illinois 60661
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 726-1221
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
The number of shares of the registrant's common stock, $.01 par value per
share outstanding, as of July 31, 2002 was 29,556,056.
1
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 15
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a 23
Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 25
2
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS JUNE 30, 2002 DECEMBER 31, 2001
- ------ ------------- -----------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 8,906 $ 13,708
Accounts receivable, net 84,693 74,669
Prepaid expenses and other 9,776 11,283
--------- ---------
Total Current Assets 103,375 99,660
--------- ---------
Property and equipment, at cost 224,063 214,392
Accumulated depreciation (158,151) (144,461)
--------- ---------
Net property and equipment 65,912 69,931
Investments 13,317 14,573
Deferred income taxes 7,243 7,465
Other assets 164,134 161,794
--------- ---------
$ 353,981 $ 353,423
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capitalized leases $ 2,803 $ 3,549
Accounts payable 55,232 59,708
Accrued compensation and benefits 12,792 20,368
Accrued property, payroll and other taxes 5,767 1,949
Accrued expenses 5,087 5,851
Accrued restructuring costs 1,982 2,904
Deferred revenue 30,570 32,464
--------- ---------
Total Current Liabilities 114,233 126,793
--------- ---------
Long-term debt 20,003 2,234
Other liabilities 12,406 13,565
STOCKHOLDERS' EQUITY
Preferred stock-authorized, 1,000,000 shares,
$.01 par value; none issued -- --
Common stock - authorized 60,000,000 shares,
$.01 par value, 29,753,605 and
29,397,373 shares issued and
outstanding, respectively 301 297
Additional paid-in capital 202,757 200,826
Retained earnings 10,881 19,945
Accumulated other comprehensive loss (6,600) (10,237)
--------- ---------
Total Stockholders' Equity 207,339 210,831
--------- ---------
$ 353,981 $ 353,423
========= =========
The accompanying notes are an integral part of these statements.
3
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Information services revenues $ 139,832 $ 140,906 $ 272,951 $ 277,214
Costs and expenses:
Information services sold (125,580) (123,811) (246,131) (246,071)
Selling, general and administrative expenses (12,255) (14,014) (23,007) (27,337)
Restructuring and other charges (1,860) (4,102) (7,152) (8,199)
--------- --------- --------- ---------
(139,695) (141,927) (276,290) (281,607)
--------- --------- --------- ---------
Operating income (loss) 137 (1,021) (3,339) (4,393)
Interest expense (283) (554) (343) (1,345)
Other, net 502 (436) 143 (1,052)
Equity in earnings (losses) of affiliated companies 225 (120) 266 (176)
Minority interest benefit 96 585 395 1,377
--------- --------- --------- ---------
Income (loss) before income taxes 677 (1,546) (2,878) (5,589)
Income tax (expense) benefit (384) 306 880 1,874
--------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change 293 (1,240) (1,998) (3,715)
Cumulative effect of accounting change-
impairment of goodwill -- -- (7,065) --
--------- --------- --------- ---------
Net income (loss) $ 293 $ (1,240) $ (9,063) $ (3,715)
========= ========= ========= =========
Net income (loss) per common share before cumulative
effect of accounting change - basic $ .01 $ (.04) $ (.07) $ (.13)
========= ========= ========= =========
Net income (loss) per common share - basic $ .01 $ (.04) $ (.31) $ (.13)
========= ========= ========= =========
Net income (loss) per common and common equivalent share
before cumulative effect of accounting change - diluted $ .01 $ (.04) $ (.07) $ (.13)
========= ========= ========= =========
Net income (loss) per common and
common equivalent share - diluted $ .01 $ (.04) $ (.31) $ (.13)
========= ========= ========= =========
Weighted average common shares - basic 29,526 29,068 29,511 29,069
========= ========= ========= =========
Weighted average common and
common equivalent shares - diluted 30,909 29,068 29,511 29,069
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
4
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,063) $ (3,715)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred data procurement costs 64,391 61,730
Depreciation 13,704 14,554
Amortization of capitalized software costs and intangibles 1,665 2,979
Restructuring and other charges, net of cash payments (178) 715
Deferred income tax benefit (880) (1,874)
Equity in earnings of affiliated companies and minority interests (660) (1,201)
Impairment of goodwill 7,065 --
Other 82 60
Change in assets and liabilities:
Accounts receivable (10,135) 2,986
Other current assets 1,506 1,571
Accounts payable and accrued liabilities (9,167) (6,038)
Deferred revenue (1,894) 7,019
Other, net (916) 6,966
-------- --------
Net cash provided by operating activities 55,520 85,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred data procurement costs (69,004) (65,579)
Purchase of property, equipment and software (7,427) (12,029)
Capitalized software costs (1,016) (1,233)
Investment in joint ventures -- (1,834)
Other, net 18 251
-------- --------
Net cash used in investing activities (77,429) (80,424)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings (repayments) 17,000 (5,250)
Purchases of Common Stock -- (110)
Proceeds from issuance of stock and exercise of stock options 1,763 643
Net repayments of capitalized leases (1,986) (1,049)
-------- --------
Net cash provided (used) by financing activities 16,777 (5,766)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 330 (745)
-------- --------
Net decrease in cash and cash equivalents (4,802) (1,183)
Cash and cash equivalents at beginning of period 13,708 11,914
-------- --------
Cash and cash equivalents at end of period $ 8,906 $ 10,731
======== ========
The accompanying notes are an integral part of these statements.
5
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Principles of consolidation: The condensed consolidated financial
statements include the accounts of Information Resources, Inc. and all wholly or
majority owned subsidiaries and affiliates (collectively "the Company").
Minority interests reflect the non-Company owned stockholder interests in
international operations. The equity method of accounting is used for
investments in which the Company has a 20% to 50% ownership interest because it
exercises significant influence over operating and financial policies. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Interim financial statements: The interim financial statements are
unaudited, but include all adjustments (consisting of normal recurring
adjustments) necessary, in the opinion of management, for a fair statement of
financial position and results of operations for the period presented. The
preparation of interim financial statements necessarily relies on estimates,
requiring the use of caution in estimating results for the full year based on
interim results of operations.
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. For the first half of 2002 and 2001, all stock
options, aggregating 9,065,710 shares and 9,510,974 shares respectively, were
excluded from the weighted average shares outstanding calculation because they
were anti-dilutive. For the second quarter of 2002, stock options aggregating
2,745,850 shares were excluded from the weighted average shares outstanding
calculation because they were anti-dilutive.
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the period was as follows
(in thousands):
SIX MONTHS ENDED
----------------
JUNE 30,
-------
2002 2001
---- ----
Interest $ 269 $1,389
Income taxes 314 332
Non-cash investing and financing activities are excluded from the
consolidated statement of cash flows. During the second quarter of 2002, the
Company acquired computer equipment for $2.0 million in exchange for capital
lease obligations.
6
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable were as follows (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Billed $ 70,151 $ 66,065
Unbilled 18,738 12,555
-------- --------
88,889 78,620
Reserve for accounts receivable (4,196) (3,951)
-------- --------
$ 84,693 $ 74,669
======== ========
NOTE 4 - INVESTMENTS AND OTHER ASSETS
Investments were as follows (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Mosaic InfoForce, L.P., at cost plus equity in
undistributed earnings $ 4,737 $ 5,273
Datos Information Resources, at cost plus equity in
undistributed earnings 4,263 4,341
GfK Panel Services Benelux B.V., at cost 1,315 1,315
Middle East Market Research Bureau ("MEMRB"),
at cost 2,774 2,781
Other 228 863
------- -------
$13,317 $14,573
======= =======
In the second quarter of 2002, the Company wrote off its U.K. subsidiary's
40% investment in the Radar Retail Research ("Radar") joint venture. In June
2002, the Company and its partner in Radar, Taylor Nelson Sofres, decided to
cease Radar's operations. Accordingly, the second quarter 2002 operating
expenses include a charge of $966,000 relating to the write off of the
investment and the accrual of the Company's share of Radar's closing costs.
7
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
Other assets were as follows (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Deferred data procurement costs -
net of accumulated amortization of
of $140,377 in 2002 and $138,046 in 2001 $153,966 $144,500
Intangible assets, including goodwill -
net of accumulated amortization of
$5,566 in 2002 and $13,584 in 2001 451 7,811
Capitalized software costs - net of
accumulated amortization of $4,910
in 2002 and $4,665 in 2001 4,073 4,412
Other 5,644 5,071
-------- --------
$164,134 $161,794
======== ========
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Under the
new rules, goodwill, the excess of the carrying value over the net book value of
investments accounted for using the equity method and intangible assets deemed
to have indefinite lives are no longer amortized but are subject to annual
impairment tests. Other intangible assets continue to be amortized over their
useful lives.
During the second quarter of 2002, the Company performed a goodwill
impairment test as required by Statement No. 142 to determine the implied fair
value of the goodwill recorded on its books as of January 1, 2002. As the
goodwill related entirely to previous international transactions, the fair value
was estimated by discounting the estimated future cash flows of the
international reporting unit. Based on this analysis, the Company recognized a
goodwill impairment charge of $7.1 million. In accordance with Statement No.
142, the charge has been reflected as a change in accounting principle in the
Statement of Operations. As required by Statement of Accounting Standards No. 3,
"Reporting Accounting Changes in Interim Financial Statements," the first
quarter 2002 financial statements have been restated to reflect the goodwill
impairment charge.
8
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
Proforma results for the second quarter and the first six months of 2001
are summarized below, assuming the provisions of Statement 142 had been adopted
effective January 1, 2001 and assuming no goodwill impairment was required in
2001 or 2002 (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income (loss) $ 293 $(1,240) $ (9,063) $(3,715)
Add:
Goodwill amortization -- 140 -- 278
Amortization of Mosaic
InfoForce, L.P. investment -- 79 -- 158
Cumulative effect of accounting change -
impairment of goodwill -- -- 7,065 --
------- ------- --------- -------
Adjusted net income (loss) $ 293 $(1,021) $ (1,998) $(3,279)
======= ======= ========= =======
Basic and diluted earnings per share:
Reported net income (loss) $ .01 $ (.04) $ (.31) $ (.13)
Goodwill amortization and amortization
of Mosaic InfoForce, L.P. investment -- .01 -- .02
Cumulative effect of accounting change -
impairment of goodwill -- -- .24 --
------- ------- --------- -------
Adjusted net income (loss) $ .01 $ (.03) $ (.07) $ (.11)
======= ======= ========= =======
NOTE 5 - LONG TERM DEBT
Long-term debt was as follows (in thousands):
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Bank borrowings $ 17,000 $ --
Capitalized leases and other 5,805 5,783
-------- --------
22,805 5,783
Less current maturities (2,802) (3,549)
-------- --------
$ 20,003 $ 2,234
======== ========
9
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
On July 12, 2002, the Company replaced its existing $35 million credit
facility, which was scheduled to expire in October 2002, with a new $40 million
credit facility. The new facility has floating rate interest options that range
between 2.25% and 3.00% over LIBOR and commitment fees of up to 0.50% payable on
the unused portion. The new credit facility expires in July 2005. Under the new
credit facility, the maximum commitment of funds available for borrowings is
limited by a defined borrowing base formula related to eligible accounts
receivable. Borrowings under the facility are secured by the Company's assets.
As of July 12, 2002, the Company had $14.9 million of borrowing availability
under the new revolving credit facility.
The financial covenants in the new 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. The new bank credit agreement contains
covenants which restrict the Company's ability to incur additional indebtedness.
As of July 12, 2002, the Company was in compliance with all covenants.
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 loss were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 293 $(1,240) $(9,063) $(3,715)
Foreign currency translation
adjustment 4,569 (753) 3,636 (2,527)
------- ------- ------- -------
Comprehensive income (loss) $ 4,862 $(1,993) $(5,427) $(6,242)
======= ======= ======= =======
NOTE 7 - STOCK REPURCHASE
In June 2002, the Company sold 51,005 shares of newly issued Common Stock
for $.4 million to employees participating in the Company's 2000 Employee Stock
Purchase Plan ("ESPP"). The Company purchased 210,000 shares of common stock
aggregating $1.2 million on July 11, 2002 in connection with the stock
repurchase program announced in August 2000 that was established principally to
acquire shares to fund the ESPP.
10
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 8 - SEGMENT INFORMATION
The Company's business information services are conducted almost
exclusively in the United States and Europe. The Company's operations in other
markets account for less than 1% of consolidated revenues. The Company considers
revenues and the aggregation of operating profit (loss), equity earnings
(losses) and minority interests ("Operating Results") on a geographic basis to
be the most meaningful measure of the operating performance of each respective
geographic segment and of the Company as a whole.
The following table presents certain information regarding the operations
of the Company by geographic segments (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
U.S. Services $ 104,771 $ 107,005 $ 204,807 $ 210,266
International Services 35,061 33,901 68,144 66,948
--------- --------- --------- ---------
Total Revenue $ 139,832 $ 140,906 $ 272,951 $ 277,214
========= ========= ========= =========
Operating Results:
U.S. Services $ 6,299 $ 6,981 $ 12,541 $ 13,148
International Services:
Operating loss (3,133) (505) (5,956) (2,588)
Equity in earnings (losses) of
affiliated companies -- (27) (78) 125
Minority interest benefit 96 585 395 1,377
--------- --------- --------- ---------
Subtotal--International Services (3,037) 53 (5,639) (1,086)
Corporate and other expenses including
equity in affiliated companies (944) (3,488) (2,428) (7,055)
Restructuring and other items (a) (1,860) (4,102) (7,152) (8,199)
--------- --------- --------- ---------
Operating Results 458 (556) (2,678) (3,192)
Interest expense and other, net 219 (990) (200) (2,397)
--------- --------- --------- ---------
Income (loss) before income taxes $ 677 $ (1,546) $ (2,878) $ (5,589)
========= ========= ========= =========
(a) Restructuring and other charges for U.S. Services and International
Services were $1.9 million and $0 million, respectively, for the three
months ended June 30, 2002 and $1.9 million and $2.2 million, respectively,
for the three months ended June 30, 2001. Restructuring and other charges
for U.S. Services and International Services were $6.0 million and $1.1
million, respectively, for the six months ended June 30, 2002 and $4.0
million and $4.2 million, respectively, for the six months ended June 30,
2001.
11
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
NOTE 9 - RESTRUCTURING AND OTHER ITEMS
Since 1999, the Company has undertaken three major initiatives as described
below resulting in incremental, one-time expenditures that have been classified
as restructuring expenses in the Statement of Operations.
Project Delta: In the third quarter of 1999, the Company initiated a
comprehensive program named Project Delta. The objective of Project Delta was to
improve productivity and operating efficiencies to reduce the Company's ongoing
cost structure in its U.S. operations. The work outlined as part of Project
Delta was completed during the third quarter of 2001. A restructuring accrual
was established in 1999 to reflect certain of the outstanding obligations
related to 1999 restructuring charges. Certain restructuring costs were not
eligible for accrual in 1999 and were recorded during 2000 and 2001.
Transition of German Production to U.S. Facility: The Company made the
decision in the fourth quarter of 1999 to transfer production services for
IRI/GfK Retail from an external vendor in Germany to the Company's U.S.
headquarters facility in order to enhance its InfoScan offering in Germany and
to reduce future production costs. The transition of German production to the
U.S. facility began in the first quarter of 2000 and was completed in the first
quarter of 2002.
Information Technology Assessment: During the fourth quarter of 2001, the
Company began a review of its information technology operations to assess
potential restructuring costs and benefits. The review included initial
assessments of database design, transition planning and cost and savings
estimates and was completed in the second quarter of 2002.
Other Items: During the fourth quarter of 2001, the Company settled a
dispute with Manugistics Inc. Manugistics agreed to pay IRI a total of $8.625
million, resulting in a gain of $2.0 million which was reflected as other income
in Restructuring and Other Items. The Company received the settlement proceeds
during the first quarter of 2002.
12
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
The following tables reflect restructuring and other items incurred and
cash payments made during the first half of 2002 and 2001 (in thousands):
LIABILITY 2002 ACTIVITY
(RECEIVABLE) AT ---------------------------------- LIABILITY AT
DECEMBER 31, 2001 PROVISION CASH NON-CASH JUNE 30, 2002
----------------- --------- -------- -------- -------------
RESTRUCTURING CHARGES
Project Delta
Termination benefits $ 634 $ (240) $ (362) $ -- $ 32
Discontinued activities 265 -- (12) -- 253
Transition of German production
to U.S. facility 592 1,131 (1,723) -- --
Information technology
assessment 1,413 6,261 (5,977) -- 1,697
OTHER ITEMS (1,036) -- 1,036 -- --
------- ------- ------- ------- -------
$ 1,868 $ 7,152 $(7,038) $ -- $ 1,982
======= ======= ======= ======= =======
2001 ACTIVITY
LIABILITY AT ---------------------------------- LIABILITY AT
DECEMBER 31, 2000 PROVISION CASH NON-CASH JUNE 30, 2001
----------------- --------- -------- -------- -------------
RESTRUCTURING CHARGES
Project Delta
Termination benefits $ 2,029 $ 21 $(1,692) $ -- $ 358
Disposition of excess office space -- 17 (17) -- --
Discontinued activities 541 2,042 (113) (2,042) 428
Other costs -- 2,116 (2,116) -- --
Transition of German production to
U.S. facility -- 4,003 (3,546) -- 457
------- ------- ------- ------- -------
$ 2,570 $ 8,199 $(7,484) $(2,042) $ 1,243
======= ======= ======= ======= =======
Termination Benefits: As of the end of 2001, 397 employees had been
terminated under various Project Delta initiatives. The accrual balance
remaining as of June 30, 2002 represents the unpaid severance costs associated
with employees previously terminated.
Disposition of Excess Office Space: The Company recorded $.02 million of
charges relating to lease buyouts in the first half of 2001 relating to office
space not currently utilized.
13
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D.
(UNAUDITED)
Discontinued Activities: During 2000, it was determined that certain
equipment used in the Company's U.S. operations to collect retail information
would no longer be utilized after the second quarter of 2001. Accordingly, the
Company recognized a non-cash charge of $2.0 million in the first half of 2001
relating to accelerated depreciation on this equipment.
Other Restructuring Costs: Other restructuring costs in the first half of
2001 relate primarily to consulting fees paid to a third party for assistance in
the identification of process improvements and efficiencies within the U.S.
operations.
Transition of German Production to U.S. Facility: During the first half of
2002 and 2001, charges of approximately $1.1 million and $4.0 million,
respectively, were recorded related to the transition of German production to
the U.S. facility. These costs consist primarily of parallel processing and
temporary workforce expenses. The transition was completed in the first quarter
of 2002.
Information Technology Assessment: 2002 costs relate primarily to
consulting fees paid to a third party in connection with the technology project.
14
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following narrative discusses the results of operations, liquidity and
capital resources for the Company on a consolidated basis. This section should
be read in conjunction with IRI's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained therein.
RESULTS OF OPERATIONS
The Company's consolidated net income was $0.3 million or $.01 per diluted
share for the second quarter of 2002 compared to a consolidated net loss of $1.2
million or $.04 per diluted share for the corresponding 2001 quarter. The
Company's consolidated net loss was $9.1 million or $.31 per diluted share for
the six months ended June 30, 2002 compared to a consolidated net loss of $3.7
million or $.13 per diluted share for the corresponding 2001 period. Excluding
restructuring and other charges, and the cumulative effect of an accounting
change for goodwill, net income for the quarter and year to date 2002 was $1.4
million or $.05 per diluted share and $2.4 million or $.08 per diluted share,
respectively, compared to $1.5 million or $.05 per diluted share and $1.5
million or $.05 per diluted share, respectively, for the corresponding 2001
periods.
Second Quarter Versus Prior Year
Consolidated revenues for the quarter ended June 30, 2002 were $139.8
million, a decline of 1% over the corresponding quarter in 2001. U.S revenues
were $104.8 million, a decrease of 2% compared to the prior year due to a 5%
decline in retail tracking revenue that was partially offset by an increase in
revenue from panel and analytics products and services. International revenues
increased 3% to $35.1 million. Excluding foreign exchange effects, international
revenues decreased 1% over the prior year driven primarily by a decline in
revenue from the Company's German operation.
Consolidated costs of information services sold increased 1% to $125.6
million for the three months ended June 30, 2002 compared to $123.8 million for
the second quarter of 2001. During the second quarter of 2002, the Company
incurred an expense of $966,000 relating to the write off and closing of its
U.K. subsidiary's 40% investment in Radar Retail Research ("Radar"). The costs
also increased due to higher compensation resulting primarily from annual salary
increases, and higher field operation costs relating to projects generating
revenue. These increases were offset by savings in a number of areas including
information technology.
Consolidated selling, general and administrative expenses decreased 13% to
$12.3 million for the three months ended June 30, 2002 compared to $14.0 million
for the second quarter of 2001. This decline is attributable to lower recruiting
and relocation expenses, lower incentive accruals, and reduced marketing costs.
15
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Earnings before interest and taxes, excluding restructuring and other
charges of $1.9 million, was $2.3 million for the second quarter of 2002
compared to $3.5 million in the prior year, before restructuring and other
charges of $4.1 million. This decline is the result of lower revenues and
contribution in the U.S. and increased international losses due to the Radar
write off and higher losses from the Company's German operation. These declines
were partially offset by lower corporate expenses.
Restructuring and other charges are discussed below. Interest and other was
$0.2 million in income for the second quarter of 2002, a decrease of $1.2
million over the prior year. The decline was due to lower interest charges and
foreign exchange gains resulting from the strengthening of European currencies
against the dollar during the second quarter of 2002.
The Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" in the first quarter of 2002. Proforma
results for the second quarter of 2001, had the provisions of Statement No. 142
been applied, would have been a net loss of $1.0 million or $.03 per diluted
share compared to a reported net loss of $1.2 million or $.04 per diluted share.
First Half Versus Prior Year
Consolidated revenues were $273.0 million for the six months ended June 30,
2002, a decrease of 2% over the corresponding period of 2001. U.S. revenues
decreased 3% to $204.8 million for the first half of 2002 compared to the prior
year due to a 5% decline in retail tracking revenue that was partially offset by
an increase in revenue from panel and analytics products and services.
International revenues increased 2% to $68.1 million. The impact of currency was
negligible on prior year revenue comparisons.
Consolidated costs of information services sold of $246.1 million for the
six months ended June 30, 2002 were unchanged from $246.1 million for the first
half of 2001. Increases due to higher compensation resulting primarily from
annual salary increases, the write off of Radar and higher field operation costs
relating to projects generating revenue were offset by reduced costs in a number
of areas including information technology.
Consolidated selling, general and administrative expenses decreased 16% to
$23.0 million for the six months ended June 30, 2002 compared to $27.3 million
for the first half of 2001. The decrease is the result of lower recruiting and
relocation costs, reduced incentive accruals and lower marketing costs.
For the first half of 2002, the Company's earnings before interest and
taxes, excluding restructuring and other charges of $7.2 million and the
cumulative effect of an accounting change for goodwill of $7.1 million, was $4.5
million compared to $5.0 million in the prior year before restructuring and
other charges of $8.2 million. This decline was the result of lower
contributions from both U.S. and international operations offset by lower
corporate expenses.
16
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Restructuring and other charges are discussed below. Interest and other
expense was $0.2 million for the six months ended June 30, 2002, a decrease of
$2.2 million over the prior year. The decline was due to reduced interest costs
resulting from lower debt and foreign exchange gains resulting from the strength
of the European currencies against the U.S. dollar during 2002.
Proforma results for the first half of 2001, had the provisions of
Statement No. 142 been applied, would have been a net loss of $3.3 million or
$.11 per diluted share compared to a reported net loss of $3.7 million or $.13
per diluted share.
During the second quarter of 2002, the Company performed a goodwill
impairment test as required by Statement No. 142 to determine the implied fair
value of the goodwill recorded on its books as of January 1, 2002. As the
goodwill related entirely to previous international transactions, the fair value
was estimated by discounting the estimated future cash flows of the
international reporting unit. Based on this analysis, the Company recognized a
goodwill impairment charge of $7.1 million. In accordance with Statement No.
142, the charge has been reflected as a change in accounting principle in the
Statement of Operations. As required by Statement of Accounting Standards No. 3,
"Reporting Accounting Changes in Interim Financial Statements," the first
quarter 2002 financial statements have been restated to reflect the goodwill
impairment charge.
On May 1, 2001, Wal-Mart announced its decision, effective as of the
beginning of August 2001, to discontinue providing point-of-sale and related
data for its U.S. business to all third party data providers, including the
Company and ACNielsen. The Company has developed an alternative data solution
for its customers that replaces Wal-Mart sample-based point-of-sale scanner data
with the Company's consumer panel data. The Company introduced its solution,
InfoScan Advantage, to clients beginning in October 2001.
While management believes InfoScan Advantage is the best available
substitute in the marketplace for Wal-Mart scanner point-of-sale data, it does
not provide the granularity of Wal-Mart point-of-sale data. IRI is continuing to
review and develop enhancements to this service that are targeted to improve
data accuracy and maximize the value of the data. Although the Company's
InfoScan Advantage panel solution is still relatively new to the marketplace,
management believes that it is a reasonable substitute for the Wal-Mart scanner
data, particularly for the larger product categories on which IRI reports.
However, many of the Company's clients are continuing to evaluate IRI's InfoScan
Advantage solution. If, based on the level of acceptance, the marketplace does
not view the Company's solution as a reasonable substitute for Wal-Mart scanner
data, the Company's revenues and results of operations could be materially
impacted.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current cash resources include its $8.9 million consolidated
cash balance and $14.9 million available as of July 12, 2002 under the Company's
new bank revolving credit facility discussed below. The Company anticipates that
it will have sufficient funds from these sources and internally generated funds
from its U.S. operations to satisfy its cash needs for the foreseeable future.
The Company's bank credit agreement contains covenants which restrict the
Company's ability to incur additional indebtedness.
17
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Financings
On July 12, 2002, the Company replaced its existing $35 million credit
facility, which was scheduled to expire in October 2002, with a new $40 million
credit facility. The new facility has floating rate interest options that range
between 2.25% and 3.00% over LIBOR and commitment fees of up to 0.50% payable on
the unused portion. The new credit facility expires in July 2005. Under the new
credit facility, the maximum commitment of funds available for borrowings is
limited by a defined borrowing base formula related to eligible accounts
receivable. Borrowings under the facility are secured by the Company's assets.
The financial covenants in the new 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. The new bank credit agreement contains
covenants which restrict the Company's ability to incur additional indebtedness.
As of July 12, 2002, the Company was in compliance with all covenants.
Cash Flow
Consolidated net cash provided by operating activities was $55.5 million
for the six months ended June 30, 2002 compared to $85.8 million for the same
period in 2001. This decrease was primarily attributable to changes in accounts
receivable and accounts payable resulting from the timing of collections and
payments. Additionally, in the second quarter of 2001, the Company received a
$10.9 million cash payment as an early termination fee on a client contract that
was to expire in 2005. Management expects an improvement in operating cash flows
in the second half of 2002.
Consolidated cash flow used in net investing activities was $77.4 million
in 2002 compared to $80.4 million for the same period in 2001. Investing
activity in 2002 reflects higher expenditures for data procurement, primarily
for causal data, that were offset by lower capital expenditures. Additionally,
investing activity in 2001 included payments made in connection with the
formation of Mosaic InfoForce, L.P.
Net cash used before financing activities was $21.9 million for the six
months ended June 30, 2002 compared to net cash provided before financing
activities of $5.3 million for the same period in 2001. Consolidated cash flow
provided by net financing activities was $16.8 million for the six months ended
June 30, 2002 compared to cash used by net financing activities of $5.8 million
for the same period in 2001. During the six months ended June 30, 2002, the
Company borrowed $17 million from the bank compared to repayments of $5.3
million in the prior year.
18
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Other Deferred Costs and Capital Expenditures
Consolidated deferred data procurement expenditures were $69.0 million for
the six months ended June 30, 2002 and $65.6 million for the same period in
2001. 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
$40.9 million and $39.2 million for the periods ended June 30, 2002 and 2001,
respectively, for the Company's U.S. services business and $28.1 million and
$26.4 million, respectively, for the Company's International services business.
Consolidated capital expenditures were $7.4 million and $12.0 million for
the six months ended June 30, 2002 and 2001, respectively. Capital expenditures
for the Company's U.S. services business were $5.3 million and $9.6 million,
while depreciation expense was $11.4 million and $12.4 million for the six
months ended June 30, 2002 and 2001, respectively. The decrease in U.S. capital
expenditures is primarily due to the purchase of equipment in 2001 used in
conjunction with the panel business. The Company's International services
business capital expenditures were $2.1 million and $2.4 million for the six
months ended June 30, 2002 and 2001, respectively, while depreciation expense
was $2.3 million and $2.2 million for the six months ended June 30, 2002 and
2001, respectively.
Consolidated capitalized software development costs, primarily in the U.S.,
were $1.0 million and $1.2 million for the first half of 2002 and 2001,
respectively.
Impact of Inflation
Inflation has slowed in recent years, however the Company's results of
operations are impacted by rising prices given the labor intensive nature of the
business. To the extent permitted by competitive conditions, the Company passes
increased costs on to customers by adjusting sales prices and, in the case of
multi-year contracts, through consumer price index provisions in such
agreements.
RESTRUCTURING AND OTHER CHARGES
Since 1999, the Company has undertaken three major initiatives as described
below resulting in incremental, one-time expenditures that have been classified
as restructuring expenses in the Statement of Operations.
Project Delta: In the third quarter of 1999, the Company initiated a
comprehensive program named Project Delta. The objective of Project Delta was to
improve productivity and operating efficiencies to reduce the Company's ongoing
cost structure in its U.S. operations. The work outlined as part of Project
Delta was completed during the third quarter of 2001. A restructuring accrual
was established in 1999 to reflect certain of the outstanding obligations
related to 1999 restructuring charges. Certain restructuring costs were not
eligible for accrual in 1999 and were recorded during 2000 and 2001.
19
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
Transition of German Production to U.S. Facility: The Company made the
decision in the fourth quarter of 1999 to transfer production services for
IRI/GfK Retail from an external vendor in Germany to the Company's U.S.
headquarters facility in order to enhance its InfoScan offering in Germany and
to reduce future production costs. The transition of German production to the
U.S. facility began in the first quarter of 2000 and was completed in the first
quarter of 2002.
Information Technology Assessment: During the fourth quarter of 2001, the
Company began a review of its information technology operations to assess
potential restructuring costs and benefits. The review included initial
assessments of database design, transition planning and cost and savings
estimates and was completed in the second quarter of 2002.
Other Items: During the fourth quarter of 2001, the Company settled a
dispute with Manugistics Inc. Manugistics agreed to pay IRI a total of $8.625
million, resulting in a gain of $2.0 million which was reflected as other income
in Restructuring and Other Items. The Company received the settlement proceeds
during the first quarter of 2002.
The following tables reflect restructuring and other items incurred and
cash payments made during the first half of 2002 and 2001 (in thousands):
LIABILITY 2002 ACTIVITY
(RECEIVABLE) AT ---------------------------------- LIABILITY AT
DECEMBER 31, 2001 PROVISION CASH NON-CASH JUNE 30, 2002
----------------- --------- -------- -------- -------------
RESTRUCTURING CHARGES
Project Delta
Termination benefits $ 634 $ (240) $ (362) $ -- $ 32
Discontinued activities 265 -- (12) -- 253
Transition of German production
to U.S. facility 592 1,131 (1,723) -- --
Information technology
assessment 1,413 6,261 (5,977) -- 1,697
OTHER ITEMS (1,036) -- 1,036 -- --
------- ------- ------- ------- -------
$ 1,868 $ 7,152 $(7,038) $ -- $ 1,982
======= ======= ======= ======= =======
20
INFORMATION RESOURCES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D.
2001 ACTIVITY
LIABILITY AT ----------------------------------- LIABILITY AT
DECEMBER 31, 2000 PROVISION CASH NON-CASH JUNE 30, 2001
----------------- --------- ------- -------- -------------
RESTRUCTURING CHARGES
Project Delta
Termination benefits $ 2,029 $ 21 $(1,692) $ -- $ 358
Disposition of excess office space -- 17 (17) -- --
Discontinued activities 541 2,042 (113) (2,042) 428
Other costs -- 2,116 (2,116) -- --
Transition of German production to
U.S. facility -- 4,003 (3,546) -- 457
------- ------- ------- ------- -------
$ 2,570 $ 8,199 $(7,484) $(2,042) $ 1,243
======= ======= ======= ======= =======
Termination Benefits: As of the end of 2001, 397 employees had been
terminated under various Project Delta initiatives. The accrual balance
remaining as of June 30, 2002 represents the unpaid severance costs associated
with employees previously terminated.
Disposition of Excess Office Space: The Company recorded $.02 million of
charges relating to lease buyouts in the first half of 2001 relating to office
space not currently utilized.
Discontinued Activities: During 2000, it was determined that certain
equipment used in the Company's U.S. operations to collect retail information
would no longer be utilized after the second quarter of 2001. Accordingly, the
Company recognized a non-cash charge of $2.0 million in the first half of 2001
relating to accelerated depreciation on this equipment.
Other Restructuring Costs: Other restructuring costs in the first half of
2001 relate primarily to consulting fees paid to a third party for assistance in
the identification of process improvements and efficiencies within the U.S.
operations.
Transition of German Production to U.S. Facility: During the first half of
2002 and 2001, charges of approximately $1.1 million and $4.0 million,
respectively, were recorded related to the transition of German production to
the U.S. facility. These costs consist primarily of parallel processing and
temporary workforce expenses. The transition was completed in the first quarter
of 2002.
Information Technology Assessment: 2002 costs relate primarily to
consulting fees paid to a third party in connection with the technology project.
Future Restructuring Charges: The Company's restructuring programs were
completed as of June 30, 2002 and management has no immediate plans for future
restructuring projects.
21
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 in this Quarterly Report on Form 10-Q are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated. These
risks and uncertainties are described in reports and other documents filed by
the Company with the Securities and Exchange Commission including the Company's
Annual Report on Form 10-K for the year 2001.
22
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Annual Meeting.
On May 17, 2002, Information Resources held its annual meeting of shareholders.
As of that date, shareholders of the Company's common shares outstanding were
entitled to 29,505,635 votes. At the meeting, the Company's shareholders voted
on the election of three directors, for three year terms. The results were as
follows:
Votes For Votes Withheld
--------- --------------
Election of Directors:
James G. Andress 26,832,048 689,618
Eileen A. Kamerick 27,294,024 227,642
Jeffrey P. Stamen 27,111,911 409,755
Additionally, the Company's shareholders voted to ratify the appointment of
Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending December 31, 2002. The votes cast for were 26,976,862, votes against were
539,559 and abstentions were 5,245.
A more detailed description of the matters voted on by shareholders of the
Company at this meeting is included in the definitive Proxy Statement dated
April 17, 2002 and incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Revolving Credit Agreement dated July 12, 2002
between the Company, the Lenders thereto and
LaSalle Bank National Association, as agent for
the Lenders.
10.2 Security Agreement dated July 12, 2002 in favor of
Lenders who are a party to the Revolving Credit
Agreement dated July 12, 2002 and LaSalle Bank
National Association, as agent for the Lenders.
10.3 U.S. Subsidiary Pledge Agreement dated July 12,
2002 in favor of 10.3 LaSalle Bank National
Association, as agent for the Lenders.
23
Exhibit No. Description of Exhibit
----------- ----------------------
10.4 Foreign Subsidiary Pledge Agreement dated July 12,
2002 in favor of LaSalle Bank National
Association, as agent for the Lenders.
99.1 Chief Executive Officer Certification of Periodic
Report
99.2 Chief Financial Officer Certification of Periodic
Report
b. Reports on Form 8-K.
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INFORMATION RESOURCES, INC.
---------------------------
(Registrant)
/s/Andrew G. Balbirer
---------------------
Andrew G. Balbirer
Executive Vice President
and Chief Financial Officer
(Authorized Officer of Registrant)
/s/Mary K. Sinclair
-------------------
Mary K. Sinclair
Controller
(Principal Accounting Officer)
August 14, 2002
25